The American IPO market is hot for many companies, but surprisingly cool for others. The gap between the two cohorts of private companies looking to list is becoming notable.
When Chinese ride-hailing giant Didi first set an IPO price range, The Exchange was curious about why the company felt so inexpensive. Compared to its American comps, shares in Didi simply felt underpriced at its proposed valuation interval. Recently, Didi stuck to its initial expectations by pricing at $14 per share, the upper end of its range, but no higher.
This week also brought a lackluster float for Chinese grocery-delivery company DingDong, which cut its IPO raise but only managed a flat American debut. Another China-based online grocery delivery service that went public domestically last week, Missfresh, is doing even worse.
With just those few data points, you’d be hard-pressed to be particularly bullish about U.S.-listed IPOs. Why go public in the United States if you are going to be underpriced and then trade poorly? The answer is that while many Chinese companies are seemingly struggling to find the demand that they expect for their shares on American exchanges, domestic companies are seeing some opposite results.
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We’re talking tech companies here, I should add; The Exchange doesn’t track IPO results for commodities diggers and biotech labs. It’s a big world. We have to focus.
There are contrary data points to our general thesis. Nio’s recent share price appreciation could be construed as such. But if we parse recent IPO news from SentinelOne and Xometry in contrast to what we’ve seen from Chinese tech companies’ own paths to the American public markets, there really does seem to be a gap forming.
Uneven ground
Didi’s IPO price of $14 per share values the company at around $67 billion on a nondiluted basis, and as high as $70 billion if we counted more shares in its market cap calculations. As we previously calculated, with around $6.5 billion in total Q1 2021 revenue and positive net income, the company is trading at a stiff multiples discount to Uber.
Indeed, Uber’s trailing price/sales ratio is north of 8x. If we valued Didi’s revenues from the last twelve months at the same price, it would be worth nearly $179 billion. It’s not. And that’s the gap that we want to stress.
That a few other Chinese tech IPOs listed in the United States underperformed in the last week is contrasted by a blizzard of positive IPO results from domestic companies from just this week:
- Xometry priced its IPO above-range; TechCrunch coverage of its financials here.
- SentinelOne priced its IPO above its raised range; TechCrunch has coverage its financials here, and pricing here.
- LegalZoom also priced its IPO above-range. More here.
- Integral Ad Science priced its IPO above-range as well. More here.
You get the idea.
On one hand, a deluge of positive results for tech companies of all stripes. On the other hand, the public offering of one of China’s most famous technology companies in the form of Didi hardly made a splash. Perhaps it will trade strongly today, but it’s hard to imagine the company closing its valuation gap to Uber, even if we decided to allow Uber an inherent business-model advantage to grade on a curve.
What’s going on? We had a few guesses when we first discussed Didi’s IPO price range. A refresher:
Are investors more bullish about global growth than what China can muster?
Are investors more concerned about competition in the Chinese mobility segment than in Uber’s more global market?
Are we seeing Chinese companies trade at a discount to U.S. peers due to concern regarding an increasingly active and domineering government in the Asian nation?
Frankly, after reading quite a lot about how the Chinese Communist Party — a one-party government run by a single autocrat — is dealing with tech companies lately, some concern could be warranted.
While the United States Congress chases its own tail trying to find a way to regulate the increasing power of domestic tech giants, a smattering of what’s going on in China, via recent headlines, listed in reverse chronological order:
- Xi Warns Against Tech Excess in Sign Crackdown Will Widen (Bloomberg, March 2021)
- Beijing bruises China’s tech titans in battle for power (Verdict, April 2021)
- China’s New Power Play: More Control of Tech Companies’ Troves of Data (WSJ, June 2021)
You get the idea. Is that the market where you want to tie up your capital? Some VCs think so, but it appears that American investors aren’t entirely sure that it’s the right move; there are other factors at work here, but I struggle to discount this particular point entirely. Luckin’s epic fraud is another reason that domestic investors could be cautious, but that story has seemingly fallen out of conversation far more quickly than WeWork’s implosion, and it was worse.
So for American companies, welcome to the final day of the Q2. It’s a screamingly good one for domestic technology IPOs. For some foreign companies, however, the ticker tape parade appears to have been cancelled.
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