Credo Technology (CRDO) goes public amid IPO volatility
Credo Technology (CRDO) bucked a trend this week by staging a large IPO at a time when many companies are putting off plans to go public.
But Credo’s stock experienced extreme volatility in its first two days of public trading Thursday and Friday.
The stock was up more than 3.5% in afternoon trading Friday, but then plummeted, closing down 3.95% on the Nasdaq Global Market. That sequence followed a Friday morning drop and 25% spike on Thursday’s IPO.
The IPO ranked as the first significant tech IPO in the US this year and only the 11th overall IPO globally, according to Bloomberg.
IPOs down admid sell-off
Jonathan Simnett, a director with London-based tech mergers and acquisitions advisory firm Hampleton Partners, said the 11 IPOs are down from 17 IPOs that raised $3.5bn at this point in 2021, when pent-up demand was being released as the reality of the Covid-19 pandemic became apparent.
According to Simnett and other analysts, a broad-based market sell-off, sub-par IPO performance, investor worries over interest rates and US Federal reserve monetary policy, market volatility, tensions over China and a potential Russian invasion of Ukraine are reducing enthusiasm for IPO listings.
San Jose, California-based Credo sold about 18.4m shares at the bottom of its projected price range – $10 apiece – after planning to offer 23.4 million shares at between $10-$12 each.
US robotics firm Knightscope’s stock also suffered extreme volatility after it went public this week – albeit on a much smaller scale than Credo.
Knightscope (KSCP) closed up 175.63% on the Nasdaq Global Market on Friday, and jumped about 44% in after-hours trading, after falling more than 50% on Thursday. As a result, the stock price was more than four times higher than its Thursday closing price.
Knightscope, which took the unusual path of raising funds via its website before going public, raised $22.4m on its IPO by selling 2.4 million shares at $10 apiece.
Virtually every sector hit
Matt Kennedy, a senior strategist at IPO research firm Renaissance Capital, told Crunchbase that the market-wide stock sell-off is “hitting virtually every sector.”
“The fact that they completed the offering is impressive – in this market especially,” Kennedy told Capital.com. “Most companies are delaying their IPOs right now. This is a bold move to launch in this market. But they did it, and they got it done, so you have to give them credit for that.”
Kennedy said companies are postponing IPOs because there is not enough demand for them, or the IPO prices are not to their liking. He said companies “across the board” will delay IPOs until at least March or April.
Market sentiment shifted
Richard Remillard, president of Ottawa, Canada-based Remillard Consulting Group and a former head of the Canadian Venture Capital and Private Equity Association, said it appears that market sentiment on IPOs has shifted – “at least in North America.”
“I think the place to start (for the cause) is with what seems to be happening in public markets, which are off recent highs and where there is a considerable contraction, bear market even, in the tech sector, which tends to be concentrated in the Nasdaq,” Remillard told Capital.com.
Media reports on recent sub-par IPO performance and the contraction of tech price-to-earnings multiples - “particularly among companies with thin-to-no margins” – could dampen executive appetite to go the IPO route, he added.
Gross proceeds off
Credo’s gross proceeds, before deducting underwriting discounts and commissions and other offering expenses payable by Credo, were expected to be $183.8m (£137.11m), the company said in a news release. The company had expected to raise $200m.
Several companies have either postponed scheduled IPOs or put off plans to begin the process of going public. Bitcoin miner Rhodium and commercial REIT operator Four Springs Capital Trust were among companies that postponed IPOs recently, with both blaming “market conditions.”
“The postponements will continue until morale improves,” wrote Renaissance CEO Bill Smith in his weekly commentary, which Capital.com receives.
Steep discounts needed
Kennedy anticipates that most private companies will hold off on their IPO plans.
But Simnett said it’s too early to tell whether tech companies will be more reluctant to go public this year. Much depends on investment that has already been made, investor desire for profits, and general enthusiasm for new stocks.
“As the world economy continues its pandemic-driven rush to digitise and transform there will be plenty of competition from strategic buyers and (private-equity) firms anxious to pursue build strategies and roll-ups to capitalise on this phenomenon,” Simnett said. “This may negate any desire in management and stakeholders to rush to list and endure the uncertainties, overheads and compliance requirements that going public brings.”
For the foreseeable future, Smith said, IPO investors will look for sure signs of company growth and profitability.
SPAC deals also down
Meanwhile, mergers of blank cheque companies and private firms have also declined sharply this year. Blank cheque firms, also known as special purpose acquisition companies (SPACs), are shells that exist solely to target another firm and take it public.
SPACs list via IPOs before combining with other companies.
Smith said SPAC formations are finally being hit by poor returns, and more SPACs are withdrawing from the process of going public.
According to Renaissance, more than 250 SPACs were on file to complete offerings at year-end 2021 after 613 blank-cheque IPOs raised more than $144bn last year, breaking all prior records.
Sentiment has soured
“But sentiment has soured in the wake of poor returns and challenging market conditions,” said Renaissance on its website. “While SPAC issuance remained high in the (fourth quarter), those challenges may finally be impacting the start of the SPAC lifecycle, as a wave of sponsors have officially abandoned IPO plans.”
According to Renaissance, 14 SPACs have withdrawn their IPO paperwork this month, exceeding the total withdrawals for all of 2021.
Smith said SPAC Cohn Robbins Data’s agreement to purchase a Swiss lottery operator for $9bn affirms Renaissance’s prediction that more SPACs “will cast their nets outside the US.”
Remillard said the outlook for SPACs and IPOs might be more attractive in Canada because Canadian markets have less exposure to tech stocks.
“If there is less demand for IPOs in 2022 versus 2021, I would expect the use of SPACs to decline relative to conventional listings,” said Simnett.