When is the next major IPO?
By MICHAEL GARCIA | WASHINGTON — With the economy slowly returning to normal, investors are eager to take advantage of a potential new opportunity: a stock that’s going public.
But a new report from Bernstein Research suggests that investors will wait until at least 2019 to buy that kind of stock.
The reason: While the Dow Jones Industrial Average has soared, it hasn’t done much to close the gap between what it and the S&P 500 is capable of, and what it needs to close to make it a strong performer again.
Bernstein’s report is the latest to suggest that investors are ready to buy stocks that have a strong potential for growth, but which may not be able to generate significant returns in the long run.
“Investors are going to buy a lot of companies that are going public in the next three years or so,” Bernstein analyst Michael Sacks told CNBC’s “Squawk Box.”
Investors have been buying into the SaaS (software-as-a-service) sector because it has an obvious need for growth.
They want to take on some of the risk that comes with taking on a more expensive product like a startup or even a traditional retail company.
And because the market is becoming more crowded, companies need to offer a bigger slice of the pie to the people who are paying for it, not just a smaller slice.
Investors also want companies that can scale quickly.
They’re interested in companies that have strong revenue streams, and companies that do things that other companies can’t do, like build apps and manage data.
The companies in the SAAB (software as a service) space are also expected to grow in value.
“Investors need to see growth in these areas,” Sacks said.
Investment guru Mark Zandi has long argued that there are three main reasons that the SAB is doing well: high-quality product, relatively low cost, and high margins.
But in this case, it looks like investors have been getting their money’s worth.
“The SABs revenue growth has been very good, and we’re seeing it from both the revenue growth and margins that we see,” Zandi said.
“So I’m not really concerned that it will continue to get better.
It is still a very good product.”
Investor sentiment toward companies that don’t have strong growth potential isn’t as strong as it was during the financial crisis.
In late 2014, Zandi noted, the SAG-E index of U.S. corporate profits fell 4.2% year over year.
The S&s 500 index of the SAC (sales-to-average) ratio dropped 8.4%.
“I don’t think investors have much of a sense that the growth potential is very high,” Zanki said.
Sacks and Zandi agree that investors should expect to see some of that S&ing growth coming from a number of companies in this sector.
“I’m sure there will be a few that go public,” Sack said.
But there’s a risk that the investment frenzy will quickly fade as investors start to realize that the stock market is only as good as the underlying product.
“People will get a lot more concerned when there is no growth and the stock is in a downward trend,” Saks said.
Bernstein Research predicts that SaaAs growth will average just 1.5% per year through 2027.
“That’s not sustainable,” Zanksi said, adding that investors have to look for a return on investment that’s 10% or more per year to be willing to buy into a stock.
“We’re not talking about a 20% return.
We’re talking about 5% or less.”
Bernstein also expects that the market will be able keep pace with the SSA (software and services as a business) and SACs growth.
That will lead to more companies being in this space, but “there are still a few companies that need to get out of this space,” Zanesi said