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IPOs By Quarter

Q1 2020’s IPO results were a disappointment after a relatively busy Q4 2019’s robust 53 IPOs held the potential for continued strong volume.

The quarter finished on a down note, with only five completed IPOs for the entire month of March. Three of the five IPOs were blank check firms.

Q1 2020’s result of 39 U.S IPOs represented a significant drop from the previous quarter’s tally and was likely due to the rise of the Covid-19 coronavirus outbreak.

Stock markets around the world sold off, creating volatility which is the enemy of the IPO market.

The chart below shows the number of U.S. IPOs on a quarterly basis since Q2 2015.

U.S. IPOs by Quarter: Q2 2015 to Q1 2020

U.S. IPOs by Quarter: Q2 2015 to Q1 2020

IPOs By Industry

During the quarter, there was a relatively narrow distribution of industries, with only 13 industries represented.

  • Blank check firms accounted for thirteen IPOs, almost double the nearest industry
  • Biopharma firms completed seven IPOs
  • Healthcare IT companies finished four transactions followed by Financial Services at 2.

The remaining eight industries had only one IPO each, as shown in the chart below:

Q1 2020 U.S. IPOs by Industry

Q1 2020 U.S. IPOs by Industry

IPOs by Country of Origin

U.S.-based companies accounted for 28 of the 39 IPOs, representing a reduced 72% of the total during the quarter.

The period featured only two other countries with IPOs, a very low distribution for international capital raising in the U.S.

China came in second place with eight IPOs (20.5%), as has been the pattern in recent quarters.

Canada was the only other country, with three IPOs during the quarter.

Q1 2020 U.S. IPOs by Country of Origin

Q1 2020 U.S. IPOs by Country of Origin

Return Since IPO by Industry

In a market driven by healthcare fears as a result of the Covid-19 virus, it isn’t surprising that health-oriented industries claimed the top three spots by industry

Healthcare Services companies provided an average return of 29.6% during the quarter.

Biopharma firms grew by 12.06% and Healthcare IT firms added 6.1% as of quarter’s end.

Notably, REITs were the poorest performed by a wide margin as investor fears of large scale business closures weighed negatively on sentiment.

All other industries were in negative territory by the end of the quarter, as the chart shows here:

Q1 2020 Percentage Return by Industry Since IPO

Q1 2020 Percentage Return by Industry Since IPO

Opinion Performance

During the quarter, I published ‘BUY’ opinions for only 6 IPOs, reflective of my caution in the market environment.

For my 6 IPO BUY opinions, the median return during the quarter was 14.53% and the average return was 16.39%, which compared favorably to the benchmark S&P 500 Index and the IPO ETF.

  • By comparison, the S&P 500 Index returned a negative (19.2%) during the quarter.

During the quarter, a much smaller number of quality healthcare services, healthcare IT, and biopharma firms came to market

The IPO market faced challenges late in the quarter, sharply reducing returns and dampening enthusiasm amid the growing Covid-19 pandemic.

By focusing on the highest quality issues and proceeding with caution, I was able to produce outsize gains for selected new issues when compared to the S&P 500 and the IPO ETF index benchmarks.

Looking Ahead

IPOs in Q2 2020 are likely going to be a struggle for general technology firms.

The Covid-19 coronavirus outbreak will hit the stock market particularly hard during the second quarter as the pandemic’s effects are expected to reach their peak infections and lethality by the end of April

As a result, sentiment is strongly negative in the IPO market, with the exception perhaps of biopharma and other healthcare related new issues.

Overall stock market volatility is a negative for the smooth functioning of the IPO market, as it makes valuation consensus more difficult to achieve for institutional investors in IPO transactions.

As a result, companies seeking to go public will likely have to work that much harder to show the value of their offering and their ability to operate in spite of the pandemic’s economic effects.

Firms which show large losses or no path to profitability will likely have a very difficult time closing transactions.

Even before the pandemic outbreak, investors were paying more attention to operating metrics beyond revenue growth and this focus is likely to intensify in the quarters ahead.

Biopharma and other life science IPOs will likely continue to go to market as the industry continues to find institutional investors for its long-term hold oriented stock offerings that serve to replenish the diminishing pipelines of big pharma firms worldwide.

I'll research U.S. IPOs (except Blank Check firms) and will provide timely opinions for readers and members.

I believe market volatility will continue to present challenges to the IPO market at least through Q2, but also believe that healthcare firms will likely present interesting opportunities for investors willing to brave uncertain market environments.

Donovan Jones

April 17, 2020

(The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)