It doesn’t matter that Peloton shares tumbled on their first day: Morning Brief - Yahoo Finance

Friday, September 27, 2019

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Why Peloton's IPO was a huge success

Peloton went public on Thursday.

Shares of the interactive exercise platform operator priced at $29 on Wednesday and finished Thursday’s trading session at $25.76, good for an 11.2% decline on its first day of trading.

This decline in the stock on its first day of trading could be framed as a disappointment. Bloomberg notes, for instance, that was the third-worst public debut of the last decade.

This price action might indicate that investors aren't excited about Peloton's prospects and that the struggles of consumer tech IPOs this year will continue. Some may also ask if this means the IPO window is closing. Have the struggles at The We Company spread into other offerings? And if the whole market of a successful IPO is seeing shares pop on the first day, then surely this is a failure, right?

Well, as far as famed VC investor Bill Gurley sees it, the first-day IPO pop is the most misunderstood and financially nonsensical event that a management — and investors and the media — team could root for.

Speaking with Patrick O'Shaugnessy on the Invest Like the Best podcast this week, Gurley took to task the idea that "successful" IPOs are ones in which a company’s stock trades sharply higher on the first day of trading.

"Thinking that a pop is a marketing event is about the most short-term oriented decision a manager or CEO/CFO could think," Gurley said. "Because it happens and it's over. And then the rest of your corporate life is based on how the company performs. And the notion that I'd get some lasting benefit by paying $500 million for this marketing event flies in the face of long term thinking."

Gurley cites an analogy about homebuying he heard from Henry Blodget — imagine selling your house and then hearing your broker sold the home for 80% more the next day. Now imagine celebrating that. This is what is happening when first-day IPO pops are cheered. It is a celebration that makes no economic sense.

Companies that see shares pop on the first day of trading leave money on the table. Money that could've been used to invest in the business. And the founders, employees, and early investors in a company that sell shares into the IPO also lose money — potentially hundreds of millions of dollars — if the stock goes nuts on the first day of trading. The only stakeholders excited about a first-day IPO pop are the investors who were fortunate enough to get an allocation the day before the IPO and then flipped these shares and the bankers who will now be able to earn fees on a future secondary offering of stock.

To take a real world example from this year, anyone that sold Beyond Meat (BYND) shares into the IPO sold shares at $25; when the market closed on Beyond's first day of trading, those shares were worth $65.75. So a Beyond Meat executive, for example, that sold $1 million worth of Beyond Meat stock into the IPO lost out on more than $1.6 million in potential gains.

Peloton IPO (Reuters)

But guess who did benefit? The investors who got an IPO allocation of Beyond and flipped it on day one and the bankers that got to participate in Beyond's secondary offering in late July.

In other words, the winner of Beyond Meat's IPO wasn't Beyond Meat.

Now, certainly the bankers that run IPO processes don't do nothing. You cannot have well-paid, well-connected finance professionals market your company and connect with investors for free. And as with many things in financial markets, the psychology of events can matter as much as the economics of an event. So if the psychology of an IPO that sinks on its first day of trading is thought to indicate that the company's prospects are bad, then the economic benefit for a company that prices its IPO higher than where it opens for trade might be ignored by investors.

Gurley's solution for companies is to favor direct listings. In a direct listing — which we've seen from Spotify (SPOT) and Slack (WORK) recently — companies don't lean on a team of bankers to drum up support for shares at a certain price.

Instead, the company says it will list shares on a certain exchange on a certain date and then shares begin trading. The newly-public company does not raise any money or issue any new shares. Of course, the problem with direct listings is that they make bankers a whole lot less money.

But the goal of an IPO isn't to enrich bankers or to make shares trade higher. The goal of an IPO is to raise money and offer liquidity to early shareholders who had been sitting on illiquid positions. The price the market sets for shares after they start trading does not — or at least, should not, and certainly need not — matter to the company.

Because in the end, a good company will be respected by the market over the long term. As Gurley reminds listeners, Facebook (FB), Amazon (AMZN), and Alphabet (GOOGL) "broke issue" and traded below their IPO price. And I think we'd all agree these companies have done well by their shareholders.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

What to watch today

Economy

8:30 a.m. ET: Personal Income, August (0.4% expected, 0.1% in July); Personal Spending, August (0.3% expected, 0.6% in July)
8:30 a.m. ET: Durable Goods Orders, August preliminary (-1.2% expected, 2.0% in July); Durables excluding Transportation, August preliminary (0.3% expected, -0.4% in July);
10 a.m. ET: University of Michigan Sentiment, September final (92.1 expected, 92.0 prior)

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