IPOs, a global rebound and Tariff Man

The IPO market is hot

As I wrote last night, IPO conditions right now seem nearly ideal for growth companies to come to market. The appetite for loss-making companies shows us that public investors are willing to overlook losses as long as growth remains robust.

For example, Zoom Video has more than doubled in value since its initial public offering. PagerDuty is up 90% and Pinterest shares have gained more than 50%. Lyft is weighing on the bullish sentiment. But one could argue that its an idiosyncratic case.

Last month, Uber was thinking it could get out at a valuation near $100 billion. After Lyft’s inauspicious debut, this has been scaled back. But the price range is still  $80 up to $91 billion, above the last private funding round of $76  billion.

That’s still 7-8x 2018 revenue of $11.3 billion. Revenue growth was 42% in 2018. But revenue in 2017 had more than doubled from 2016 levels. The focus is growth because Uber lost up to $1.1 billion in the first quarter of this year.

Note that this is will be the third largest IPO ever. Alibaba raised $25 billion in 2014 at a valuation of $167 billion. And Facebook sold $16 billion of shares in 2012, at a valuation of $104 billion.

And it will be a boon for California tax revenue. Estimates are for $1 billion of additional tax revenue for the state, where the top 1% of earners pay 47% of state income tax.

P.S. – Softbank is also considering an IPO. The valuations bandied about would eclipse even Uber. That will underpin WeWork because it will give punters the sense that SoftBank’s liquidity can help WeWork stave off any end of cycle liquidity issues. It doesn’t make me like the stock — I think it will go to zero. But it does make the likelihood that WeWork’s IPO is successful that much greater.

Private market is where the action is

Here’s the thing though. Despite the upsurge in Zoom, Pinterest or PagerDuty shares, as I wrote yesterday, most of the gains have accreted to the private market. Dion Rabouin has a great daily read over at Axios. And he highlighted the following this morning:

Startups are putting off IPOs, thanks to big capital raises on the private side. “The amount of funding in the private markets has been greater each year. These companies in effect are getting all the capital they need privately. Whereas before they would go public,” Dan Levitan, co-founder of venture capital firm Maveron, told Axios’ Dan Primack on stage.

To my mind that makes the public markets riskier. The optionality inherent in the mobile web land grab I spoke of yesterday is probably being almost fully  captured by private markets. Sure there’s a spike in shares once these companies go public. But what will the full cycle public market returns be on average? They could be negative. Something to consider

Tesla’s got the money

On a similar note, Tesla has already raised the money it needed. The company mused about the possibility of raising capital during its earnings call. I took that not as just musing, but a hint that they were coming to market. And sure enough, they have done. The deal was very successful. I will bold the key bits for you:

Meeting solid demand from investors, Tesla was able to increase the size of its convertible bond offering by $250 million to $1.6 billion. It also raised roughly $750 million from its sale of nearly 3.1 million common shares at $243 a share—around $100 million more than originally anticipated, not including expenses related to the sale.

The company could ultimately raise as much as $2.7 billion if underwriters exercise options to purchase additional shares and bonds, the company said in a filing with the Securities and Exchange Commission.

Shares of Tesla rose 4.3% on Thursday a share after the company began marketing its stock and bonds, an unusual response as shares in firms raising capital through stock sales often decline, reflecting the increased quantity of securities available in the market. Shares rose another 4.5% Friday to close at $255.03, according to FactSet.

Tesla’s success is a signpost. The market favors growth over value. And investors are willing to take risks to get that growth.

When the music stops, many of these growth companies will get caught out and tank. Some will go to zero. Others will do just fine. Some will do extraordinarily well, far outpacing market returns. Which companies will fall into which categories is unknown. And its this fact that is driving the rush into these names.

My take on the global economy

I think we have seen re-acceleration in Q1 in both the US and China. This is simply a quarter-on-quarter bounce off a trough. And it is not clear how long this re-acceleration will last and whether it will cause year-over-year-trend growth to also re-accelerate. But, it does rule out the downside scenarios like recession. The FT has a good take on that score. Here’s the key bit:

Less than a month ago in the imposing setting of the IMF’s HQ2 building in Washington DC, Gita Gopinath, its new chief economist, had a bleak message for the world.

Disappointing data had led the fund to cut its forecasts for global growth yet again, any recovery pencilled in for the second half of this year was “precarious” and this toxic combination meant that spring 2019 was a “delicate moment” for the global economy.

Less than a month later the IMF’s message appears to have been far too gloomy. Over the past few days the three largest economic blocs in the world — the EU, China and the US, comprising almost half of global output — have published their first quarter estimates and all three have been stronger than expected.

On the latest data, at least, the slowdown of late 2018 has already ended.

I am no wild-eyed bull. I saw the slowing too. But, I have been peddling the possibility of a re-acceleration for weeks now. The IMF simply got caught looking in the rear view mirror. And it does highlight the degree to which these forecasts are also likely to miss the eventual turn in the business cycle. Just a heads up on that score

And notice that growth laggard Europe is also finally benefitting here. ECB officials almost sound bullish. Here’s Bundesbank President Jens Weidmann:

From today’s perspective, much suggests that the economy is only experiencing a temporary weak phase and will pick up speed again after its soft patch.

Finnish Central Bank head Olli Rehn:

Some very recent indicators hint at stabilization. This is good news, of course. But in my view we should not jump the gun after the first green shoots and change the course. In policy-making, it is often better to be safe than sorry.

They are prepared for worse to come but are optimistic those preparations will be unnecessary. And that means pressure on countries like Italy will subside. That’s bullish for Italian assets, including their government bonds.

One minor wrinkle here is the emerging markets, which are suffering from a strong dollar and the original sin of using it as a funding currency. As I wrote ad nauseam throughout 2018 regarding the rebalancing thesis pushed by Jeremy Grantham, US assets look expensive on a relative basis. But the outperformance may be warranted, and, thus, will continue.

But what about Tariff Man?

US President Donald Trump is threatening to impose tariffs on the Chinese by Friday, if they don’;t come to heal. That has roiled global asset markets. Estimates are that a full blown US – China trade war would erase 1.6-2.0% from Chinese GDP growth. I have seen no estimates on the US.

It’s clear that Trump thinks the US is sitting pretty economically. And so, he is using this as an opportunity to extract concessions from the Chinese – a move that is standard operating procedure for Trump.

For their part, the Chinese aren’t biting yet. And the rumor is that they may have even cancelled talks with Trump, effectively calling his bluff. Let’s see what happens.

Personally, I am non-plussed. I don’t think this will be a big factor in global growth either way. And to the degree it tamps down on bullishness and gives a bid to safe assets, it is actually positive, since risk assets look overbought right now.

Happy Monday!