Surf Air’s rough debut serves as cautionary tale for direct listings

Going public via direct listing can be a bit of a gamble. For Surf Air Mobility Inc., it proved to be more like a spin on the roulette wheel.

When the stock finally began trading just before 3 p.m. Thursday in New York, it was on paper worth a quarter of the value expected the night before. While the reference price in a direct listing is merely an estimate of value — and a flawed one at that — the rocky debut could serve as a cautionary tale for other wanna-be public companies considering the route without the brand recognition direct listings typically accompany.

For small companies looking at a direct listing, Surf Air’s Chief Executive Officer Stan Little has some advice: “Number one, make sure you have the money that you need to execute since you’re not raising money yourself,” he said on the floor of the NYSE Thursday. 

Despite the widespread view that it’s a cheaper and faster way to go public, only a handful of well-known companies like Spotify Technology SA, Slack Technologies Inc. and Coinbase Global Inc. have tapped the option to go public. 

The venture-backed regional air carrier with plans for electric planes opted for a direct listing after a SPAC deal was called off last year. While the company had reasons to go public, including a tie-up with Southern Airways Corp. and unlocking additional funding, its start isn’t the exit its backers were hoping for.

When the dust settled on Surf Air’s debut — which accounted for about an hour of regular trading — the share price had tumbled 37% from its opening level to give it a market value of roughly $290 million. At $3.15, the company was worth less than a fifth of what investors went to bed thinking it would be worth on Wednesday night when the exchange assigned a reference price of $20 a share. The stock extended losses to drop another 24% to $2.41 on Friday.

“Surf Air’s early trading highlights that IPO markets aren’t yet completely receptive to somewhat speculative story stocks,” said Rohit Kulkarni, an analyst at Roth MKM. “Given Surf Air’s cold reception, IPO timetables of cash burning startups might get pushed back even further.”

While the demand for some new IPOs has been strong — a handful to debut over the past two months are up more than 35% from their offering price — Surf Air’s rocky start shows investors are being cautious, according to Quincy Krosby at LPL Financial.

“This was disappointing in one aspect, but it was positive because we have a discerning market and it’ll be a lesson to other deals to do your homework and see what the interest is,” the chief global strategist said. 

Unlike a traditional initial public offering in which shares are sold at the offer price before trading begins, nobody bought or sold stock at the reference price. It’s more of an odds-making exercise as to what the company could be worth. One of the downsides of direct listings is that it’s “someone else’s speculation,” according to CEO Little, who saw other takeaways from his company’s debut.

For Little, a lesson learned “is you have to invest a lot more money than you would think in advertising and investor awareness. I don’t think we saw a whole lot of volume from our shareholders come on on the sell side today, we just didn’t get the word out to buyers as much as we should have.”