Investors Are Getting Distracted By All The Shiny New IPOs

Investors Are Getting Distracted By All The Shiny New IPOs

about 3 years ago3 mins

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Investors have found themselves a new shiny thing to play with this year: initial public offerings (IPOs) hit records last quarter, and December’s continuing that run of form.

🕰 Recap

  • The number of companies that made their stock market debut hit an all-time high last quarter
  • December is adding to the buzz: meal delivery company DoorDash had its dazzling first day on the stock market on Wednesday
  • And on Thursday, Airbnb’s shares more than doubled on the home rental company’s first day of trading

✍️ Connecting The Dots

Last quarter saw a bonanza of initial public offerings (IPOs), which made it the most active third quarter in the last 20 years by money raised. The Asian and US stock markets, in particular, saw a host of newly listed shares, most of which were in the technology sector. And with public tech companies having done so well this year, plenty of private tech companies figured the time was ripe to offer shares and earn themselves a higher valuation than they would’ve if they’d stayed private.

The time was certainly right for DoorDash, the food delivery company that’s benefited from a homebound customer. In the first nine months of 2020, in fact, DoorDash processed food orders worth $16.5 billion – three times more than the same time last year. That laid the groundwork for a successful IPO on Wednesday: investors sent its shares up more than 80% on its first day of trading, even after having hiked its starting price twice the week before.

But on Thursday, Airbnb one-upped DoorDash’s performance: the home rental company’s shares more than doubled on its stock market debut. Pandemic-stalled travel has made life difficult for Airbnb this year, but the high demand for its shares goes to show investors are feeling confident both in the company itself and the travel industry’s eventual recovery.

And while you’d think things would start to wind down for the year after those two blockbuster IPOs – among the biggest of the year in the US – you’d be very much mistaken. 2020 continues to be anything but typical, with fintech company Affirm and children’s game company Roblox set to join the stock market before the year’s out.

🥡 Takeaways

1. Let the hype train leave the station.

Warren Buffett has previously called investing in IPOs “a stupid game”, and a study by UBS and the University of Florida agrees with the legendary investor: it showed more than 60% of public companies trade below their initial starting price five years down the line, and that first-day share price moves aren’t predictive of future performance. That means pre-IPO investors and company founders stand to benefit most from a stock market debut, not small-time retail investors who might struggle to buy in before the company in question hits the market.

2. Don’t sell yourself short.

DoorDash and Airbnb went the traditional route with their IPOs: they sold their shares to an exclusive group of investors at an “IPO price” suggested by the investment banks that advised them. But by the end of the first day of trading on the stock market, investors pushed that price significantly higher, suggesting Airbnb and DoorDash could’ve sold them for more to begin with. So maybe a direct listing – where the market sets the price – would’ve been a better way to go…

🎯 Also On Our Radar

JPMorgan said this week that the trend that’s seen money pour out of gold and into bitcoin since October is set to continue for years to come. Still, the investment bank admits there’s a good chance bitcoin’s price has overshot in the short term, and that the shiny metal is due for a recovery.

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