Does plunging stock prices for hot startups that have recently gone public mean a broader market meltdown is coming?
It’s not far-fetched to think that’s the growing message here.
With the stock prices of once richly valued startups coming out of the gate weak for the past six months, it could be a sign that the broader market is near full valuation. Sure one doesn’t want to brush every company — small or of the S&P 500 variety — with the same stroke, but investors could be sending a message that valuations are too stretched for where the U.S. business cycle is headed in the near to medium term.
“I think I would stay away from it [Peloton] for now, that’s for sure. That was not a successful deal for anyone other working at Peloton in the beginning,” said Sevens Report Research founder Tom Essaye on Yahoo Finance’s The First Trade.
Essaye added, “I think part of the failure of some of these high-flying IPOs is making me a little nervous. I don’t have any hard or fast facts on this, but I have just been around long enough to know when you see this trend of high-flying names falling flat it sometimes could lead to maybe more cautious investor behavior. Over the longer term that is good, but in the near-term it’s just something I am paying attention to.”
To that end, investors haven’t held back on punishing numerous buzzy new issues on their first day of trading this year. In their minds, these companies have yet to show profits and it’s unclear when they will do so — hence, investors are taking a more wait and see approach, experts say.
Connected fitness player Peloton (PTON) — which hasn’t been profitable since its 2014 founding — saw its stock sink 11.2% on its Thursday debut at the Nasdaq.
“This is a huge day for Peloton, it was a fundraising event for us. We have over $1.5 billion on the balance sheet,” Peloton President William Lynch said to Yahoo Finance on Thursday, its first day as a public company. “If you look at some of the [stock] buyers today, seven of the top 15 have been in the stock and our capital table and have seen this management team execute and can see the potential for the brand.”
Peloton’s stock fell about 3% on Friday’s trading session.
SmileDirectClub (SDC) fared much worse than Peloton in its Nasdaq debut on Sept. 12. The at-home braces seller saw its stock plunge 28% on its first day of trading. The market reaction represented the year’s worst debut for a U.S. company valued at more than $1 billion.
Similar to Peloton, SmileDirectClub executives downplayed the day one stock price movement.
SmileDirectClub Chief Financial Officer Kyle Wailes told Yahoo Finance the company isn’t getting caught up in the first day response, emphasizing the long-term potential for the company.
Elsewhere, shares of Uber (UBER) and Lyft (LYFT) have nosedived 25% and 18%, respectively, since their hyped IPOs in May. WeWork had several valuation cuts as it attempted to go public this month, and ended up pulling the listing. Endeavor pulled its IPO for the second time on Thursday evening, following Peloton’s tepid debut.
The Renaissance IPO ETF — which tracks the performance of newly public companies — has dropped 6% in the past six months.
“I wouldn’t say it’s a sign [of a market top], I will say I have seen it before and market tops were not that far after,” cautions Essaye. “It’s definitely something that has caught my attention — it’s a sign of it not really being a healthy stock market.”