Whether pet products, workplace chats or fake meat, the estimated markets for products and services of companies going public runs into billions of dollars. But enthusiastic investors may find these forecasts too optimistic when the economic downturn finally arrives.
Chewy, Slack and Beyond Meat are just a few of those off to a fast start in a hot market for initial public offerings. Slack Technologies, with sales of $401 million in the fiscal year ending January 31, estimates its “addressable market†at a modest $28 billion.
Chewy sees the market for its pet products at $70 billion, while Beyond Meat is targeting the entire $1.4 trillion market for meat products.
In other words, investors, these companies are destined to grow exponentially. So buy your shares now.
Feeding the IPO Frenzy
The concept of ‘total addressable market’ has become a buzz-phrase feeding the frenzy in the hottest IPO market in years. While some, such as Slack’s direct messaging, are markets created by new digital technologies, others are existing markets showing rapid growth, such as pet products, that are being revolutionized by technology.
And others, like Beyond Meat, capitalize on non-technology innovations and massive shifts in cultural habits.
Last year’s IPO for Elastic, which operates a search program that aids companies from Uber to Tinder, remains one of the most successful, as the price nearly doubled to $70 from the IPO price of $36 on the first day of trading. (It traded recently at $77.) The addressable market for big data analyticsOpens a new window is $23 billion.
Conquering these markets, or at least capturing a sizeable chunk, looks easy when the economy is growing. But prospects may dim considerably once a recession obliges consumers to cut back on what are essentially luxuries.
There were 467 IPOs worldwide in the first half of 2019Opens a new window , raising $63 billion with half that amount coming on US exchanges where tech company IPOs raised $19 billion.
Slack actually went public not with an IPO but a direct listing, which means its shares started trading but the company did not issue any new stock or raise fresh capital.
Impending Slowdown
Even IPOs considered a flop, such as that of Uber Technologies, offer investors strong growth prospectsOpens a new window . The consensus price target for Uber’s stock is about $54, a gain of nearly one-fourth from current prices.
In the battle between Uber and Lyft for US ride-hailing market share, analysts caution that investors should pay attention to Uber’s big advantage in other addressable markets. Uber not only has a global platform for ride-hailing but extensive operations in food delivery and freight.
In the regulatory filing for its IPO, Uber said the addressable market for Uber Eats is $795 billion, while for freight the figure is $700 billion.
On a more mundane note, RealReal, an online marketplace for second-hand luxury goods, raised $300 million in an IPO, with estimates of the addressable market for used luxury goods running to $200 billion Opens a new window in the US alone.
The bull market in IPOs is likely to lastOpens a new window through the rest of the year, even as signs of an impending economic slowdown increase. Momentum alone can carry the market as most IPO shares continue to perform well.
Hints by the Federal Reserve that it will cut interest rates this year are a negative sign, indicating the Board fears a recession — yet also positive as lower rates would provide stimulus to the economy.
Late-Cycle Phenomenon
But a bullish IPO market is historically a late-cycle phenomenon, as private equity investors hurry to the exits before the party is overOpens a new window . Likewise, equity market investors want to get the last bit of return out of stocks before the markets head south.
The inescapable fact is that in a recession, people spend less on pet food, take fewer rides, buy fewer luxury goods, and curb spending generally. A software play like Slack may be less vulnerable, but companies, too, will be less inclined to invest in improvements that are nice-to-have rather than urgent.
Recessions can sneak up, often coming when investors least expect itOpens a new window . Bubbles burst, like the dot-com bubble in 2000 or the housing bubble in 2007, or the economy just suddenly takes a dive. At that point, investors rush to take their profits in the stock market and addressable market estimates get scaled back.
It’s happened before, and it’s a safe bet it will happen again when the next downturn arrives.