By Tim McLaughlin
BOSTON (Reuters) - Companies making their debut on the U.S. stock market are getting a rough welcome, especially if they are losing money, casting a shadow over the calendar for initial public offerings for the rest of the year.
The surprise postponement of the WeWork IPO has underscored how confidence is eroding in the market both for companies looking to raise capital and investors.
A more discerning market for initial public offerings continued to punish Peloton Interactive Inc (O:PTON) on Friday, a day after it began trading, as shares of the fitness startup fell 4% to $24.74. The company is now trading 15% below its Wednesday IPO price.
In the past, public market investors have typically expected companies to become profitable within 18 months or so of an IPO. This timeline has been relaxed with money managers eager to add businesses with fast-growing revenue to their portfolios.
Recent deals, however, suggest an uncertain economic outlook is pushing investors to be more selective about the loss-making companies they are willing to back.
Peloton reported rapid top-line growth of 110% during the fiscal year that ended June 30. But the company also showed negative operating leverage, with operating expenses surging 147% over the prior year.
Loss-making teeth-alignment company SmileDirectClub (O:SDC) earlier this month became the first U.S. IPO in three years to price above its target range and close down on its first trading day, according to research firm Renaissance Capital.
The average IPO return in 2019 is now about 9%, down from more than 30% at the end of June and more than 18% about two weeks ago.
In the United States, much of the attention in the third quarter has focused on a deal that failed to come to fruition - the planned IPO of WeWork parent We Company.
Having aimed to launch its IPO earlier in September, the company postponed plans to list until later in 2019, before replacing its chief executive officer and saying it was reviewing its timetable to go public.
Endeavor Group Holdings (N:EDR), an entertainment and talent agency company backed by Hollywood power broker Ari Emanuel with a track record of losses, made a last-minute decision to abandon its IPO due to the tough market conditions.
Taking a lesson from the struggles earlier in 2019 of ride-hailing companies Uber Technologies (N:UBER) and Lyft Inc (O:LYFT), which have no stated timetable for becoming profitable, investors have started to push back on companies with a history of steep losses.
"It will be a dialogue among bankers and boards and senior management teams where they say, 'these were isolated and not comparable,' or say 'we have a sentiment shift and we need to be more conservative and use a different strategy,'" said David Ethridge, U.S. IPO services leader at audit firm PwC.
The market was more receptive to lesser-known names such as cyber security company Ping Identity (N:PING) and cloud monitoring company Datadog Inc (O:DDOG). Both companies have reported more modest losses and rely on selling to companies rather than to consumers.