- KPB & Co Research
Over the last 5 months there have been a number of tech companies seeking to raise money from the public. With the stock market scare in Q4-2018 in the rear view mirror, investors and chief financial officers are using the renewed optimism as a window to beef up their company's balance sheet at a low price. Some of the big technology names that have gone public since 2019 includes Uber, Lyft, Beyond Meat, Pinterest, and Zoom. Some of these companies have seen rapid increases in price to the benefit of exiting shareholders, some declines, and some relatively no change.
Beyond Meat IPO Trailer
Investors who are buying into these companies should consider whether they are getting value for money or are being lured into holding the "hot potato" during tougher economic times. Today, there is an elevated risk of a recession given the slowdown in Europe, Emerging Markets, and North America. Evidence of this risk can also be surmised from the now easier monetary policy stance that central banks of G7 countries have taken. If there is a slowdown in the economy, the valuations of these companies may become way cheaper than they are now, potentially leading to missed opportunities.
As we "pop the hood" of these companies it becomes clear that financial flexibility is being sought as they reflect on going into what maybe perceived as a slow growth environment, where the appetite for risk maybe more subdued. This theme of financial flexibility can be teased out from a few things: the post IPO shareholder structure, expected expenditure on growth, and the cashflow position of the company.
Change in Major Institutional Ownership After IPO
Post IPO Shareholder Structure
For most of the companies listed Institutional shareholders, with at least 5% ownership in the pre-IPO equity of the company, are looking to dispose of small amounts shares. In the case of Uber, the level of institutional ownership is expected to decline from 58.2% to 45.7% post IPO, for Lyft it will move from 40.1% to 35.33% of class A shares, for Beyond Meat it is 39.4% to 35.33%, Pinterest no change for class B, and Zoom no change for class B. This trend indicates that many of the pre IPO investors will likely stay put for a protracted period of time. Of course, these ownership structures can change over time as investors dispose of stock after the lock period ends. Nevertheless, we can at least say that for companies such Pinterest where institutional shareholders are not disposing of any stock, all of the capital raised (US$1.36Bn) will go back to the company. For the other companies except Zoom, most of the proceeds from the IPO will go to the treasury. In the case of Uber, the company is expected to receive US$8Bn, while selling shareholders will pick up US$1.2Bn. Lyft will receive approximately US$2.6Bn while Lyft shareholders will get under a billion dollars. Beyond Meat will get US$219Mn while its investors will pick up less than US$100Mn. In the case of Zoom all of the stock sales is from employees who are looking to take US$433.5 million off the table.
All of the companies mentioned except Zoom are burning through cash on annual basis. In 2018, Beyond Meat had a cash need of US$60Mn, and this shortfall will get larger as the company embarks on more investment in infrastructure to support growth. Uber has a running annual cash draw of US$2Bn+, and had to pull down US$2.23Bn in 2018. Lyft used US$610Mn in cash during 2018. Zoom is cash flow positive to tune of 20.9Mn, which explains why the company is not raising any money. Pinterest is burning through US$82.5Mn in cash per year but also has roughly US$627.8Mn in cash and equivalents + marketable securities.
Stated Use of Proceeds
The stated use of proceeds for most companies tend to be generic and so do not provide insights most times, but there are a couple of exceptions this time. Beyond Meat is expects to use the funds in the following way:
We currently estimate that we will use the net proceeds from this offering, plus cash on hand, as follows: $40 million to $50 million to invest in current and additional manufacturing facilities; $50 million to $60 million to expand our research and development and our sales and marketing capabilities
Pinterest outlined that:
We intend to use a portion of the net proceeds from this offering to repay approximately $326.1 million that we expect to borrow under our revolving credit facility prior to the completion of this offering to fund the tax withholding and remittance obligations of approximately $326.1 million related to the RSU Settlement.
Capital Expenditure and Growth
All of the companies mentioned are in the early phase of growth, and so are looking to finance growth projects of varying sizes. Last fiscal year Uber spent over 1.03Bn in expanding the business through the purchase of US$588Mn in capital equipment and intangible assets, US$412Mn investments for non-controlling equity stakes, and US$64Mn for acquisitions. Lyft seems to be bit more cautious, as the company has access to US$2.037Bn in cash and short term investments on balance sheet, while only spending US$68Mn on the business, and US$257.6Mn on acquisitions. Pinterest's capital needs seems some what small relative its size. Pinterest spent US$22Mn on capital equipment in 2018. In 2018, Beyond Meat spent $23.2Mn on manufacturing equipment, and manufacturing facility improvements. Like Pinterest zoom's capital expenditure seems quite small, but they are positioned to increase as the company brings in more cash from operations. In fiscal year ending January 2019, Zoom communications spent US$30Mn on capital equipment, coming from US$10Mn the prior year.
2019 is shaping out to be busy year for the IPO market as companies look to shore up their balance sheet going into a possible slow growth environment. Most of the companies that came public this year are running a cash deficit making it very important for them to maintain access to capital markets. In recessionary times both debt and equity markets tend dry up, making it potentially costly for companies to finance their growth. With the stock market still at all time highs, it is a good idea for companies to to raise capital. At the same time investors who are looking get in now should be very cautious around valuations.