IPO Price Discovery is Getting Harder
A lightly informed and archaic process struggles with the current market.
Recently, we had a glaring example with Venture Global VG 0.00%↑ . An LNG exporter with a bold plan to use “modular” technology to scale up production and tap global markets - capitalizing on the massive spread between very low US natural gas prices and high prices in Europe. Bankers set the range at $40 to $46. After institutions balked, they had to drastically cut it to $23 to $27. After pricing at $25 the shares have found their way down to $12.
There are some company-specific issues at Venture Global, but still, going from $42 to $12 is a pretty big whiff from a mighty team of 22 banks led by Goldman Sachs GS 0.00%↑ and JP Morgan JPM 0.00%↑ .
Company managements have a few things to contend with:
Banks and their clients seem unwilling or unable to do more homework before filing. They also seem to have forgotten that the best practice is to file low and raise the range into pricing.
In busier markets, the typical practice was to use the last six or eight transactions in the space to inform pricing - we don’t have that now. Deals from two years ago are not that useful.
High volatility in public comparables is also making it more challenging. How helpful is a comp like Tempus AI when the shares go from $90 to $45 and back to $60 in one month?
Traditional yardsticks are not often used. Using price/sales as a metric over earnings or other measures has become common. The practice has always been arbitrary and frequently “relative,” which only works at a specific point in time.
Bankers and companies with a retail investor appeal must also consider the “vibe” and more creative thinking. A friend of mine outside of our “business” successfully invests as a hobby. He bought Reddit in the $40s, feeling that the market cap at the time was just “too low,” and enjoyed the run to $200.
Finally, the process still runs with yellow legal pads (or an Excel-based digital facsimile), and pricing and allocation are done in a Zyn-sucking back room.
This week, we have CoreWeave $CRWV, which has plenty of harder-to-price features. Hyper-growth, some quasi-related party issues, questionable management, and related companies that trade at a broad range of valuation multiples. It’s the old “fish or fowl” question.
Bankers have filed with a range of $47 - $55, which is broader than usual. One small broker has initiated coverage pre-IPO with a price target of $47.
We covered some of the valuation considerations for CoreWeave before, but we will update it now that we are closer to pricing.