How To Analyze An IPO

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

My colleague and co-host Tracy Alloway is out this week, so not going to be a long introduction, but one of the big things that's going to happen, or least expected to happen in markets in 2019, is the flotation of some pretty big, highly anticipated IPOs, some of those Silicon Valley unicorns that people have been talking about forever, Uber, Lyft, Slack, all of them, plus more likely to go public this year after a long wait. Of course, many of them are huge, and they're going public at a stage in life that is much later than many of the big tech companies that are currently public when they decide to go public, or when they decide to do their IPO. So I want to talk more about the IPO market on today's episode. And to discuss this, I have with me Rett Wallace. He is the founder and CEO of Triton AI, a company that analyzes IPOs through various proprietary measures.

And we're going to talk about the evolution of the IPO market, as well as how to analyze an IPO. Because theoretically, there might be people out there looking at some of these that would like to have some perspective on how to think about the value and the investment appeal of these well-known companies. So Rett, thank you very much for joining us.

Rett Wallace (1:35)

Great to be here, thank you.

Joe Weisenthal (1:37)

Let's start with that question about why these companies are, so people say, coming public much later in life. So companies like Amazon and Microsoft and Apple, they essentially did their IPOs when they were fairly tiny startups, at least by today's standards.

What's changed since then, the 1980s to 2019, such that these big companies are already produced billionaires and people have gone on to great fortunes ever before floating a share of stock?

Rett Wallace (2:12)

Sure. Well, like most things, there are a couple of different narratives by way of explanation.

What you'll hear from people in Silicon Valley is that founders don't like to take their companies public because being a public company CEO is kind of a pain in the neck. And so anybody who's out to comply with the Sarbanes-Oxley Act and other things that were imposed on publicly traded companies as a protection against retail investors who buy their shares, if you have access to capital in the private markets, it might be easier for you to stay private and not expose your numbers, expose yourself to liability and so forth. So almost all of the reasons that you could think of why a company wouldn't go public are regulatory. They stem from the changes in the regulations of the securities business. And there's a long geeky narrative that we could get into about that.

When companies like Amazon and Netscape and Yahoo went public on a couple of million dollars of sales and earlier generations of companies like Intel and so forth went public, really as soon as they got to revenue, that's because capital formation happened in the public market.

Joe Weisenthal (3:18)

Let's actually, let's back up for a second. Tell me about your firm and why this is an area that you pursued. What is it about IPOs that are interesting in general?

And what is your background that caused you or that prompted you to go into analyzing them and providing this service of breaking them down?

Rett Wallace (3:36)

Sure. Well, it's, IPOs are a very good example of what came after the Great Depression when the government decided to reform the securities industry so that you didn't have a big speculative bubble anymore, the kind that created the 1929 stock market crash. And so the innovation at that moment was that securities come with data, stapling the 10 Ks and the 10 Qs, the regular recurring reporting and disclosure so investors would know what they are buying was the great innovation after 1929

And that prompted a situation where companies, if they wanted to trade stocks with each other or have people buy their shares, they had to be public. And so companies went public much earlier. If you, again, geekily read like the biography of Rockefeller, for example, before the crash, one of the reasons he was so successful in investing is that he had access to information that wasn't broadly available.

Joe Weisenthal (4:30)

That always helps.

Rett Wallace (4:31)

Right. So information has always been a key component of being successful as an investor.

And so the origin story of our firm is that we saw what was happening, that fewer and fewer companies were going public. And that meant that more and more of the interesting companies were private. And these companies operated outside of the information regime of the Securities Act of the United States.