U.S. IPO Quarterly Review: Q2 2020

IPOStreet

Total IPOs by Quarter

U.S IPO market results in Q2 2020 posted a strong bounce-back later in the quarter after a slow start due to the effects of the Covid19 pandemic on stock markets.

The quarter finished on an upbeat note, with 58 priced IPOs for the quarter.

Q2 2020’s result of 58 U.S. IPOs represented a 45% increase from the previous quarter’s tally but a 14% drop from Q2 2019’s results.

Generally speaking, the U.S. IPO market is open for business as long as the VIX volatility gauge is below 40.

With the exception of Thursday & Friday June 11 -12, for most of Q2 the VIX was well below a 40 reading.

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

q2ipos

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IPOs By Industry

During the quarter, there was a slightly wider distribution of industries than in the previous quarter, with 15 industries represented.

Blank check and Biopharma firms accounted for twenty IPOs, far greater than the next nearest industry result

Healthcare IT and Enterprise IT companies finished three transactions each followed by Consumer companies at two.

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

q22020industry

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IPOs by Country of Origin

U.S.-based companies accounted for 47 of the 58 IPOs, representing a much higher 81% of the total during the quarter.

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

China came in second place with eight IPOs (13.8%), as has been the pattern in recent quarters.

Switzerland, Sweden and Israel each accounted for only one IPO during the quarter.

q22020country

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Return Since IPO by Industry

A single Software industry company, GAN Limited (GAN), accounted for the top return during the quarter of 199.41%.

The same occurred with the Medical Devices industry: one company stock, Inari (NARI), grew by 154.95% and Healthcare IT firms added 6.1% as of quarter’s end.

The largest cohort by number of IPOs, Biopharmas, returned an average of 62.03% during the quarter, a stunning result for those 20 IPOs.

Other notable industries that performed well were Ecommerce, Enterprise IT and Fintech, while Edtech brought up the bottom of the ranking with a drop of 19.83%, as the chart shows here:

q22020industryreturn

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IPOs On TheStreet Performance

During the quarter, IPOs On TheStreet published ‘BUY’ opinions for 23 IPOs versus 6 in the previous quarter, reflective of my bullish sentiment in the market environment after the sharp drop in Q1.

For the 23 BUY opinions, the median return during the quarter was 82.31% and the average return was 81.3%, which compared favorably to the benchmark S&P 500 Index and the IPO ETF.

By comparison, the S&P 500 Index returned 20.14% during the quarter.

The IPO ETF (IPO) by Renaissance Capital returned 52.52%.

During the quarter, a larger number of quality Biopharma, Consumer and Enterprise IT firms came to market

The IPO market accelerated late in the quarter, sharply increasing returns and raising enthusiasm amid medium and large offerings.

By focusing on the highest quality issues and not ‘fighting the Fed,’ IPOs On TheStreet was able to produce outsize gains for selected new issues when compared to the S&P 500 and the IPO ETF index benchmarks.

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Looking Ahead

IPOs in Q3 2020 are likely going to be affected by the negative numbers for Q2 earnings as well as questions about the trajectory of the Covid-19 coronavirus outbreak in the U.S. and how quickly or slowly the region will emerge from the pandemic.

However, sentiment appears to be robust for the present, especially with the high number of new filings in the biopharma industry.

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 long as the VIX can stay reasonably below the 40 mark, the U.S. IPO market should continue to ‘make up for lost time’ with a robust calendar during Q3.

A potential complicating factor will be the upcoming U.S. general election, causing investors to think twice about making longer term bets on stocks.

Despite the busy Q2 results and strong demand, issuing firms which show large losses or no path to profitability will likely have a very difficult time closing transactions at favorable terms.

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.

IPOs On TheStreet will research all U.S. IPOs (except Blank Check firms) and will provide timely opinions for our members.

I believe market volatility will continue to present periodic challenges to the IPO market at least through Q4 2020, but also believe that the IPO field will likely present interesting opportunities for investors willing to brave uncertain market environments.

Donovan Jones

July 1, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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