Today, I read in the NY Times that Fitbit, the San Francisco-based company that is a pioneer in wearable fitness tracking devices, has raised the prospective share price range for the initial public offering, or IPO, which will occur this Thursday, June 18th. The company filed for the IPO in May, wagering that customers will continue to spend in this hot market. And right now, it looks like a good bet: Fitbit profit topped $132 million in 2014, and the first quarter of 2015 showed a 300% surge in year-on-year sales. By listing on the New York Stock Exchange (NYSE), Fitbit stands to earn quite a purse of cash. Earlier this month, Fitbit expected to list shares between $14-$16 per share, while today that range climbed to $17-$19. (For some context, Facebook’s opening NYSE price was $42.05, while Alibaba’s IPO price was $68.) Of course the IPO price is only one factor in the equation: the total value from the IPO comes from the number of shares offered multiplied the price/share minus filing and other costs. According to the IPO filing, the company plans to sell 22.4 million shares, while existing shareholders plan to sell an additional 12.1 million shares, totaling 34.5 million shares to be offered. So:
Amount raised by an IPO: $ per share x # of shares (- filing costs... which I am neglecting)
So with the simple change in share list price, the amount Fitbit stands to gain (before costs):
34.5 million shares x $14/share = $483 million low range
34.5 million shares x $19/share = $655 million high range
Now 34.5 million shares is not random and does not equate to percentage; it appears that after this IPO, Fitbit ownership will have been parsed into about 205 million shares total. So insiders will retain ownership of the country, as only 34.5 M of 205 M shares, or ~ 17% of ownership will go to the public.
The valuation of a company, how much it is worth, is calculated based on what others are willing to pay for a share. In other words, although all of the shares of the company have not been paid for at a set price per share, stock price is indicative of what each share is worth. So the midpoint of this new valuation, $18 per share, gives:
Fitbit Valuation: $ per share x total shares
= $18 x 205 million ~ $ 3.7 billion valuation for Fitbit.
Amount raised by an IPO: $ per share x # of shares (- filing costs... which I am neglecting)
So with the simple change in share list price, the amount Fitbit stands to gain (before costs):
34.5 million shares x $14/share = $483 million low range
34.5 million shares x $19/share = $655 million high range
Now 34.5 million shares is not random and does not equate to percentage; it appears that after this IPO, Fitbit ownership will have been parsed into about 205 million shares total. So insiders will retain ownership of the country, as only 34.5 M of 205 M shares, or ~ 17% of ownership will go to the public.
The valuation of a company, how much it is worth, is calculated based on what others are willing to pay for a share. In other words, although all of the shares of the company have not been paid for at a set price per share, stock price is indicative of what each share is worth. So the midpoint of this new valuation, $18 per share, gives:
Fitbit Valuation: $ per share x total shares
= $18 x 205 million ~ $ 3.7 billion valuation for Fitbit.
So an IPO brings the company a hefty cash sum and also puts a relative number on the monetary value of the company. Like most things in life, this money doesn't come free; in order to get cash from an IPO, a company must effectively sell ownership. Shares don’t come just come out of thin air – 100% of the company is owned, so although the amount of shares might increase, the current ownership shares must decrease to accommodate new shareholders. So how did Fitbit decide how many shares to list? And what is the time course from IPO filing to market listing? And lastly, what does an IPO mean for Fitbit, shareholders, and people wanting to get involved in the public offering for Fitbit? Here is my understanding of the IPO process, mostly gauged from a great article in Forbes.
- Months ago: Fitbit decided the balance between raising capital and selling ownership and came up with a # of shares to be sold. Fitbit's current share holders include: 21% between Co-Founders Mr. Park and Mr. Friedman, 28.9% by outside shareholder Foundry Group Funds, and 22.4% by True Ventures. I believe this ownership was parsed into ~ 170 million shares, and now that 34.5 million shares will be sold, each owner's share will be decrease by 1 - 170/(170+34.5) or 17%.
- Months ago, after Fitbit decides shares to list: Fitbit’s underwriting banks (which include Morgan Stanley, Deutsche Bank, Bank of America, and Merrill Lynch) notified institutional investors that 22.4 shares of FIT (the NYSE listing) are on the table (and then another 12.1 shares came from current investors to total 34.5 million). These institutional investors in general include top pension funds, mutual funds, hedge funds, and high net worth individuals and long standing clients. Basically, these are accredited, experienced investors who can help create stability in the stock price. Fitbit did not request a price per share from these investors. Rather, these institutional investors made requests/orders on the price and number of shares they were willing to buy. Example requests: “I will buy X shares at any price”, “I will buy Y shares if the price is between a and b, but Z shares if the price is over c”.
- Wednesday, June 17th, around 4:00 pm (the day before the IPO): Fitbit will set a final IPO price. No matter what happens to the share price after it is listed, Fitbit will know exactly how much cash it is going to raise because ALL of the shares will sell – the number of share requests always greatly outnumbers the demand.
- Thursday at 8:30am (before the market opens): the IPO underwriters will allocate all of the 34.5 million shares to the investors. As mentioned, the demand outweighs the supply, so the underwriters make decisions by weighing several factors such as investor reputation, term of investment, and foreign versus domestic investors. Before the market opens, all of the 34.5 million shares, priced at the same starting point, will be in the hands of investors.
- Thursday at 9:30 am: (markets will open): investors all over the world - both the original institutional investors and new retail investors (regular Joes)- will make orders. Each order will be either a bid (“I want to buy XX of FIT ”) or an offer (“I want to sell YY of FIT”). Note, the latter is presumably from the institutional investors.
- Thursday morning, shortly after market opens: The designated market maker (DMM) for Fitbit will collect the initial orders and reports a prevailing share price from the bids and offers. This number will be reported to the media.
- Thursday morning, after initial orders: the DMM will set an opening share price and block any new orders from coming in. This share price is set with the goal to balance supply and demand. The DMM will enter and carry out the first sets of buy and sell offers based on this set opening price. This process will take ~ 15 minutes to over an hour, according to stock activity (so Fitbit will presumably take around an hour).
- Later Thursday Morning: after this price discovery stage, FIT begins trading at the opening price.
- Thursday during market open hours: the price discovery of FIT will fluctuate throughout the day based on supply and demand.
- Thursday at 4:00pm: the market will closes, and FIT will have a final price.
Now that we have worked through the obscure process of IPO listing, what does it all mean? For Fitbit as a company, the key numbers are locked in today (the day before the IPO, as I write this post). Fitbit listed an offering price, and institutional investors have laid claims to each and every share. So for Fitbit, the IPO cash has been raised even before the actual stock is listed in the NYSE. For the employees and shareholders of Fitbit that owned shares previous to this IPO listing, the key is the market valuation of Fitbit, or the time after market open that Fitbit is open for trading. This price, the price per share, determines the equivalent dollar amount each of these shareholders possesses. Tomorrow, the day FIT is listed on the NYSE, the share price can take a direction upwards or downward of the offering price. If the stock continues to climb, it would indicate that Fitbit could have asked more per share, and hence acquired more cash. However, it's generally good to keep shareholders content, and thus an increasing share price is generally positive (not always though... overvaluing a stock is also risky.) On the flip side, if the share price falls after listing, this reflects poorly on the underwriters and introduces doubt about the company to the investors and media alike.
Fitbit's product line faces stiff competition from the Apple watch, Nike+, Samsung Gear, and Jawbone, who has apparently sued Fitbit for hiring Jawbone employees who disclosed proprietary information. That said, Fitbit currently has an impressive 34% of the the wearable fitness device market. Furthermore, a Study by Juniper Research purports the number of wearable fitness devices to triple by 2018 to 70 million in-use devices. Admittedly, I'm feeling ready to invest. However, there are still risks to consider, and this senior technology analyst is particularly poised to verse some of his hesitations with Fitbit. I am anxious to see what happens tomorrow!
Sources:
1. NY Times: Fitbit Raises Prices for IPO
2. NY Times: Fitbit Files to Go Public
3. Investopia: How Does IPO Pricing Work?
4. Forbes: Fitbit Is Days Away From This Year's Hottest IPO
5. CNBC: Fitbit files for initial public offering
6. Alibaba Claims Title For Largest Global IPO Ever With Extra Share Sales
7. Fitbit Company Website
8. USA Today: Fitbit raises IPO price range
9. Juniper Research Wearable Fitness Device Study
10. Fitbit - Not in shape for an IPO
Fitbit's product line faces stiff competition from the Apple watch, Nike+, Samsung Gear, and Jawbone, who has apparently sued Fitbit for hiring Jawbone employees who disclosed proprietary information. That said, Fitbit currently has an impressive 34% of the the wearable fitness device market. Furthermore, a Study by Juniper Research purports the number of wearable fitness devices to triple by 2018 to 70 million in-use devices. Admittedly, I'm feeling ready to invest. However, there are still risks to consider, and this senior technology analyst is particularly poised to verse some of his hesitations with Fitbit. I am anxious to see what happens tomorrow!
Sources:
1. NY Times: Fitbit Raises Prices for IPO
2. NY Times: Fitbit Files to Go Public
3. Investopia: How Does IPO Pricing Work?
4. Forbes: Fitbit Is Days Away From This Year's Hottest IPO
5. CNBC: Fitbit files for initial public offering
6. Alibaba Claims Title For Largest Global IPO Ever With Extra Share Sales
7. Fitbit Company Website
8. USA Today: Fitbit raises IPO price range
9. Juniper Research Wearable Fitness Device Study
10. Fitbit - Not in shape for an IPO
RSS Feed
