Cutting through IPO noise and understanding the underlying financial healthThe appeal of category game-changers like Peloton, WeWork, Uber, and Lyft to consumers and investors is clear. These companies have garnered lots of attention from investors and the public alike throughout their journeys to IPO, but with WeWork falling just short of the finish line and Peloton’s lackluster debut, the IPO market has taken pause. The turn to discipline from institutional investors, demanding more clarity on these big visionary companies’ underlying business models before throwing more cash at them, is a positive development, but signals broader implications for the rest of the private company market.
Financial Health Indicators Raise Red Flags Before IPO
The big IPO names of 2019 thus far share common financial health characteristics. With high risk Financial Health Ratings (FHRs), which measures short-term resiliency and default risk, coupled with even riskier Core Health Scores (CHSs), measuring longer-term underlying operational efficiency and sustainability, burning through cash without a clear path to profitability is a troubling path.
“There’s weakness in the short-term, but the long-term prospects of [Peloton] are really challenged, and this is the kind of profile you see with a lot of companies that come to IPO,” commented James Gellert, RapidRatings Chairman & CEO, on Yahoo Finance. “The question is, can they over time take the money, invest it properly, and begin to accelerate a path to profitability…and then see both the Financial Health Rating and the Core Health rise.”
Frothy Market Conditions Hiding Weak Financial Health
While a small percentage of private companies ultimately fund themselves through IPOs, the dampened debuts of Lyft, Uber, and Peloton as well as WeWork’s shortcomings signal headwinds ahead for other companies considering an IPO. The ensuing questions will be about the broader private company market, with the pending scarcity of capital for private companies in a down market and ongoing declining financial health of companies, globally.