Unicorns – start-ups valued at over US$1bn – are making headlines this week, but it’s not all good publicity. An IPO application by Bitmain, a firm in the business of producing and distributing software for bitcoin mining, “has been shelved, at least for now”, writes Paddy Baker for Crypto Briefing.
Bitmain filed for an IPO on the Hong Kong Stock Exchange in September 2018. However, six months on, its application has expired.
Bitmain’s official
blog cites immaturity of the cryptocurrency sector and relationships with regulators and the public as reasons for the IPO halt. Baker reports on the falling value of bitcoin since the company’s application. One bitcoin was trading at US$6,000 in September 2018, but since, market outlooks and expectations have changed, he says.
Prospective investors greeted the initial IPO announcement with enthusiasm for the potential profits. According to its filing, in 2016, Bitmain had made a pre-tax profit of US$151.3m, and in the first half of 2018, this had surged to US$1bn.
If attitudes had remained positive, Bitmain would probably have been able to raise its US$3bn target for the IPO, says Baker. However, the cryptocurrency market on 26 September 2018 was worth approximately US$215bn and on 26 March 2019, the total value was approximately US$135bn. He says the “declining prices damaged the economic viability of mining equipment, which is expensive to buy and run”.
In mid-December 2019, bitcoin’s value fell to a yearly low of US$3,200 and the return on investment was low. That led some bitcoin miners to renounce cryptocurrency, says Baker.
Although Bitmain’s IPO is on ice for now, the
Hong Kong Stock Exchange states that a company that has submitted an application to list on the exchange can restart at any time – providing it includes up-to-date financial records.
Crypto Briefing article
A herd of unicorns ahead?
Could there be a ‘unicorn invasion’ ahead? Michael P Regan for Bloomberg explores this idea. With a long list of expected IPOs on Wall Street – including taxi app Uber Technologies, ride-hailing company Lyft, digital corkboard Pinterest and home rental site Airbnb – there is a chance that 2019 could be one of the “biggest years on record for the amount of money raised for US-listed IPOs”, he says, citing a prediction by Goldman Sachs Group that the total raised could reach US$80bn, “an estimate that may prove low”.
But here’s where paranoia on Wall Street could kick in. “There’s no arguing that peaks in IPOs have occurred near major tops in the stock market and close to the onset of recessions,” Regan writes. “Both 1999 and 2007 were unusually strong years for IPOs, that were swiftly followed by nasty bear markets in stocks and downturns in the economy.”
Jim Paulsen, chief investment strategist at Leuthold Group, explains that although it might seem like a good time to IPO from a private company’s perspective, as confidence is high and there is low concern for price, this might not be the case. “I would argue that, although the market is up this year, it sure seems like cautiousness and pessimism about recession and a bear market is also up this year,” Paulsen says.
Bloomberg article
Opportunity over profits
Despite the suggestion that the increase of unicorn IPOs could be the calm before a recessionary storm, this doesn’t seem to have dampened Wall Street’s appetite for the fast-growing tech companies. But it’s not the profits that are attracting investors. Kate Clark for Tech Crunch writes: “In Silicon Valley, investors don’t expect their portfolio companies to be profitable.” She explains that this ideology is reflected on Wall Street, where market opportunity overrides profitability.
Lyft, which began publicly trading on 29 March 2019, isn’t profitable, she says. The firm posted losses of US$911m in 2018, according to data collected by
The Wall Street Journal – but also had US$2.2bn revenue in 2018, which, according to Clark, is one of the largest annual revenues for a pre-IPO firm.
The reported losses haven’t detracted attention from Lyft’s IPO. Clark refers to a
Reuters article, stating that on 19 March, the IPO was oversubscribed. According to
The Wall Street Journal, Lyft upped the cost of its stock as a result. This shows Wall Street’s “desire for unicorns, profitable or not”, says Clark.
Wall Street has “a leniency towards unprofitable tech companies”, says Clark, with 64% of the 100+ companies with unicorn status that have completed a venture capitalist-backed IPO since 2010 making losses. “Wall Street is still adapting to the rapid growth of the tech industry; public market investors, therefore, are willing to deal with negative to minimal cash flows for, well, a very long time.”
Could the appetite for unicorns be a result of the shortage of venture capitalist-backed IPOs? Clark suggests so. “In 2006, it was the norm for a company to make its stock market debut at 7.9 years old, per PitchBook. In 2018, companies waited until the ripe age of 10.9 years, causing a significant slowdown in big liquidity events and stock sales.”
Tech Crunch article
Are unicorns worth the Wall Street hype? Or is the invasion of unicorn IPOs an ominous sign for the economy? Leave your thoughts below.
Seen a blog, news story or discussion online that you think might interest CISI members? Email bethan.rees@wardour.co.uk.