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JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas.
Today we're sitting down with Max Wolff of Multivariate.
Great to have you back.
MAX WOLFF: Always my pleasure, thank you.
JUSTINE UNDERHILL: So today we're
going to be talking a little bit about the IPO market,
and what a market it's been recently.
Could you give us a little bit of background
as to why you're saying that this is an IPO onslaught,
and what are some of the major IPOs
that you've been looking at?
MAX WOLFF: Sure, so great questions--
let me take a step back to try to take two steps forward.
So we've basically seen some developments
in late-stage private companies over the last 10,
15 years even.
They ebb and flow, but they've basically been the trends.
And those trends are companies staying private a lot longer,
becoming much larger in their private incarnations,
and also in sort of an emerging asset class, where
buying and selling the shares in pre-public or private companies
has become a much bigger business, in part
because the companies are bigger, in part because there
are more people interested in getting access before the IPOs.
And if nothing else, in part, just because,
if you stayed private that long, you
create problems for your employees, who are ultimately
building the company.
So I start working for you in the traditional sort
of Silicon Valley dream story.
I'm 22, 23, 24.
My salary is mediocre, especially
for the cost of living in places like San Francisco or New York,
where--
not exclusively, but a lot-- these guys are based,
these men and women are based.
And so fast forward, my company's successful,
it's seven, eight, nine years later.
I'm still making $150,000 a year.
And on paper, I'm worth $20 million.
But I can't pay off my student loans.
I can't really buy a house.
I can't even rent the house I want.
I can't have the vacation I want.
Or quite frequently, sadly, I'm getting divorced,
and we have one marital asset.
And that marital asset is my nonpublic shares.
And I want to find a way to get some liquidity for those,
so lots of different reasons.
But big, long story here, people end up wanting these companies.
And so they have an idea about them, which means the hype,
the build-up, the tease, can be five years, instead of
a short IPO period.
They've been in some unregulated IPO process, a lot
of these names, for a while.
What's become more interesting to me, as sort of an analyst
and an active advisor in the space,
is that their valuations have become very aggressive.
So historically, and in most reasonable business models
or valuations you'd attempt, an asset that's illiquid--
you can't sell it for money easily or cheaply when you want
to--
and an asset that's opaque--
you really can't tell what's going on with the company
or get a great handle on what it's worth--
those usually are a discount.
So the joke is, if I'm selling you a wonderful gift in a bag
that you can't return, you're going
to demand a pretty good price, or you
have to be an unusually trusting soul.
And being an unusually trusting soul in the marketplace
is not necessarily always that sort of stuff of happy endings.
So it's risky.
But we had a weird thing.
So the ability to imagine this boundless future
has started to command a premium.
What do I mean?
These illiquid and opaque private names
have become more valuable, in many cases,
than public markets will accept.
And so the response was, well, just
wait until you'll finally be understood.
And then when you run out of time
or you get more greedy than you are needy to be understood,
you go public.
And that's happened now, especially because we're
obviously in the late, late innings here of a long bull
market, and people are feeling like, let's get out
when the getting's good.
And I think it's going to test the disconnect between what
people who don't know what they're buying
are willing to pay and what people who do
know what they're buying are willing to pay.
And that is what an IPO determines.
JUSTINE UNDERHILL: Do you think that this
is substantially different from the IPO boom of the late '90s?
Specifically because these companies
have been private for longer, is it maybe easier
to tell what they're worth?
MAX WOLFF: Yeah.
So on the good news, once you get information,
if you get information, there's more and better information.
And it stretches back further, so much better information.
The flip-side is, the growth cycle tends to decelerate,
and so you're paying a premium for a growth company, which
in many cases may be later in its growth stage.
And which people have just begun to wrap their heads around,
the tax base is increasingly defined
by a very small number of very large, very powerful companies.
So people have this imagination of the startup landscape,
of all kinds of smart young women and men leaving
school and having a brilliant idea
and building it into a product.
But actually, the tech landscape is dominated by near $ 1
trillion valuation behemoths, your Apples, your Googles,
your Facebooks, your Amazons, who aren't particularly keen
on upstarts disrupting them, who have huge cash hoards to Dubai,
what looks like a threatening business model,
and who have all the returns of global scale, endless cash,
and brand recognition.
So actually, there's more and more people
at higher and higher valuation trying to grab an increasingly
slippery ring.
And that hasn't done anything to cool public excitement,
but it has done something to make this a real winner
take-all business.
And that gets sort of tested when you come public.
Because when you come public, the secrets
have to become disclosures or you're a criminal.
And the liquidity is, every 9:30 AM to 4:00
PM, except for a few holidays, you
are going to be judged and repriced
by hopefully an active market.
So short-term buffeting about occurs,
and you get the scrutiny of a different grade
and class of investors.
And the big issue is, everyone who
feels like they're inclined to take a look at what you're
up to can get a lot more information
about what you're doing.
JUSTINE UNDERHILL: Now, we have seen clusters of IPOs
happen before in this bull market.
Do you think that this cluster is potentially different
and that it does signal we're in the late innings
and that this could be coming to an end?
MAX WOLFF: Yeah, I think you're sort of seeing now
the platinum crop in web 2.0.
So if you think about the most discussed,
most sort of scaled, everyday names in the space--
names like Slack coming, Pinterest just came out,
Lyft just came out, Uber coming out--
like you're starting to get all the big names--
Airbnb, right?
After these, the next crop is less well-known.
It's more of a traditional-- so we're not
talking the decacorns.
They call them decacorns sometimes,
the $10-plus billion valuations.
So this is the big crop.
And obviously, they've decided that the timing is good,
the appetite's there.
Because IPOs, the IPO window opens and closes.
How successful and how many IPOs there are
is always a pretty good test of two things--
how desperate people are for cash--
that's part of the reason you go--
or how good they feel the market's timing is for a risk.
The newer you are, the less I know about you,
and therefore the more risky.
So yeah, the newer you are, the more risky
you are by definition, because I don't know much.
JUSTINE UNDERHILL: Now in terms of how to play this market,
are there particular companies that you've
been looking in that?
MAX WOLFF: Yeah, so the sort of thing
that will make a lot of people annoyed at me,
but I'll say it anyway, is, unless you feel like you really
know a company and you really understand
the space they're in, generally buying IPOs not a good idea.
So people love it and it's exciting.
And it's a great story to be a part of, and a lot of people
like to buy IPOs in companies that they
have a relationship with because they use the product.
It's why there tends to be more hype around what
we call B2C than B2B names.
So B2C, business to consumer, that's
sort of a household name company,
as opposed to business to business.
So if you look at the excitement around a company,
particularly one that's been controversial
that a lot of people know.
So that's really maybe more like your Airbnb
a little bit, your Uber, your Lyft, so part of your life,
if nothing else part of the apps on your phone
that you probably use, or most people probably use.
They get even more hyped because people have strong opinions.
Oh, I used it and the driver cursed at me.
Or I used it and it's great.
Or my car broke down and I would have
walked 10 miles in the rain if it weren't for Lyft or Uber.
So people just have a personal visceral experience with them.
But generally, what an IPO roadshow
is is a giant infomercial for something
you don't know much about and you couldn't get.
And so it has all the hallmarks of a kind of pump scenario,
pumping up the value.
And this is the pattern that I was most interested in.
A lot of these guys, you can't sell the shares
if you're an insider for six months.
So a lot of them, you have a second bite at the apple,
about six months after they go public, when you actually
know how they're doing.
You've seen two earnings reports.
You've seen them surge and then slide a little bit, which
is a common pattern.
And then you can buy them six months and a day later
with full information, often at a bit of a discount.
So unfortunately, pretty often at a discount to the IPO price,
but definitely a discount to the first week.
Because the first few days these companies trade,
the underwriters, the banks that take them public
support their share prices.
So unless you're just desperate because you
know the world is going to learn the magical mysteries that only
you know about the wonders of this company, chasing an IPO
is a very dangerous investment.
JUSTINE UNDERHILL: OK, so while you're
a little bit wary about getting into an IPO soon as it happens,
would you consider shorting an IPO given the fact
that there is a lot of hype surrounding some of these B2C
names?
MAX WOLFF: Yeah, so shorting it is tricky.
You can't do the first 30 days, but there's often rotation.
So there's a way people do it.
So sometimes they play the rotation.
So in other words, if you're interested in taking a somewhat
jaundiced view of the opportunity set for the price
offered by, say, Uber-- a contemporary issue for us--
then you might make an opinion about Lyft.
Because presumably, some people who
are interested in getting exposure to the ridesharing
would have bought at the first opportunity, which was Lyft,
chronologically ahead of Uber.
So you could play that game.
You'd say, oh, OK, Lyft might do better
than people think because they won't
be as excited about Uber, or the reverse, depending on how you--
you have to wait 30 days usually to do it.
And if you've been previous investor,
you can't do it either.
The first couple months of a company's trade,
it's not a standard, normal trade.
Looking at how they trade doesn't give you
as much insight into how the public receives
a company as you might want.
But the sort of cheap, easy, organic way
is to study the companies without succumbing
to the temptation to make a major investment
in the companies, especially these days.
So for a long time, there was a sort of reliable 20-plus%
pop on IPO.
And we still see that, but you have to be very fast--
and that's a market-timing game-- in and out,
because often that fizzles pretty quickly.
Lyft in the very recent past had a bit of this issue.
So came out priced way above, about 20%
above the IPO price on the very first trades to be done,
and then it has sort of had a bit of a long retrace.
Come down a bit over the subsequent several weeks here.
And that's not so infrequent, by the way.
Because the other thing about the modern tech IPO,
which people should keep in mind, is these
are mostly what are called low float IPOs.
So historically, you sell about 10% or 15% of yourself
in an IPO.
And these guys are normally selling more like 6%
or 7% of themselves.
So there's actually a very, very small number of stocks,
while their big investment banks spend lots of millions
of dollars doing a giant extended infomercial,
and the media goes there, because it's exciting,
and lots of pictures and interviews,
and so you're really in a situation that
could be a bit of a perfect storm for a savvy individual
or small institutional investor, who's savvy in many ways,
but maybe not so experienced in this market.
But again, what we're seeing is the price discovery models
that we have that need to work for efficient markets--
if I have less liquidity, if I have less transparency,
I get a discount-- have started to run in reverse.
So a lot of these companies, people
buy them because they're like, oh,
now they'll be more valuable, because I can see inside
and I can trade them.
Only they aren't.
Because something is a little bit broken here, disconnected
between standard normal market function and the way
we've seen tech IPOs come to the public in the last 10 years.
JUSTINE UNDERHILL: Do you have an outlook
specifically for Lyft?
You mentioned that it's kind of been on a bumpy ride
for the past few weeks.
Where do you see that potentially going?
MAX WOLFF: Yeah, so I think Lyft might
continue to have some pressure.
So the growth story is pretty good,
a better growth story, by the way,
than Uber, but a much smaller company.
Historically, less losses, although lately they've
had some pretty big losses reported over at Lyft.
I think the issue with these companies is the following.
These companies are stuck between a bunch
of big entrenched players.
So if I'm Lyft, if I'm Uber, right now
I'm an app that sits on a mobile phone, which
means I collect no more data, possibly
less, about my users than Apple and Google,
who are fearsome competitors, who are looking at this to see
what they want to do about it--
Google probably more than Apple, but both.
And I'm also seeing the tech guys start
with the movement towards self-driving cars,
even though that's a few years off.
And we're seeing a lot of labor issues, the questions being
asked about whether the Uber and Lyft drivers are employees--
they're not classified that way now--
or whether they're independent contractors.
That's a social issue, but pertains to them.
So basically, to get extremely excited about them
at a valuation, you have to think,
driverless cars are coming pretty soon.
My guess is they're not coming as soon,
because the regulatory issues, the insurance issues,
and the state and local government issues
are still pretty big.
So they may begin to penetrate the market,
but I don't think they're going to be as big a portion as fast.
That's a headwind.
They're going to have some labor issues.
And public markets prize profits.
And these folks have delivered jaw-dropping losses,
particularly Uber, but Lyft a bit, too.
And I also think there's just a lot more transparency.
And Uber has done a pretty good job
of cleaning up a pretty problematic corporate culture
that developed earlier.
And I don't think that story's quite over.
Big strides have been made, and lots
of kudos to the management, but not a journey that's
been completed.
So there's risk there.
And I just think the space is a bit risky.
Because if you do get the driverless cars,
and then you have car manufacturers
and technologists.
And what Uber and Lyft become are apps that
are good at training drivers.
But if you replace those with machines,
that's less of a special sauce.
And then they become brands, convenience, and habit.
And there is a bit of a question about how many billions
of dollars that gets you.
JUSTINE UNDERHILL: So you see a lot more potential downside
for these ridesharing companies than upside?
MAX WOLFF: At these prices, yes.
I think they're both solid companies.
I think they stay with us.
I think they've built meaningful franchises.
So I think they're both very interesting companies that have
a long-term value proposition.
But at the prices where they are presently situated,
I think their return to sitting back and watching things evolve
might be better than diving right in.
That being said, they still grow.
They still matter.
They're interesting companies.
And the other thing I would always caution
is, each IPO is different.
Each company is a real company.
So having a general outlook on IPOs
is probably not a great idea.
It's just, there's too much variation in the pool.
Pay attention to what the market's telling you.
If you look at Zoom, which is basically
a teleconferencing platform recently endorsed
by the government, which is a nice bona fide.
If you look at Zoom versus a Pinterest or a Lyft,
the market's willing to pay a much bigger premium these days
for profit as against growth than it used to.
So it used to be growth, growth, and growth were
the big three for tech IPOs.
And now profit and/or declining loss profile is a big deal.
And that makes the ridesharing space difficult,
because it's massively and dramatically non-profitable
up through now.
And it tends to be a story of late
for both the big players in the space, Lyft and Uber,
where growth means increasing losses.
And profitability being the lingua franca
of the day, that means these might be smarter
wait and watch stories than dive right in.
JUSTINE UNDERHILL: So you'd be more bullish on something
like Zoom?
MAX WOLFF: Before it went crazy, so yeah.
If there's something exciting or a positive attribute
but it gets priced into the stratosphere,
then you usually still want to wait and see.
But you want to learn what the markets say.
And the markets saying they're so excited about profit
that they'll sort of chase you to the moon.
And so then you don't want the next thing to be like, well,
I think the market's going to be all cued up on growth.
If the market's telling you something else,
you want to pay attention to it.
That's a question of, momentum is a powerful winner.
It's a good strategy.
I am not a momentum investor, and I haven't historically
focused on the laws and lessons of momentum.
But there are plenty of folks who have,
and they've done very well.
JUSTINE UNDERHILL: OK.
Can you summarize your IPO outlook for the coming year?
MAX WOLFF: Yeah, don't chase.
IPOs are the way we sort of take the market's temperature
about how much extra risk they want.
The answer has been more, more, more, more, more
for a long time, so people forgot sometimes
it's less, less, less.
I think the trade spat coinciding
with some of this IPO binge is another reason to be careful.
And I think very rarely is it a once in a lifetime opportunity
to buy an IPO in the first few weeks.
And very commonly, it's an emotional decision caught up
in the moment.
And however understandable that is, just
because something's understandable,
doesn't always mean it's a great alpha strategy.
JUSTINE UNDERHILL: All right, Max, thank you so much.
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MAX WOLFF: Thank you.
JUSTINE UNDERHILL: That was Max Wolff of Multivariate.
For Real Vision, I'm Justine Underhill.