> In an IPO, SEC rules typically restrict shareholders from selling shares until six months after the offering. A direct offering makes it much easier for employees and early investors to cash out as soon as the first day of trading. This can be a big help for investors in companies that have waited to go public, which many of the best-known tech companies have been doing for years
Is it wrong to interpret this as other people expecting the bubble to pop soon and wanting to pass the bag sooner rather than later?
I don’t know, but I do think you can take the recent spate of high profile IPOs as an indicator that a lot of people want to “cash out” (sell their shares) or “cash in” (raise money whilst the market is bullish) right now. Presumably they think the market won’t get much better.
It seems pretty obvious that we’re in a bubble, given the excessive valuations and obvious signs such as the incredible rise of WeWork and “me too” startup culture. But the nature of a bubble is that such things are normalised and rationalised. What’s particularly difficult about this bubble is that economic conditions have conspired to maintain it far longer that the .com boom, which has meant predictions of the burst have been premature.
I definitely think we’re in a better place than the late 90s, but it’s still a bubble. Perhaps such cyclic swings are inevitable; just wish we’d done more constructive and positive things than Uber, Airbnb, Facebook, Twitter, with this era of cheap money. Could have had more Teslas and SpaceXs.
In a traditional IPO, the company finds a bank to underwrite the deal and that bank gets shares. That bank is then taking on the risk of the shares flopping and tries to sell. The SEC rules protect the underwriting bank from competition during that time.
In a direct listing, the shares are coming from the current shareholders, so there is no need to stop competition because there is no third party to compete against.
A Cynic might say the bank expects a bubble 6 mo out, but I'd assume that's either baked into the fees/cost (4-7% as per the article) or they believe the shares of the company will be worth more eventually.
That is possible, but in theory there has been due diligence to verify the company as an on-going concern. Normally the goal of going public is to let those who took the risk in the beginning to get a payout, given that they have had their funds locked up all this time. Those who choose to invest now are taking the risks for access to future returns.
No, it used to be the point. Now a large portion of the point is to cash out existing investors. I do not claim it is the sole purpose, and this is largely true among unicorns, but it is certainly a shift. Look at Facebook: they kept raising huge series of private equity.
That is only true with a very small, very richly valued group of technology stocks. You're talking about a few dozen companies max per year. Using that small group to extrapolate a claim that therefore IPOs are now primarily used to exit shareholders, is clearly a dramatic overreach.
Pharma & biotech companies as one example (the market has seen far more IPOs in that sector over the last year than it has large tech companies using their IPO as an exit), are still very frequently doing IPOs so they can raise operational cash to burn and to use their public stock for funding and acquisitions later.
Sounds wrong. First of all, I'm pretty sure it's not the SEC which forbids selling the first 6 months. It's the underwriting banks that enforce this on pre-ipo shareholders in order to protect the price volatility of the offering.
Yes. You are imputing intent from action, which is often wrong.
Another interpretation: they don’t care for the terms underwriters are offering, and think a better price can be set offering shares directly to investors. And that a good price serves everyone well.
Google had a rough go of it, IIRC, and there is some risk that institutional investors will sit the round out without their banking partners running the show.
The current stock price is the value of one stock, selling on a specific date, at a specific time, with a specific number of shares outstanding, at a certain trade volume, as compared to other options one can purchase in the market.
Multiplying that stock price by the number of outstanding shares provides a number known as market capitalization, but it is not THE value that an organization provides to society.
That’s a bit disingenuous. Efficient market theory gives clear reasons to believe that rational investors would produce a market valuation of the stock, based on net present value of future income streams, that reflects marginal utility in putting a dollar into the stock vs not.
Obviously, rational & efficient market behavior breaks down in reality. But tell me, how does it break down exactly? What alternative measurement of intrinsic value is better, and in what sense?
If you have special knowledge of what subjective / behavioral differences current trading patterns exhibit in contrast to rational or efficient behavior, then by all means share it, or make trading decisions with it, because it means you can measure / predict something pretty much no one else can.
But if you don’t have that special knowledge, then how exactly can you know the prevailing market prices are not actually reflecting intrinsic value?
you can suggest that true stock values are both unknowable and that the market is a weak approximation at the same time. Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings.
The stock market exhibits massive changes without much new information except information about the actions of other investors. You can similarly believe something is basically worthless (e.g. crypto) and simultaneously believe the price will not go down in the next long while due to investor behavior. The opposite is especially true for non dividend stocks.
The market does incorporate new information into the price, but that doesn’t mean new business information is the only driver of the price, the largest driver of the price, or that the price is well set to begin with.
Consider the current state of the economy. People have lots of money with fewer places to put it. Lots of people just dump it into index funds. That means more shares of large companies are bought, which means the price of those shares is going to go up. This is happening as a fixed function based on total market cap. Did we really get any new information to believe that npv of future cash flows had gone up? Nah.
The market inpounds any new, publicly available information into the price, not merely business information.
If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
> The market inpounds any new, publicly available information into the price, not merely business information.
Yes, and the “price” is not the expected net value of future cash flows, it’s an estimate of what people are going to pay for it. The price and the value are two distinct concepts.
> If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
I know that you’re taking a positive “well show me” kind of stance to imply that I don’t know the market better than the people actively involved in it. But I’m not claiming to know where prices should be. I’m claiming prices are driven by a variety of things, one of which is value, but much of which is just various unsubstantiated assumptions. Many of those assumptions could be entirely incorrect. That does not mean the market will realize this soon, or ever, so assuming that any particular world view of what’s incorrect will materialize in a price change isn’t the wisest decision.
For capital gains oriented growth tech stocks especially, significant money has been invested because of a simple lack of alternatives, which has inflated prices. Should those prices fall? Irrelevant question, because value is not the sole driver of price. Irrationality is a part of the system.
Isn’t it somewhat cyclical? It seems to me that the market price is also information about what the market thinks about the company, and what the market thinks about the company can certainly affect the performance of the company.
> Requiring one to know the true answer to challenge the status quo isn’t all that different from poor religious reasonings.
Dismissing something obvious and derived by a large-scale aggregation of views in favor of something contrarian and unsubstantiated is much more similar to religious arguments.
Per user it is probably a few pennies per month if they are smart about it. Which is basically nothing as a percent of a single unit sale (subscribing user) compared to the marginal cost of selling cars
Since they need infinite storage even for non-paying users in case they pay for full historical search (though this can be on Glacier or some other type of archival storage), it's probably more than a few pennies, but your point is still entirely valid.
If it's a few pennies for month how are their operating expenses greater than their revenue? Have you even looked at their public filing or are you just making assumptions?
"Cost of revenue consists primarily of expenses related to hosting Slack and providing ongoing customer support for paid customers. These expenses include employee compensation (including stock-based compensation) and other employee-related expenses for customer experience and technical operations staff, payments to outside service providers, third-party hosting costs, payment processing fees, and amortization expense associated with internally-developed and purchased technology. We expect our cost of revenue to continue to increase in absolute dollar amounts as we grow our business and revenue."
That amortization could be significant; it's likely that they're not spending $5 in hosting and devops alone. It may not be pennies, but it's way less than the cost of a car.
You say that, but Twitter has many thousands of employees. They could be much more profitable if they weren't paying enormous amounts of money (for what end I have no idea, the site seems to always be getting less reliable and more bloated).
I remember thinking the same sorts of things with the original dot-com IPOs, and again later when the dot-com companies started buying established companies.
Never saw a Slack-Tesla or AOL-Exxon kind of mixture though.
It is really hard to make a financial argument for the value of a stock that makes no profits and is has a low to negative book value. Clearly there are valuable companies in this category such as Amazon and Facebook early in their days as public companies. But trying to figure out what they might be worth someday is an exercise in predicting what the future of the world might be. It is not like making a calculation on the back of an envelope.
So to the OP, yeah I totally agree. It's fascinating.
Hypothetically, a companies value should be a sum of it’s expected infinite cash flows divided by the discount rate.
If a company lost $10 one year, $5 another, and broke even the third a guess of making money the fourth year is probably more reasonable than a guess of making the average, even with a marginal book value.
Therefore, I don’t think it’s that surprising that companies losing money are still worth a lot.
This isn’t always a reasonable way to think of things, though. It’s important to consider the actual realities of the business. For Slack, I think it’s largely fine. There really shouldn’t be a hard constraint preventing them from making shit tons of money.
Uber and Lyft are a different story. I have a hard time imagining a situation in which those companies will ever be profitable, even with self-driving cars, save one buying out the other.
Discounted cash flow analysis is not what is going on here. Looking at it historically, FB went public with a valuation that its web business at the time could never justify. If you assume people who bought at the price were making a rational calculation, they weren't valuing the business cash flow, they were valuing something else Facebook had. A technical capability, the management, a brand, the things that let them extend their business to mobile messaging and acquire WhatsApp and Instagram. What happened wasn't just cash flow growth. Ditto for Amazon and Google.
I think that is what is going on with Uber. Their current core business will never earn enough to justify their valuations. Investors assume it will add new divisions and capabilities.
> It is really hard to make a financial argument for the value of a stock that makes no profits and is has a low to negative book value.
IMO the best justification for Slack's market value is that its likely to be acquired by one of the mega-cap tech companies in the relatively near future.
Alone it may not be a profitable business, but integrated into a broader ecosystem like AWS or Microsoft Office or Facebook's network, may result in extremely valuable synergies.
I’m curious how symbols are assigned. Most companies have symbols that are similar to their names. Can companies just choose anything they want? Or do you have to be a big player with connections to score a vanity symbol like this one?
> “The ball’s pretty much in the company’s court, as long as its choice isn’t already in use and won’t offend anyone’s delicate sensibilities. The NYSE requires that companies submit their symbol requests at least 20 days before they mail out notification to shareholders and that they list a first, second, and third choice. The exchange rarely gives a thumbs-down to the preferred option. One notable rejection occurred in 1992 and involved Furr’s/Bishop’s Inc., a Texas-based cafeteria operator that wanted to disassociate itself from its floundering holding company, Cavalcade Holdings Inc. But the NYSE denied the company’s application for the symbol FBI, on the grounds that it might cause confusion with a well-known law-enforcement agency, and Furr’s/Bishop’s was forced to remain CHI on the board. (The beleaguered company, later delisted from the NYSE, eventually changed its name to Furr’s Restaurant Group—FRRG on the ignominious pink sheets—and has since filed for bankruptcy.)
Some companies select cheeky symbols, rather than mere acronyms. The father of the trend may be Southwest Airlines, which was first listed as LUV in 1971—a nod to its origins at Dallas’ Love Field. Other semi-clever tags include BID for auctioneer Sotheby’s, FUN for amusement park operator Cedar Fair, and BUNZ for deli chain Schlotzsky’s. It’s a lot easier to come up with something witty if you’re listed on the Nasdaq, as that exchange allows symbols to be up to five letters long; the NYSE sticks with a 3-letter limit.”
The primary reason for doing a direct listing is because you don't need to raise capital. It's mostly reserved for the case where you want your pre-existing shareholders to access the liquidity of the public markets.
In contrast, if you're actually going public to raise more capital, direct listings are a lot riskier. Basically the point of the IPO, and paying investment banks huge fees, is to select and handhold the new investors.
The investment bankers perform a lot of work around actually getting supply to meet demand. They're doing roadshows in front of potential investors, getting feedback on the best way to present the company, trying to determine what the market would price the company, etc. They're also making some effort to curate a higher-quality investor base, i.e. those who actually believe in the company's vision and aren't likely to flip the shares for easy money or sell out at the first sign of trouble.
The reason for the traditional IPO pop mostly has to do with compensating these types of investors for making a commitment and taking a risk on an unproven stock.
Now if it's definitely debatable whether what the company pays in the form of investment banking fees and systematic underpricing is actually worth it. But the point is that for a company like Slack, which isn't raising capital, it's almost certainly not worth it. On the flip side the success of this particular doesn't necessarily tell you anything about how much value a traditional IPO does or doesn't add.
Anyone proclaiming it was a 50% pop is misleading. The opening price was around $39 so it essentially finished flat for the day.
The “reference price” is meaningless because it meant absolutely nothing. It wasnt the price it opened at. So why should we base the % change from that imaginary price. And this is was a direct listing so not even an underwriter got a 50% pop.
The media just wants to make things sound more impressive than it really are.
Sure it's up 50% from the "reference price", but publicly for you and me retail investors we had NO chance at that gain.
You'd have been super lucky to get some shares at where it opened at $38.88 (12:08 EST). It immediately shot up to daily high of $41.95 which is most likely where retail trades would have executed at (assuming you used a market order, which you never should). Always buy with limit orders. See the following screenshot of the graph of today[1] of $WORK for reference.
I set a buy order yesterday through Schwab and got a notification today that it executed at $38.50, which as far as I can tell was the retail opening price. It executed at 12:08 Eastern.
I set a limit $50 because they didn’t announce a price as far as I could tell, and I knew I was going to be working today and couldn’t pay attention. It did cost me some because I could have bought more shares had I set a lower limit, but I am happy the trade executed at a low price.
A market order is "I want to buy 10 units, no matter what the market price is" and a limit order is "I want to buy 10 units at a price no more than $50" or whatever.
For retail investors in a situation like this, it probably doesn’t matter. You would create a buy limit order at a price somewhere high enough that it’s likely to execute no matter what the price is doing, so the effect is basically the same as a market order.
The advice to generally use limit orders is good though. Rarely would a retail investor need a market order.
> assuming you used a market order, which you never should).
Yeah I don't get why market orders even exist. If you're doing something that usually costs thousands to millions, is it ever a meaningful benefit to saving a click or two and a few keystrokes?
If my broker had an option to remove my ability to do market orders (sell or buy) I would immediately enable that.
I have traded literally several million of dollars (especially counting all the tax loss harvesting I’ve done) over the years as a private investors in highly liquid index funds, and always use market orders. I don’t think I’ve ever been shortchanged...
I'm not a high frequency trader. When I want to sell (all highly liquid shares), I've made that decision on other factors than a 0.1% variation of the listed stock price.
What I care about is that it sells.
It's hold-over from the dotcom days when I saw colleagues sell options with a limit order just above the current listed price that never got fulfilled in an a constant down market.
Would it still be called a market order if you were denominating the order in dollars-converted-at-moment-of-sale? I.e. "buy however many shares I would get for $500, I don't care how many or few that is at the time." That seems more useful, and still caps your losses, while offering something limit orders don't.
A marketable limit order is strictly better: "I'll sell at the best price available, but no more than X% worse than the current price" vs. "I'll sell at literally any price". In most cases, they give identical results, except in certain catastrophic cases where the limit order will save you (e.g., flash crash).
If you do a limit order that is higher than the current market order, you stand a pretty decent chance of executing at that price rather than at the more beneficial market price.
Market order just means sell it at what it's worth right now.
Is it wrong to interpret this as other people expecting the bubble to pop soon and wanting to pass the bag sooner rather than later?