2020 has been a banner year for IPO (initial public offering) pricings. Jay Ritter, “Mr. IPO” in an interview said that the New Issue Market is “not as crazy as in 1999 and 2000, but still crazier than any other intervening years.” According to Professor Ritter, the average first-day return was 41% in 2020. Ritter, known as “Mr. IPO” for his work on initial public offerings, created a comprehensive database of U.S. IPOs dating back to 1980. 

This past week reflected another week of torrid growth. Software firm C3. Ai Inc. jumped 120%, food delivery service Door Dash climbed 86%, and Airbnb more than doubled the following day. 

 

Airbnb enjoys a market value greater than $100 billion, far more than Marriott ($42 billion) For the first nine months of 2020 it had revenue of $2.5 billion, and sustained a $697 million loss. 

 

Airbnb was the 19th company in 2020 to double in its first day of trading, which marked the most since 2000. In that year 77 companies at least doubled in their first day of trading.

Ritter expressed concerns that we could be in a bubble. He wrote that “it is difficult to come up with a plausible valuation today that should be much higher in public markets that it had recently in the private market. There is a mistake going on right now with the valuations and some of these companies.”

 

Some 80% of companies that went public this year were unprofitable in the 12 months prior to the IPO. This exceeds the number of unprofitable companies in the past four decades except for 2000 and 2018.

 

Art Hogan, chief market strategist at National Securities Corp, commented, “there is no doubt that the emergence of a much larger cohort or retail-slash-traders are moving markets. There seems to be an entire subculture of people that sort of follow the same things, talk to each other on social media, and drive enthusiasm for individual issuers. And sometimes it makes no fundamental sense to anybody.”

 

Among some 50 companies that had been backed by private equity and went public this year, their total worth jumped 660% on the first day of trading from levels indicated in their latest round of private funding, according to data compiled by PrivCo and Bloomberg

Why is the IPO market so much higher than the private market?

• Liquidity premium: shares in the public market can be bought and sold easily after a public listing

• Investors in the private market focus on earnings and competition. This contrasts with the retail crowd who in a frenzy believe that “stocks always go up.”

 

Many Wall Street veterans, people like myself, recall the dot-com era of the late 1990s when individuals enjoyed much more clout than institutions in setting the price for newly public companies. We remember the dramatic bubble of that era. From 1995 to its peak in March 2000, the Nasdaq Composite rose 400% only to fall 78% from its peak by October 2002.

 

Ritter wrote, “Back then (1999), it was mainly very young internet companies that doubled in price, and almost all of them crashed and burned. This year, we are seeing larger and more mature companies, such as Airbnb, double in price” Ritter said “Although the stock may drop, the company is unlikely to crash and burn.”

I can remember the heady days of 1999 when at cocktail parties people gleefully recounted their winnings. By 2002 these same people were inhaling Alka-Seltzer to relieve their stomach and headaches. William McChesney Martin, former chairman of the Federal Reserve said, “The job of the Federal Reserve is “to take away the punch bowl just as the party gets going.”