Unicorn IPO: Attention! Unicorns have a habit of failing in public markets. here’s why
Unicorns tend to “specialize” in the art of commanding billion dollar valuations regardless of their profitability, as deep-pocketed investors in the private equity (PE) world willingly participate in ” the pink story well told, with the promise of resounding success “in the future”, which actualizes several years of profit across the board.
One of those Indian unicorns with a billion dollar valuation, not Zomato, is now working hard to make one rupee by burning over 700 rupees (burn is a much more acceptable word in the EP world, when prepare to destroy scarce economic resources in pursuit of future profits). It is the power that they command.
Zomato, which is valued at $ 9 billion, generates nearly Rs 2,000 crore in revenue but suffers losses to the tune of Rs 816 crore. Many analysts are racking their brains trying to find a way to valuing “that giant” sitting on millions of losses, as public markets are used to looking for value in financial statements.
Unfortunately, these conceptual stocks have no value to offer in their financial statements except for selling powerful dreams with pink presentations, for which there is a buyer ready at every step, who also pays more valuations. high. This buyer is often referred to as the “biggest fool” in the private market, which seems to simply follow the mantra “the higher the risk, the higher the profit”.
But they are deep-pocketed investors with a high risk appetite. They agree to even write off 100% of their investments as the need arises, and continue to move forward with confidence. This is where public markets take a totally opposite stance, looking for substance in the financial statements they would like to pay for by discounting visible future benefits.
Analysts aside, investors outside of the PE world are also puzzled over Zomato’s valuation, as financial data for this share class will not offer any clue on valuations. These investors seem to be caught between greed and fear, as they want to own a stake at all costs, but at the same time fear losing capital, as valuations are already at an astronomical level, leaving nothing on the table for Investors.
Decision making becomes more complicated when you look at some of the ecommerce companies like Amazon, which do extremely well in the public markets by providing multiple returns to equity investors, which makes you want to not miss the bus. .
Under these circumstances, the best thing for investors to do is look at their listed peers and check how they are performing in public markets globally. Fortunately, we have several companies listed in developed markets that belong to the âZomato familyâ and offer similar services through technology platforms.
There was a lot of excitement around unicorns like Lyft, Uber, We Work, Door Dash, and Deliveroo before they joined, and they were touted as game changers in the tech space. Let’s see what some of them brought to investors after their migration from private to public markets.
Lyft Inc was listed on the US markets in March 2019 at the first price of $ 72 and recorded a modest gain of 8%. This company operates a mobile app that offers vehicle rentals and is considered a tech giant in the United States. After listing day, the stock has embarked on a southward journey and is still struggling below the issue price with a 52-week high and low of $ 68 and $ 21, respectively.
Uber Technologies was listed in May 2019 at an IPO price of $ 45 and turned out to be a disaster on its very debut day as the stock stabilized below the issue price. He now cites a 52-week maximum and minimum of $ 64 and $ 28, respectively.
Co-working spaces company We Work scheduled an IPO at a valuation of $ 47 billion in 2019, but it was caught in a controversy within a month and its valuation was reduced to $ 10 billion. . This led to a postponement of the IPO sine die. The company is still struggling and has reportedly always planned an IPO at a valuation of $ 9 billion.
In December 2020, the Door Dash food delivery app made a flying debut in the US at an issue price of $ 102 and ended the day with an 85% gain, which valued the company. at around $ 60 billion, or 16 times its revenue. Its 52-week high-low range remained between $ 256 and $ 110 and the stock never slipped below the issue price, making it the only success in this space in the public markets.
Deliveroo, another online food delivery company, earned the dubious distinction of being the worst performing IPO when it debuted on the London Stock Exchange, as it fell 31% on the first day of the market. March 31, 2021 compared to the issue price of 390 pence. The title is now languishing at 29% below the issue price with a 52-week low at 224 pence.
These examples clearly show that public markets have a different approach to valuing these stocks compared to the private equity market. Therefore, there is no reason to believe that Zomato is going to deliver unusually high returns to investors over time.
It would also be wrong to compare a food delivery app with FANG and expect similar wealth creation, as the customer base of social media giants like Facebook, Twitter and Google is totally different from that of the food industry. food delivery. More often than not, public market listing, in particular for conceptual stocks, has only offered exits to private equity players, by passing their stakes on to the âbiggest foolsâ.
While Zomato, at first glance, issues new shares worth Rs 9,000 crore, a few investors actually pulled out through side deals in February 2021 by selling shares worth Rs. 319. millions of dollars.
Co-founder and CEO Deepinder Goyal himself has reduced his stake in the company by 0.63%, worth $ 32.4 million, and now only owns 5.51%. Retail investors should weigh these factors and exercise utmost caution before purchasing such new age companies, which may take their own time to generate profits and put investors on an endless wait for real wealth creation. .
(Mazhar Mohammad is the Founder and Chief Market Strategist at chartviewindia.in. Opinions are his)