The IPO market started strong and could soon take off

Key Points
  • For the 42 companies that have gone public this year, the first day of trading has resulted in an average pop of 22%, well above the historical range of 13% to 15%, Renaissance Capital says.
  • That outperformance extends even further, with about 62% of recent debuts still above their IPO price.
  • Many more companies are expected to debut this year, but that doesn't mean they can start jacking up prices.
Beyond Meat CEO Ethan Brown (C) celebrates with guests after ringing the opening bell at Nasdaq MarketSite, May 2, 2019 in New York City.
Drew Angerer | Getty Images

The IPO market is off to an exceptionally strong start, after a two-month hiatus around the government shutdown.

According to Renaissance Capital, 42 IPOs have priced this year. The average first-day pop has been 22%, well above the average of 13% to 15%.

The above-average performance extends beyond the first day of trading. About 62% of recent initial public offerings are still trading above their IPO price.

The biggest names are trading at an appreciable premium over their IPO price:

"With returns like this, the floodgates are going to open very fast," said Renaissance Capital's Kathleen Smith.

She notes that this week alone, 13 companies will go public, the most in three years. Among them, Uber is set to the biggest IPO since Alibaba in 2014 and the largest U.S.-based IPO since Facebook's 2012 market debut.

Coming up next week: Slack will start its road show, lab supplier Avantor will seek to raise $3 billion for its IPO, Pimco Mortgage Interest Trust, a mortgage REIT, will seek to raise $1 billion, and Luckin Coffee, an app-only coffee shop billed as the Starbucks of China, will also seek to raise $480 million. We are also waiting for WeWork to make its filing public.

David Menlo of IPOFinancial.com cautions that the success of the early 2019 crop of IPOs does not mean that other hopefuls can suddenly jack up prices.

"The landscape is much more friendly, but this is not an unfiltered environment," he said. "If the valuations are going to be pushed above general market expectations, you will have deals that may do well at the open, but they will fall under their own weight."

That is certainly on the mind of Uber executives. The ride-hailing company is expected to price its IPO on Thursday and start trading on Friday.

CNBC reported Wednesday that Uber will price its IPO at $47 or below, the midpoint of its $44-$50 price range. At the midpoint, Uber's valuation would be about $86 billion, well below prior price talk of $100 billion to $120 billion.

Menlo believes Uber's more reasonable valuation is being partly determined by Lyft, which has been the one exception to the IPO success story. It closed Wednesday's session at a new low, down 28% from its initial price in late March.

"Lyft is down because all the people who want to buy into the ride-hailing business have become disillusioned," Menlo said. "The market has decided it wants to be long Uber and short Lyft."

Much of that switch in sentiment may depend on what happens with Uber.