Snap, Blue Apron are IPO cautionary tales
The lackluster stock market debuts of social media company Snap and meal-kit delivery service Blue Apron have splashed a dose of cold water on an initial public offering season that appeared to be heating up.
The two companies share several similarities. Both are closely watched upstarts that showed genuine promise for disrupting in their respective industries and making a name for themselves in a new category of business. Both are beginning to face a serious response from potential rivals. Both had yet to report regular profits.
The result has become a cautionary tale in an otherwise red-hot stock market, a lesson for a host of technology and commercial darlings that have been lining up for their day on the public markets. Bay Area names like file-hosting service Dropbox, digital media player Roku and subscription fashion service Stitch Fix have all signaled their interest in going public, part of a wave of IPOs that may one day include the likes of Airbnb and Uber.
After Snap had its IPO in March with an opening price of $17, it saw its shares close at a low of $12.52 on Wednesday, the same day Facebook reported that users under the age of 25 spend an average of 32 minutes a day on its Instagram app, demonstrating its success with a demographic Snapchat heavily targets. Snapchat released similar data in February when it originally filed its IPO. Some analysts said Snap’s shares could fall farther when a lockup period ends that currently bars insiders from selling.
Blue Apron initially priced its shares in June at around $10 a share; by Wednesday, the stock had closed at $6.25, off more than 30 percent from its original price (which itself was lower than the company had hoped). The meal-delivery service was a victim of unfortunate timing. It went public shortly after Amazon.com announced its purchase of Whole Foods, leading to speculation the online retailer might accelerate its own meal delivery plans.
Snap and Blue Apron “are kind of ‘me too’ companies in a way,” said Kathleen Smith, manager of IPO exchange traded funds at Renaissance Capital. “There’s a lot of Blue Apron kinds of companies that have been funded. Your confidence gets shook when you see there’s a lot of competition by others that do the same. Snap was a fairly unique company, but ever since Snap has been public, its revenue growth was light, suggesting that Facebook was penetrating its market.”
Snap and Blue Apron’s struggles comes as the IPO market has been showing some life. In 2016, just 105 companies went public, the lowest number since the recession in 2009, according to Renaissance Capital, an IPO research and investment firm. This year, 86 companies have gone public, a 65 percent increase from this time a year ago. That’s a healthy improvement, but hardly a pace likely to generate enough IPOs to top the annual tally in 2014 when 275 companies went public.
So what’s prompted the renewed interest?
The stock market has been trading at record highs at a time when many of the companies, built with investor cash, have become mature enough to make a move. In some cases, the early investors are eager to start reaping their rewards for helping get the young companies on their feet.
“The overall market is the driver that’s causing companies to come off the sidelines,” said Alan Jones, a partner with PricewaterhouseCoopers International’s Deals practice.
And the government is trying to help companies in it its own way.
On July 10, the SEC put in place a new rule allowing companies to confidentially submit registration documents related to IPOs in an attempt to ease their regulatory burden. The benefit only used to be offered to smaller companies; now others can take advantage, and many of them are.
Smith said the new rules can be a mixed bag for investors. The lack of information about a company can increase the risk of buying a particular share. But making it easier for good companies to go public can be a benefit for investors and the companies seeking to raise money.
“When investors make money that opens the way for other companies to go public,” she said.
To be sure, Snap and Blue Apron have been more the exception than the rule this year. Many technology startups have had successful offerings, and new shares for the real estate brokerage Redfin soared on its debut late last month. And beyond the stock price, Jones said going public can be a major marketing and branding coup, validation that a company has arrived in the big leagues.
With Roku, Dropbox and Stitch Fix all looking to go public by the end of the year, Carmel doesn’t expect to see a pullback any time soon.
“We’re going to see a lot more IPO activity through 2017 and the first half of 2018,” he said. “I don’t know where the second half of 2018 lies, but in the meantime I think we’ll see a lot more liquidity acts that people don’t know are ready to go out.”
Alex Schiffer is a Washington Post writer.