Clients want Uber. What will you tell them?
CHICAGO — The largest number of unicorn startups in recent memory are coming to market with some early-stage venture capital investors standing to benefit handsomely.
While the initial public offerings from companies valued at more than $1 billion — like Pinterest and Lyft — have attracted a lot of attention in the media, they are also the subject of thorny questions from clients. Should they be interested in investing in mega startups going public like Uber?
“Welcome to the jungle of 2019 IPOs,” said James M. Gambaccini of the Reston, Virginia-based Acorn Financial. “When you have an event of this magnitude there is enormous hype and excitement, but very limited historical financial data that investors need to see to make well-grounded investment decisions.”
If Uber, AirBnB and Slack go public at their expected valuations, the offerings would all rank among the 10 largest venture-backed tech IPOs since 2012, according to data from CB Insights.
At this early stage, Gambaccini recommends a wait-and-see approach. In fact, the opening day, week, month and the following 6-month mark will be key data points to analyze and re-evaluate, he said.
However, a handful of tech startups that came to market this year have had eye-catching first-day returns, according to research from Morningstar. The photo-sharing app Pinterest was up 28% at the close of its first day of trading and is valued at $12 billion. Even more impressively, video conferencing firm Zoom finished day one up 72% and is now worth $17 billion.
Other advisors are optimistic.
“I tell clients that when a company that I believe is transformative goes public, I want to own their stock,” says Aventura, Florida-based advisor Austin Frye, president of Frye Financial Center. “Even when there is no immediate prospect of profits, transformative companies eventually find a way to make money. Cases in point: Amazon, Twitter.”
Unicorns and especially ride-hailing apps — like the $24 billion Lyft — have definite pathways forward to profitability, according to Morningstar analysts. “For these companies, it’s winner takes more, or winner takes all,” said Brian Colello of Morningstar Research Services told attendees during a panel at the 2019 Morningstar Investment Conference.
Such companies benefit from the network effect other tech giants like Amazon and Facebook experience if they can cross-sell additional products to customers, Colello said. For example, Uber Eats — which uses the platform to deliver food to customers — has seen significant growth in recent years.
Like other advisors, Frye is hesitant to buy stock of major IPOs on the first day of trading. He suggests advisors look for cheaper opportunities.
“If the shares of any particular IPO company seem to be running away from me during the first few days of trading, I am patient and wait for the shares to drop down again before buying,” Frye says. “All companies have bad days and bad quarters and eventually there is a buying opportunity for those who wait patiently.”
Uber is expected to list on the stock exchange later this month with an estimated valuation of $90 billion, according to Morningstar.
There are palpable risks involved with unicorn investing. After jumping 8% on its first day of trading, Lyft is 21% below its $72 offer price, according to Morningstar. From 1980 to 2016, unicorn companies with revenue in excess of $1 billion had 8.4% excess returns over a three-year benchmark, while firms with revenue of less than $1 billion lost 8.9%.
Whether clients decide to invest in flashy IPOs, the so-called "year of the unicorn" will continue to challenge advisors to identify risks and opportunities involved with investing in these massive companies.
“It’s likely to be a wild ride,” Gambaccini says.