The TradeWeb IPO launched on Thursday, and shares are up over 25%. The OTC electronic trading outfit is the latest “unicorn” to go public this year, following Lyft’s highly publicized listing on the Nasdaq. As short seller’s pile into LYFT stock, it should be a cautionary tale for investors loading up on TW and its $6 billion valuation.
There is an entire industry focusing on raising money through an IPO. Giant investment banks like Goldman Sachs and JPMorgan use all their resources to pump investor appetite, and then a media blitz ensues.
Lyft doesn’t come to the market because they want to offer you a chance to be part of their success. The rideshare company wants a public listing because it makes the owners money.
As Lyft now trades well off its highs, retail investors who bought at the open are feeling burned. The warning signs were there, with legendary investor Carl Icahn reportedly dumping his investment before the IPO and handing it over to fellow billionaire George Soros.
TradeWeb has flown under the radar amidst the focus on Lyft, Uber, Pinterest, etc. The company is mainly for large institutional clients rather than the general public. Does the lack of media coverage mean you should dive in with the price 30% above the listing price? Well, probably not. TW’s owners are a number of big banks, (JPMorgan, Citigroup, Goldman Sachs, and Morgan Stanley) as well as Refinitiv (owned by Blackstone and Thomson Reuters).
If ever there was a company enjoying every opportunity to maximize its initial valuation, it will be TradeWeb. Nothing is stopping TW shares racing higher, but if the Lyft hype machine taught us anything it’s that early volatility after IPOs can be deadly for retail buyers.
Early adopters in Bitcoin will know how tough it was to hold onto positions through the peaks and troughs. The same is true of IPOs. Snapchat might one day be worth more than its listing price, but most of the retail crowd who bought on day one will be falling out of the tree. Lyft retail investors will be encouraged by a more positive showing today. But, if there is another big dip, they will probably capitulate.
TradeWeb investors need to be aware that until a few days of volume has been pumped through TW shares, it’s almost impossible to know what direction they are heading. This makes buying it more akin to speculation than investment.
All of us have seen enough evidence to be distrustful of investment banks. Disregard for clients was the hallmark of the financial crisis, and don’t assume that the rascals have gone anywhere. If anything, they were vindicated by the bailouts.
Skepticism is an essential survival trait when trading IPOs. Understand that Lyft went public, at least in part, to make rich people richer. The same will be true of TradeWeb, and what makes me especially cautious is seeing so many of the usual suspects with their hands in the pot. These companies might be going public because the industry sees a recession coming closer than they will admit and are trying to make hay while the sun shines.