Morning Markets: Peloton is back above its IPO price after a trip to the doldrums. Perhaps the public market is already over its flight-to-quality and focus on profits.
When Peloton filed to go public, the consumer-exercise phenom received wall-to-wall coverage. Given the company’s high marketing spend, its brand was well known even by non-users. So, the press couldn’t help itself. Crunchbase News included.
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Investors seemed similarly intrigued. After setting a $26 to $29 per-share IPO price range, Peloton, fueled by hundreds of millions of dollars in venture capital, was set to roughly double its final private valuation. Eventually pricing at $29 per share, Peloton started life as a public company worth about $8.1 billion.
But then things went off the rails. Peloton opened at $27 per share and closed its first day as a public company worth under $26 per share. The result looked like a sharp rebuke of the company’s newly-extended valuation. And as SmileDirectClub, Uber, Lyft, and others struggled as public companies Peloton was looped into the idea that investors were clamping down valuation — and, therefore, revenue multiples — for tech-ish companies not selling software.
Software companies sport high margins, and a high percentage of their revenue often recurs. The market values that particular cocktail richly, especially in recent quarters. When Peloton’s shares were falling alongside those of many of its newly-public brethren, it appeared that the market was cutting the prices of tech-enabled companies, in contrast to how it valued tech companies themselves.1
But then something odd happened: Peloton’s shares rallied. The company, which reported earnings on Nov. 5, has recently seen its shares price not only recover from declines but surge past its IPO price. Heading into trading today, Peloton is worth $30.25 per share, after surging over 11 percent yesterday. In snark-parlance, this is called a narrative violation.
For Peloton shareholders, it’s a welcome result. But what does it mean for startups?
Growth, Loss
In recent years, the startup mantra has been something like ‘growth at all costs.’ Investors liked high-growth companies, and have been more willing to overlook massive losses if a company reported quickly growing revenue. The idea has been that if high-growth, cash-burning companies are well-funded, they can grow quickly and eventually turn a profit, bringing in outsized returns for their investors.
It’s only been recently (within the past few months) that disappointing IPOs have turned people’s attention toward unit economics and profitability. But maybe that was just a brief distraction, and growth is back en vogue.
We’ll be able to tell by looking at how other high-growth, money-losing companies perform on the public markets to tell us if growth really is back in; in contrast, if other companies that fit the bill don’t see rising values, Peloton would be merely bucking a trend instead of showing that the trend itself is changing.
The public markets haven’t been kind to unicorns like Uber and Lyft, but if their stock starts to rise, it could be an indication that investors have more faith in high-growth companies than has been the sentiment recently.
A change in market sentiment could also have an impact on the IPO market. While 2019 has seen a crop of lackluster IPOs (the stock prices of companies being below the set price on its first day of trading and beyond), a shift in attitude back towards fast growth being more important than profits could allow for better public market reception of companies that still lose money.
Time and market activity will tell.
Illustration: Dom Guzman
Look to the gross margins, young Padawan.↩
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