Bottom line: Big volatility for first-week trading debuts of Nio and Qutoutiao point to problems with pricing and investor indecision in the current market, and could point to more rocky debuts for at least the next few weeks.
When I previously wrote about low expectation for an IPO last week by new energy startup Nio (NYSE: NIO), I wasn’t all that surprised when the company notched a more upbeat New York debut with a 5 percent gain on its first trading day. After all, the company had been so beaten down during the IPO process that this was something akin to a dead-cat bounce and a small present for the money-losing company as it entered the publicly traded realm.
But then the stock suddenly soared by more than 70 percent on its second trading day — something one seldom sees with new IPOs. I was tempted to write the whole thing off as manipulation, even though I had no direct evidence, since the company sold around 90 percent of its IPO shares to just 10 investors. That meant that a couple of large investors could have simply traded their huge blocks of shares between each other at inflated prices, and neither would have lost any money in the process.
But then the weird first-day pop occurred again, this time with the newly listed news aggregator Qutoutiao (Nasdaq: QTT) and also to a lesser extent with online pharmacy operator 111.com (Nasdaq: YI). In the former’s case, the stock more than doubled on its first trading day. The latter jumped as much as 20 percent on its first day, though ended up giving up all the gains before the end of the session and is now below its IPO price.
Of course the granddaddy of all these tech IPOs will come on Thursday in Hong Kong, when online-to-offline services giant Meituan-Dianping will make its formal debut with local investors in a $4.2 billion offering. That listing has already priced near the top of its range, even though the company is losing massive money. But based on these other three, it could well see a big pop on either its first or second trading day.
So what’s going on here in terms of the huge volatility we’re suddenly seeing? Before we explore that a little further, we should also note that the maxim of “what comes up must come down” also appears to be at play. The 111.com IPO is already trading below its IPO price after its brief pop, and the air also appears to be quickly coming out of Nio’s and Qutoutiou’s tires.
After its impressive second-day gains, Nio’s shares have come down steadily in each successive trading day and were just 22 percent above their IPO price at Tuesday’s close in New York. Likewise, Qutoutiao has seen similar steady declines and is now a more modest 32 percent above its listing price, which admittedly still isn’t bad.
Manipulators at Work?
Manipulation certainly seems like a good explanation for these cases, though in this day and age someone would need to be rather brazen to attempt such a thing since it’s quite easy to detect. And seeing not one but three cases of such large moves seems to indicate that perhaps something else is at play.
I asked a couple of my trader friends who follow these things and both gave pretty similar answers, namely that investment bankers are currently being overly aggressive in underpricing these new IPOs over fears they won’t be able to sell all the shares. That fear is certainly understandable, since at least the Nio IPO had to be massively downsized before it ever started trading due to weak demand.
One friend pointed out that Donald Trump’s trade war is just adding volatility to the situation, which also makes sense. After all, many of these companies’ fortunes are at least in some way tied to the international market, especially a company like Nio that undoubtedly imports many of the components used in its electric cars.
At the end of the day, I’m still not completely convinced why an investor who balked at an offering one day would suddenly be willing to pay 70 percent or even 100 percent more for the exact same shares a day later. One of the traders phrased it nicely when he said “the pricing process is broken”, or perhaps investors themselves aren’t even sure how to properly value these companies. That certainly seems to be the case based on all the recent volatility, which could make buying into new IPOs tricky business for at least the next few weeks.