As an investor, the next cautionary tale is never very far away.
This week, the bombed-out shares of Made.com Group PLC (LSE:MADE) fell further as it confirmed a dilutive fundraising is on the cards, while Revolution Beauty Group PLC (AIM:REVB) bounced off its lows after news of a new investor.
What links both companies is that they both floated last year and, even before this week, their shares had fallen over close to 90% since their initial public offer.
The £14bn-plus raised in 2021 made it one of London's biggest years for IPOs – the most since 2014, while for total fundraisings it was the hottest market since 2007.
While the average performance for the ‘class of 2021’ IPOs through to early February was good, with the AIM contingent alone up an average of 21%, the rug has been pulled in recent months.
Apart from the above pair, big fallers have included Parsley Box Group PLC (AIM:MEAL) plunging 95%, In The Style Group PLC (AIM:ITS) and Victorian Plumbing Group PLC (AIM:VIC) down over 80%, CMO Group PLC (AIM:CMO), musicMagpie PLC and Deliveroo Holdings PLC losing more than 70%.
All of which, the sharp-eyed will notice, are digital business – and their decline coincides with the tech sell-off on both sides of the Atlantic.
Many of these names joined with valuations that were seen at the time as rather ‘toppy’ – riding on the coat-tails of Wall Street growth valuations as well as growth enjoyed by many tech names during the pandemic lockdowns.
In London, the fingerprints on the smoking starters’ gun for this now-bloodied group can perhaps be attributed to THG, which bagged a £4.5bn IPO valuation in the second half of 2020.
While the Hut Group owner garnered scepticism that it was 'a retailer disguised as a tech company' it triggered a rush to go public among tech companies.
This sparked a passionate argument between those saying the valuations were deserved, based on the growth potential of the companies – “just look at Tesla/ Facebook/Amazon they were lossmaking for years” – and those who wanted their jam today.
“A number of businesses were quick and canny in the timing of listings during the pandemic around the theme that the world is going to become digital,” Clive Black, head of research at Shore Capital, tells Proactive.
“Just because a business is online does not give it an entitlement to a certain valuation… the arrogance of some players in this arena is unreal.”
Looking at Made.com today, he said the online furniture retailer “has undoubtedly suffered from the sell-off of pure-play retail stocks, many of which were over-hyped as to the reality of the potency and sustainability, and so equity value, of the online channel amidst the pandemic, only to find in more normal times that normality would largely ensue.
“What a surprise eh?”
The sell-off in recent months provides lessons for investors, at least.
Black says it is a reminder of the need “to keep feet on the ground, apply common-sense to market valuations and ask the simple question: is this business really worth this?
“Greed is a powerful force, as is hyperbolic language about addressable markets and the like (see AO World, today…). Whilst monies can be made in riding the crest of waves, relatively few win… and so it is rather dull fundamentals that tend to out.”
Pandemic-boosted valuations
As it opened trading on the stock market Deliveroo commanded a market cap of just under £5bn after raising £1.5bn of cash, of which one-third was for existing investors.
Having reported underlying revenues up 57.5% to £1.2bn for the year before it floated, along with underlying losses of £223.7mln, its opening valuation was just over four times historic sales, though investors were quick to show they were not entirely comfortable.
This was not as an eye-watering valuation as has been seen elsewhere, though like many of the Class of 21 the previous year was greatly boosted by lockdown demand for its services.
Ahead of its float, Made.com boasted of “consistently shown strong topline growth”, with 36% gross sales compound annual growth rate over the last five years and a “highly cash generative due to its attractive negative working capital profile and relatively low capital expenditure requirements”.
With net revenue and underlying losses of £247mln and £5.1mln for the prior year, its opening valuation of £771.8mln was just over three times historic sales – though again its top line was boosted by exceptional lockdown demand.
Revolution Beauty brushed up well before its IPO, noting that it had “experienced rapid revenue growth with circa 99% revenue CAGR to FY19” and a global social media reach of over 6.3mln users.
Revenues that had grown to £157.6mln for the 14 months to 28 February 2021, meant its opening market cap last July of £510mln was just over three times turnover - by no means offputting for many investors on its own.
Victorian Plumbing, however, commanded a debut market valuation of £986mln that was almost five times historic revenues, which like Made.com, were boosted in the pandemic as people spent on their homes rather than on holidays and going out.
This was based on revenues that had almost doubled in the three years before floating from £117.4mln to £208.7mln, while its adjusted EBITDA jumped from £4mln to £26.2mln, and both revenues and EBITDA surging 47% and 128% in the six months ahead of the IPO.
Another quirk of the class of '21 is that one of the best performing shares, Darktrace PLC (LSE:DARK), only sits in this elevated position because its valuation was slashed from £3bn to £1.7bn following investor concern around shareholder Mike Lynch, with a recent boost coming from a private equity bid.
There are also contrasts to be found in the class of '21, even with two of the biggest fundraisings.
Dr Martens PLC (LSE:DOCS), which stomped to a debut valuation of £4.5mln that was 4.6 times the revenue of £672.2mln it made in its pre-IPO year, though unlike many of its fellow newcomers last year, it was in the black, with EBITDA of £184.5mln and a pre-tax profit of £101mln.
Having raised £1.3mln in the float, entirely for its private equity owners, at a price of 370p, the shares rewarded investors with an initial rise to 500p before being hit by the recent sell-off.
Petershill Partners PLC (LSE:PHLL), third in line in terms of funds raised, was a different kettle of fish, being an investment group with US$187bn of assets under management, raising just over £1bn split fairly evenly between the company and existing investors, and attaining a market valuation of roughly £4bn.
The best-performing newcomers from last year include some digital winners, such as Auction Technology Group PLC (LSE:ATG), up over 50%, while other tech companies (more real-world than digital, however) are sitting in positive territory: Saietta Group PLC, Big Technologies PLC and Ashtead Technology Holdings PLC.