The recent initial public offering (IPO) of German footwear company Birkenstock Holdings Ltd. has garnered much attention for all the wrong reasons. According to Renaissance Capital, a leading provider of IPO exchange-traded funds and institutional research, Birkenstock’s debut on the stock market is being regarded as one of the worst for a billion-dollar deal in the past decade.

On its first day of trading, Birkenstock’s stock, listed as BIRK, experienced a significant decline of 12.9%. The downward trend continued throughout the week, with the stock plummeting by 21% by the end of the week. As of premarket trading on Monday, the stock was down an additional 0.9%.

To put this into context, of the 95 IPOs that have raised at least $1 billion over the past 10 years, Birkenstock ranks among the bottom performers on its first day of trade. Only five other IPOs fared worse than Birkenstock in terms of their initial trading days. The most recent IPO that suffered a similar fate was AppLovin in April of 2021, which closed down 18.5% on its first day.

Interestingly, it is worth noting that larger IPOs such as Birkenstock are generally considered to be less risky. However, in this case, the stock’s disappointing performance deviates from the norm. As Bill Smith, founder and CEO of Renaissance, highlights in his commentary, only 20% of billion-dollar IPOs over the past decade closed with negative results on their first day of trading, compared to 27% for all IPOs.

While the poor market performance of Birkenstock’s IPO is cause for concern, it also sheds light on the current state of the IPO market as a whole. Smith refers to the lackluster aftermarket returns as an “autocorrect feature” that was observed a week ago.

The Changing Landscape of IPOs

The initial public offering (IPO) market has undergone a significant shift in recent times. Traditionally, investors could expect a first-day surge in share prices, resulting in generous returns. However, this trend appears to be shifting.

Aftermarket buyers, who were once eager to jump on IPO opportunities, seem to be growing cautious. Multiple instances of disappointing deals have made them skeptical. As a result, the traditional first-day pop is now nowhere to be seen.

In the case of Birkenstock, their valuation became a contentious issue. The company decided to price their IPO just below the midpoint of their price range at $46 per share. This valuation placed Birkenstock at the top of its peer group in terms of forward price/earnings ratio.

While the company boasts strong fundamentals, investors want to witness solid execution and growth before placing a premium valuation on the company. The demand for companies with exceptional potential remains, but investors are looking for reasonable prices rather than speculative bets.

It’s worth noting that the current scenario is not the “new normal” but rather a return to the “old normal,” reminiscent of the pre-2020 IPO market.

Presently, weaker companies are finding it difficult to go public, while stronger ones are aiming for valuations that prove elusive. The turbulence in the IPO market, coupled with global conflicts and a bond market meltdown, has led many IPO hopefuls to become disenchanted with the prospects for Q4. Nevertheless, it would be premature to completely discount the quarter.

Looking at the performance so far this year, the Renaissance IPO ETF has experienced a 25% increase, outperforming the S&P 500 index’s gain of 12.7%.

For more information on Birkenstock’s IPO plans, check out: Birkenstock is going public: 5 things to know about the iconic German sandal maker’s IPO designs

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