Airbnb and Doordash just blew the roof off their public listings. Insiders netted huge returns but is it a sign broader market returns are about to end?
Must know about Airbnb & DoorDash IPO
- The first day gains for Airbnb and Doordash were 112% and 86% respectively, the fourth and seventh largest of all time.
- Demand from retail investors appears and the huge outperformance in tech shares this year appear to be the difference-maker from 2019 when IPOs were more sceptically-received
- The tech IPO bonanza is bringing back memories of the dotcom boom and bust from the year 2000
- Why are IPOs doing so well this year?
- Is another bust coming?
Airbnb and Doordash just saw the fourth and seventh respectively biggest one-day percentage gains ever for an IPO. Airbnb IPO’d at $68 but opened on the Nasdaq at $146, giving it a market value of over $100 billion – making it worth more than all the three biggest US hotel chains combined. Doordash IPO’d at $102 per share but shares opened on the NYSE at $182. That left it with a $59 billion market cap. Snowflake, KE Holdings and Array, which IPO’d this year have all made it into the top 10 biggest one-day gainers of all time.
It’s worth noting that this is not just a US market phenomenon in the year 2000. Seven of Hong Kong’s best 10 IPO debuts in the past decade are in 2020.
In the case of the US, the top 3 IPO returns all happened in the year 2000, when the dotcom bubble burst. Naturally it’s worth asking if these gains are indicating the same kind of frothiness that led to a top in the market in the year 2000. But is that too simple of a comparison to make?
The above chart shows that indeed that the returns found on IPOs in the years 1999 and 2000 far exceeded the average return over the past 40 years. It can be seen that the only other year in which average IPO returns was comfortably above 20% was in 2008, the year of the financial crisis.
A change from last year
The performance of IPOs in 2020 is a marked difference from those in 2019. There were a number of high-profile technology companies saw shares fall after listing and in the case of WeWork, investors completely rejected the valuation and the IPO was cancelled.
This diagram shows that in 2019, while technology companies benefitted from easily the larges haul of IPO proceeds, post-IPO investors actually came out with a loss on average.
The number of tech-specific IPOs was already at the top end of the range by October so the number of IPOs is also up on the year However, as far as number of IPOs, 2019 was also a banner year. Evidence would suggest that the number of IPOs is probably less of a bubble indicator than the post-IPO returns.
Why are IPOs doing so well this year?
We can only speculate about what has caused the rise in IPO demand in 2020, but the biggest factor appears to be the return of the ‘retail investor’.
A new class of investor has reached the conclusion that the stock market never goes down because it is being supported by central bank money printing and now big government spending too. For these disenfranchised potential investors, the pandemic created a ‘once in a lifetime’ opportunity to jump in after a 30-40% drop in a stock market that otherwise never seemed to come down.
The huge gains in tech stocks as retail investors bought in has created an atmosphere of FOMO (fear of missing out). It’s understandable when investors look at a cherry-picked version of IPO history that shows the multi-thousand percent returns in the biggest tech stocks since their debut.
What happened with IPOs in 2000?
Some argue that the beginning of the end of the dotcom era was with the post-IPO performance of some of the top one-day gainers. Probably the two best-remembered are Pets.com and Lastminute.com. The two companies saw big double-digit one day gains but the share prices tanked thereafter as the companies never turned a profit
Airbnb & DoorDash IPO
Post-IPO returns tend to be a function of market confidence. Investment bankers do considerable work to price a company at IPO somewhere close to (perhaps slightly below) its fundamental value. So unless these professionals have gotten it seriously wrong, the subsequent gains in the stock after the IPO will naturally take the stock to a price that makes them over-valued.
Investors are only ever willing to buy overvalued stocks because they are confident enough in the market environment that they think the stocks will continue to rise anyway. The difficulty comes when the price gains don’t materialise.
If the huge one-day gains in these IPO stocks of 2020 turn to losses in 2021, it will be a sign the bubble may be bursting. If however, the gains are sustained – as many retail investors believe- by huge central bank money printing and government stimulus – then they will only serve to perpetuate the bullishness of the market and create even more FOMO for the next round of new investors.