foxex: The IPO Bubble Cometh

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

Markets Rally from Lows, but Still Close in the Red

Markets Close

Dow
25,625.59 -0.13%

S&P
2,805.37 -0.46%

Nasdaq
7,643.38 -0.63%

VIX
15.15 +3.20

INV Anxiety Index
99 Low

US 10-Yr Yield
2.374 -1.66%

Markets Rally but Remain in the Red

Volatility is back in fashion for Spring, but today it helped erase a 230 point loss on the DJIA, which closed flat for the day as the S&P 500 and the Nasdaq posted slight losses. You can thank two stocks for the rebound, Apple and Boeing. Both stocks started the day in the red, but rebounded around midday, dragging the DJIA with them.

Boeing, which has been under pressure since the fatal crash of the Ethiopian Air 737 Max Jet, its second deadly accident in six months, announced software fixes, additional pilot training and new cockpit alerts for the aircraft at a press event today. That was enough to convince investors to bid up the stock, which is down more than 12% in March.

Yield Curve Concerns

Falling yields for U.S. Treasuries have been top of mind since the Fed announced no more interest rate hikes in 2019. We even had the dreaded "yield curve inversion", last week when yields on the 3-month U.S. Treasury dipped below those of the 10-year U.S. Treasury, signifying a lack of confidence in U.S. economic growth in the near term.

Today, the yield on the 10-year U.S. Treasury hit its lowest level since 2017, at 2.38%. As a reminder, yields move inversely to price. The lower the yield, the less attractive the security is to investors who want to earn a premium for loaning the U.S. government money. Since the U.S. Treasury is widely considered to be among the 'safest' of all securities on the planet, a lot of foreign governments own it. Guess who they are?

Good guess!

It's not just the U.S.

Falling government bond yields is not a U.S. problem, exclusively. Far from it. Italy, Canada, the U.K., France, Germany and Japan are also experiencing declines in their 10-year government bonds, and all for various reasons but with one common denominator: Slowing growth. Italy is in a recession. Canada's economy is relatively stable - except for its housing market - but its biggest trading partner that it shares a border with, is suffering a slowdown. We wrote about Germany last week, which is experiencing a serious manufacturing slowdown as its largest trading partners tighten their belts. France is trying to pull itself out of a severe slowdown as protests tear through the country.

And then there is the U.K...

We have no idea how Brexit will play out, if it will play out, or what it will look like on the other side if it does leave the EU. We do know that Prime Minister Theresa May won't be in office when it does. She offered to resign from her post if and when Brexit passes. She may not have that choice pending another vote on the Brexit plan this week. Here's a chart from LPL Research on the incredible shrinking 10-year Treasuries for G-7 nations.

Are You Ready for Lyft-Off

Lyft, the ride-sharing app which operates in the U.S. and Canada is planning its initial public offering tomorrow on the NASDAQ. The 7-year old company, which competes with Uber and Via, among others, is planning to raise up to $2 billion through the IPO, selling shares in the $70-72 range when trading begins.

Lyft is part of a group of four stocks nicknamed "LUPA," comprised of companies that were born into the mobile app generation and have become a vital part of today's consumer economy. Lyft, Uber, travel industry disruptor Airbnb, and web-based photo bulletin board Pinterest, have all either filed to go public, or have been rumored to be considering an IPO in the near future.

Not one of these companies is profitable or has a concrete plan to become profitable.

Here are Lyft's 2018 numbers from the company's prospectus file with the SEC:

Revenue: $2.2 billion, double the revenue it saw in 2017
Bookings: $8.1 billion, an increase of 76 percent from 2017
Net loss: $911 million, an increase of 32 percent from 2017

Why it Matters

There is nothing new or noteworthy about companies testing the public markets before they earn a profit. Netflix and Amazon are just two of hundreds of companies that went public without profits and were widely embraced by investors. Lyft has real revenue, and it's growing, but scaling its business to really compete with Uber, which is also about to test the public markets, will be costly. The ride-share business doesn't have a lot of barrier to entry, so a new competitor offering lower rates and cleaner cars could easily disrupt the market.

The danger with IPOs is that while the stock may pop on its first day when its founders and family get to ring the opening bell, sustainable gains are not guaranteed.

SNAP is a good example of that. Shares are down 56% since its IPO, and my daughters and their friends are on it constantly.

Renaissance Capital, which invests in and tracks IPO performance, ran the numbers. The reality is that most companies trade higher on the day they IPO, but only about half maintain those gains a year later. (James is off today, so instead, today our chart comes courtesy of Renaissance Capital.)