The Hot IPO Market
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An initial public offering, or IPO, is when a privately-owned company goes public by beginning to sell shares to the public and getting listed on a stock exchange.
Despite a global pandemic, there have been 461 IPOs in the U.S. market this year, as of December 17, 2020. This is approximately double the number of IPOs (231) during the same time in 2019.
Hot IPOs This Year
Of the ten largest U.S. tech IPOs ever, three have occurred this year. One of them is the software company Snowflake, which debuted in September as the largest software IPO ever. The other two, DoorDash and Airbnb, occurred less than two weeks ago, on December 9 and 10.
The valuations of these hot IPOs often surpass their established, long-profitable, peers. By market cap, Airbnb is worth more than Marriott International Inc., Hilton Worldwide Holdings Inc. and Hyatt Hotels Corp. combined, and DoorDash is valued almost double Yum Brands Inc., which owns Pizza Hut, Taco Bell, and KFC.
IPO Valuations
David Golden, a partner at Revolution Ventures and former head of technology investment banking at JPMorgan, wrote, “Other than the dot-com era (1999–2000), I’ve never seen anything like this across so many companies…. The valuations are seemingly untethered from any analytic metrics that I’ve understood.”
The rapid increase in these companies’ share prices suggests that they could have raised a lot more money without further dilution. Skeptics are irked that these companies are giving new institutional investors a “free handout” by pricing their IPOs too low.
While institutional investors may receive free handouts, that’s not so true for everyday investors. For example, Airbnb’s offer price was $68 per share, yet the day it began trading, it immediately opened at $146 per share.
Jay Ritter, a finance professor at the University of Florida, says that hedge funds are “buying with the expectation that they’ll be able to make a profit by flipping the stock.” So, while institutional investors are making the largest gains by selling their shares on the public market for much than the offer price they paid, investors who buy later on at propped up prices have much less upside.
The Future of IPOs
In the last two years, the number of unicorns — private start-ups with a value over US$1 billion — has doubled globally to more than 500. Many of these unicorns are likely to begin exiting through IPOs while stocks are at or near all-time highs.
Rich Wong, a partner at the venture capital firm Accel, says “If the [stock market] rally stays apace, 2021 will definitely be the most active IPO market in the last 20 years.”
