Public Markets Mint IPO Gold With ‘Massive’ Valuation Premiums
For years now, people have been lamenting the decline of capital-raising prowess in the U.S. stock market. Those critiques appear to have been premature.
Long moribund, U.S. exchanges are again showing themselves to be settings for instantaneous wealth creation, including this week when DoorDash Inc. and Airbnb Inc. soared in their first public trades. Not since the height of the dot-com bubble two decades ago has a public listing done more to enrich owners than in the last 11 months, when the average first-day return for IPOs has exceeded 35%.
For stay-at-home tech plays and cloud computing upstarts to just about anything a blank-check impresario can dream up for a special-purpose acquisition company, there has virtually never been a better time to sell a private business to public shareholders. Fueled by Federal Reserve stimulus and the reemergence of individual investors as the market’s biggest force, the euphoria is sowing anxiety among Wall Street pros while making a generation of entrepreneurs rich.
“It’s absolutely remarkable — just an insatiable appetite to participate in these offerings, a sense that people ‘need’ to own these stocks,” said Andrew Ross, managing member of Confluence Global Capital, an event-driven hedge fund. “The valuations are multiples of where they were valued in private markets — a massive valuation premium in public markets.”
The soaring debuts came even as the broader market stumbled to the worst week since October. The S&P 500 fell almost 1% in the five days as concern mounted that Congress won’t pass a federal aid package even as the virus spread out of control. The Dow Jones Industrial Average lost 0.6% and the Nasdaq 100 Index slid 1.2%.
That mattered little to investors clamoring to get their hands on the latest tech darlings. In doing so, they defied concerns not very long ago among market pundits who warned the unicorn craze had gone on too long — that venture-capital sponsors, resistant to scrutiny and awash in private money, overplayed their hands waiting for the perfect time to cash out. Disappointing deals by ride-sharing firms Uber Inc. and Lyft Inc. had obituary writers working overtime last year, memorializing a decade-long expansion in tech valuations. But patience has proved a resounding virtue in 2020.
Airbnb more than doubled in its trading debut, propelling the home-rental company to a $100 billion-plus valuation and one of the biggest first-day pops on record. That’s up from a total value of $31 billion indicated in a 2017 private funding round. A rally in DoorDash shares pushed its total worth above $55 billion, compared with its last private-funding round valuation of $16 billion.
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The average first-day return for operating-company IPOs this year is 40%, the highest of any year except 1999-2000, according to data compiled by Jay Ritter, professor of finance at the University of Florida’s Warrington College of Business. An index of newly public IPO stocks kept by Renaissance Capital is up 112%, three times its best annual return before 2020.
Riding the boom are day traders. Stuck at home and trading for free, retail investors have opened at least 8 million accounts in 2020 across brokerages including Charles Schwab Corp., E*Trade Financial, TD Ameritrade Holding Corp. and Robinhood Markets Inc. Altogether, retail traders now make up a fifth of equity trading volume, according to Bloomberg Intelligence’s Larry Tabb.
DoorDash, which surged 86% on debut this week, immediately jumped onto the leader board of top orders among online traders tracked by Fidelity Investments. So did Airbnb Inc., which soared as much as 143% on the first day of trading.
Among the most popular stocks on Robinhood, five of them began trading publicly in the U.S. this year — XPeng Inc., Rocket Companies Inc., Palantir Technologies Inc. and Li Auto Inc. Popular IPOs from last year also appear on the list, including Zoom Video Communications Inc., Beyond Meat Inc., Uber and Lyft.
The Renaissance IPO ETF has attracted new cash for 15 straight sessions, the longest streak in the fund’s seven year existence. This week alone, investors have poured $145 million into the fund, on pace for the most ever, amid record volume.
“There’s been a tremendous amount of wealth created in the floating of these shares,” said Kevin Caron, portfolio manager for Washington Crossing. “There is sense of euphoria that is present in markets. Caught up in that is also a rush to attribute very very high valuations to companies that have not yet been proven. A lot of investors are looking back over the past 20 years and imagining the stocks that have matured and turned into very big successes.”
The boom is a rebuttal to anyone who has lamented the U.S. stock market’s supposed failures as a capital-raising mechanism, an argument that was supported by the steady and steep falloff in IPOs over the last 20 years as venture-capital backers resisted selling. Starved of new entrants, the average age of companies listed on American exchanges has been steadily rising since the dot-com era. By early 2019 it was 20 years, almost twice the level 1997.
That companies have had longer to season may give the current wave staying power, said Nathan Thooft, Manulife Investment Management’s head of global asset allocation.
“Part of the reason is the quality of IPOs — and you can still question individual companies — on average is a bit better than the past,” he said. “Most of these companies have been in incubation in the private side for longer than what IPOs used to be going back a decade or two decades. That doesn’t necessarily mean they’re at profitability, but there’s a line of sight for profitability that’s a bit clearer than perhaps their predecessors.”
— With assistance by Claire Ballentine, and Elena Popina
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