IPO Investors show discipline in pricing with Blue Apron

IPO Investors show discipline in pricing with Blue Apron

      HIGHLIGHTS

• Correction won’t be because of IPO market
• IPO investors dictated Blue Apron price
• Unicorn valuations are being kept in check
• “Down-Rounds” to go public are likely

The IPO market ended the month of June with a jolt.

Eight new companies went public. Many had mixed debuts with rollercoaster valuations over the course of their respective roadshows.

High-end pricings, low-end pricings and some severely cut pricings left some in the industry queasy. Many did not know how to make heads or tails of the situation.

And then the storylines came — the volatility must mean a top!

A correction is coming!

The sky is falling!

First off, there have been just 76 IPOs this year — a far cry from an out of control IPO market.

We have believed, and continue to believe, that if a correction is coming, it will not be “because of the IPO market”. In fact, the end of June was a perfect example of how the public markets showed discipline while staring straight in the face of greed.

Let’s establish one thing. The vast number of private companies and their bloated valuations via private funding round is the system that is broken. We think that flaw is being corrected and losses from late stage investors will inevitably happen. See Uber as the headline story to watch on that front.

But Blue Apron Holdings’ (NYSE: APRN) IPO, and the way IPO investors received this deal, is also a sign of future things to come. Fidelity Investments led a $135m Series D funding round in June 2015. The company, at the time, was growing at a pace that cash reserves could not keep up with. For Fidelity and other investors in that round…it may have been a good bet at the time. But with every good idea comes good competition which is head-scratching to some in the industry as to why so many private companies with great ideas do not tap the public markets sooner.

In Blue Apron’s case, and to their dismay, the competition came in the form of Amazon’s acquisition of Whole Foods in the middle of the ‘APRN’ roadshow. I have no insight into Amazon’s CEO, Jeff Bezos, and the “peculiar timing” of the deal…but it almost seemed cruel to rain on Blue Apron’s parade.

Who knows, maybe Blue Apron privately turned down an Amazon offer in the past and this was his “revenge”.

Regardless, the growth that looked great on paper started to, pardon the pun, not look so appetizing. Investors  began questioning the story, the plan and the future.

And this is where IPO underwriters and the company did the entire IPO market a service which proves public markets still have some sense of rationale. The deal was slashed midweek from a range of $15.00-$17.00 to $10.00-$11.00 and ultimately priced at the low-end of that downwardly-revised range. Institutional investors, hedge fund managers… real money… were able to dictate where they felt the deal needed to price and Blue Apron had no choice but to accept the offer.

After a roadshow that left Blue Apron badly bruised, the company opened flat but did manage to trade as high as $1.00 above the offering price on its debut day. However, the company traded below the offering price on day two.

It should be noted that a technology company with similar revenue growth and mounting losses like Blue Apron, Tintri, Inc. (Nasdaq: TNTR), also cut their price 30+% in order to appease IPO investors this week. That deal opened slightly higher and traded well during its Friday (6/30) debut.

So what’s the takeaway from the Blue Apron story? Yes…companies that are private are likely a little nervous that they may have to do a ‘down-round’ to go public. The mere fact that companies have been able to regularly raise cash and increase private valuations with the assumption that the ‘lottery ticket cashes later’ is officially being proved false.

We think IPO investors and the public markets are absolutely doing the right thing with these ‘unicorns’ with bloated valuations. Investors are properly evaluating the prospects and naming their price. Bottom line, the public markets are keeping a bubbly private mark in check.

So, for our two-cents, the sky isn’t falling — just maybe some absurd private valuations.

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Note: This article was published for IPO Boutique’s  July 2, 2017 newsletter