What Etsy's stellar debut doesn't say about the IPO market
Congratulations to Etsy on what has been by many measures a successful IPO. The stock priced at $16 a share yesterday, at the high end of its expected range, and shot up as much as 123 percent in its first few hours of trading today. This has led to the usual first-day commentary about IPO manias and cash left on tables, but the truth is the tech markets have become so distorted it's going to take some time to see clearly what's ahead for Etsy.
It's always a little surprising – actually, it's more disappointing than surprising – to see people who follow IPOs react as if the first day's performance is a serious indicator of what's to come. We should have learned this lesson after Facebook's IPO if not before. When there is a strong first-day pop, six months later the stock is, as a rule, trading well below the first-day close, even if it it's still above the offering price.
Those first-day pops are good PR for underwriters courting other potential IPO candidates. They also ensure anyone who bought into the IPO itself can exit early on without dragging down the stock too quickly. But only sometimes do they reflect any sustained market value for the newly listed company, and were companies to take all the proverbial money off the table right away, they might find their stocks trading well below the offering price months later, making the company's operations look weaker to investors than they might actually be.
Look at GoDaddy, which went public on April 1. The stock shot up 31 percent on its first day, making the company and its history of controversies look very attractive to onlookers who didn't know any better. After only two weeks in the market, GoDaddy has fallen 9% from the high it reached in early April. Yes, it's still above its $20 offering price, which was in retrospect maybe a better valuation than what investors accorded to it on its first day of trading.
GoDaddy's first-day pop – and to an extent, that of Etsy - also makes the IPO market look robust, when in fact it's suffering from a concerning imbalance between supply and demand. Only three tech companies began trading on US markets in the first quarter. There have been two so far this month, so the supply may be increasing but it's still not equal to the pent-up demand for IPOs as most tech companies seek financing in private rounds.
The demand has grown strong enough that investors are willing to overlook the fact that most of the tech companies going public are still losing money. Last year, two thirds of tech companies that raised $100 million or more in IPOs went public with losses. This year, Box, GoDaddy and Etsy all received warm welcomes in public markets while awash in red ink.
Going public with a loss doesn't mean a stock will fare poorly, but it's also the case that most of the time investors are suspicious about buying into IPOs without profits. And rightly so. You only have to go back about five or six years to find a time when nobody wanted any part of a tech IPO that wasn't profitable. Remember that? It was right after the stock market crashed.
The bias against IPOs has become so strong that Etsy seems to have lost its status as a unicorn just by filing. Etsy raised $267 million in its IPO ($307 million if underwriters exercise the greenshoe option). Today, Jawbone reportedly closed a $300 million private round valuing it at around $3 billion. We have little idea how many of the private unicorns are losing money, as Etsy and Box are, because laws requiring companies to tell the world truthfully whether they're making money or not only apply once they step into the IPO pipeline.
Etsy's decision to go public has less to do with desperation – the company's cash on hand improved through 2014 to $89 million – and more to do with its two wishes to remain independent and to share some of its success with the buyers and sellers who helped build the site into a solid ecommerce community. Etsy seems like a prime acquisition target for, say, a post-PayPal eBay, but its absurd post-IPO valuation of $3.5 billion (18 times its revenue) will repel any sane suitors for a while.
Etsy also allocated 15 percent of its IPO shares to individual investors, much of which was intended to give members of the Etsy community a chance to own the company. Etsy may aspire to corporate ideals that strike some as quirky, but this simple gesture betrays the hypocrisy of many unicorns claiming they're all about helping their users while refusing to share any of their financial success with them.
So did Etsy leave money on the table? Maybe, but not as much as the employees who cashed out in 2012 or 2014, at $6.90 a share and $10.60 a share, respectively. And being greedier about an offering price this week could well mean a depressed stock price hurting option holders in coming months. As for the IPO mania, well, let's just say the IPO markets are being no more or less irrational than the private ones.