Ant Ups the Ante in IPO Fever

Alibaba-spinoff Ant Group is set to become the biggest flotation of all time when it launches this year, potentially raising $35 billion, while investors are still awaiting Airbnb’s move public before the end of 2020.

At the half-way point of 2020 we wrote about which companies were expected to float this year, and the numbers have swelled since then.

Despite the global pandemic and extreme stock market volatility earlier in the year, investor appetite for new issues seems as keen as ever: cloud software company Snowflake (SNOW) launched at $120 on September 16 but doubled in the first few days as a public company. Despite a lack of enthusiasm for UK equities broadly, a number of high-profile companies such as The Hut Group (THG) have just floated, while others such as supercar-maker McClaren and IPA maker BrewDog are still mulling the IPO option.

US Tech Boom

The backdrop to 2020's IPO fever is the outperformance of US tech stocks, which inevitably spurs investor interest as people look for the next Tesla (TSLA) or Amazon (AMZN).

While not strictly a tech company, Airbnb fits the investor narrative in that it operates a disruptive e-commerce platform and has an established brand than appeals to millennial consumers. Airbnb was slated to float before the Covid-19 crisis, and while some investors thought the pandemic would put paid to the firm's flotation plans, the company filed to go public in August this year. Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says the float will likely attract the most attention among US IPOs this year, but the reasons behind it are more prosaic. “The fact that early AirBnb investors and employees have stock options expiring early next year may have something to do with it, as will the onerous terms of the funding deal with its private equity partners,” she says.

New US floats include software/surveillance firm Palantir (PLTR) which was set up by, among others, PayPal founder and serial tech entrepreneur Peter Thiel. Palantir has links to the US military and secret service and has never made a profit, so that may flag up some concerns to investors. “Palantir has earned a reputation for being highly secretive but it is known to be one of the biggest players in big data. The company may, therefore, struggle with the scrutiny that comes with going public and the transparency the market demands, particularly with heightened concerns about how data is used,” says stockbroker IG.

The company's shares went from $7 to more than $11 on its first day of trading on September 30. Morningstar analyst Mark Cash has initiated coverage on the firm with a $13 fair value estimate. At current prices, Cash says investors "have an opportunity to capture upside on this pioneer in big data integration and analytics". Due to its strong position in data management and US government contracts, "we think the company is poised for robust growth and margin expansion in the years ahead", Cash adds.

Going Direct

Palantir is also unusual in that it went public via a direct listing – which means the shares are offered straight to the public without the roadshows organised by Wall Street banks to drum up interest from institutional investors. Morningstar Canada's Ruth Saldanha has looked at Palantir's prospects in a recent article. Another recent example of a company that has eschewed the traditional IPO and gone direct is music streaming service Spotify (SPOT).

“Enterprise software maker Asana and Palantir will provide rare test cases for a host of buzzworthy startups on the cusp of going public. Their success or failure could further reshape the IPO market by normalising the direct listing,” says Pitchbook’s James Thorne.

But the world’s biggest float by value may not happen in the US this year. Fintech Ant Group, which was spun out of New York-listed Alibaba (BABA), is set to eclipse Saudi Aramco by raising around $35 billion. Alibaba, along with Tencent, is one of China’s biggest internet names and was founded by Jack Ma; it floated in 2014 in New York to take advantage of the liquidity and prestige of a US listing.

In contrast, Ant Financial will launch in Hong Kong and on the Shanghai STAR stock market, which only came into being last year as a rival to the Nasdaq. Experts say this reflects the growing confidence in Chinese stock markets among local entrepreneurs, as well as being a side-effect of US-China trade tensions. From an ESG perspective, this could come at a cost to global investors though, as US listing regulations are still among the strictest in the world.

Hit the Hut

Looking back to those names which have already listed on the stock market, e-commerce beauty and health platform The Hut Group is the UK’s biggest float so far this year, raising £1.8 billion, according to the London Stock Exchange, and is one of 13 new listings in 2020 (there were 23 last year, see chart). The UK tech unicorn has attracted investment from BlackRock, Janus Henderson and the Qatar sovereign wealth fund. It is also a significant holding of startup-focused investment trust Merian Chrysalis (MERI), which has just raised another £50 million from investors. Hut has a similar business model to Canadian success story Shopify (SHOP), whose shares have doubled this year amid a lockdown-inspired ecommerce boom.

The Hut Group shares floated at £5 and are now trading around the £6 level. But Hargreaves Lansdown’s Streeter flags up a potential governance concern as the company’s founder, Matthew Moulding, is both chairman and chief executive, something that would prohibit the company joining the FTSE 100 (if it gets to that size).

What does the lively market in IPOs in a pandemic tell us about the state of investing? Morningstar's John Rekenthaler has recently written about how some stock prices such as Tesla have become detached from reality, and IPOs are one example of this irrational exuberance among investors. We have also noted that some newbie investors are jumping on the bandwagon and day trading hot stocks. Streeter warns that investors need to be careful about buying into IPOs: "Given that we may have experienced peak optimism with tech stocks, investors should not rush their decisions or get swept along by the hype. They need to be sure they are really happy with the long-term prospects of the company before putting in their money."