Pricing Versus Promise
Consider Airbnb. Now with a market capitalization around $100 billion, Airbnb’s value is more than five times as high as its worth was implied in a debt funding round at the height of the pandemic.
There’s reason institutions such as venture capital firms and private equity investors might have different views than the masses on valuation these days, as well as the investment bankers who set the IPO price. One factor is the liquidity premium, or the ease with which shares can be bought and sold after a public listing. Another is that when pricing an IPO, long-term investors may be more inclined to consider earnings and competition -- standards that haven’t always seemed to govern the “stocks always go up” retail crowd.
“Some investors are deciding to hold based on fundamental analysis, trying to figure out how much Airbnb is really worth,” said Ritter. “And others are paying attention to that, but also playing momentum strategies. They might say, ‘I think they’re overvalued but I believe in the great fool’s theory. I think it’s going to go up even higher and I can sell my shares by waiting to sell to a greater fool later on.’”
Still, it can be hard in stodgier corners of Wall Street to understand why DoorDash, for example, a seven-year-old, unprofitable food delivery company with established competitors should see its market-cap balloon to $60 billion with an IPO trading pop -- almost four times more than its last private-funding round and more valuable than companies including Kraft Heinz Co., Marriott International Inc., and Twitter Inc.
“Is there a bubble going on? It’s difficult to come up with a plausible valuation today that should be much higher in public markets than it had recently in the private market,” Ritter added. “There is a mistake going on right now with the valuations and some of these companies.”
‘Use Common Sense’
That’s why Michael Holland, chairman at Holland & Co., wants no part in the action, saying that investors who piled into DoorDash and Airbnb are bound to lose their money.
“You simply have to use common sense and step in and say, ‘we’re not going to participate in this craziness,’” he said in an interview on Bloomberg Radio and Television.
Unlike in dot-com days, when companies with less than a year of operating history sometimes went public, the single-second booms of today are occurring in relatively mature firms whose sponsors have had years to arrive at a valuation. Then again, there’s something similar to those days, too: many are losing money.
Some 80% of companies that went public this year were unprofitable in the 12 months prior to the IPO, according to University of Florida’s Ritter. That’s more than any time in the past four decades, except for 2000 and 2018. In those two years, 81% of IPOs came out with negative earnings.
National Securities’ Hogan remembers the Internet bubble well, and while he says it’s almost too easy to draw a comparison between then and now, valuations of today and the number of new issues still pale in comparison. Still, it’s likely the stampede of risk-taking individual investors bidding share prices into the stratosphere ends in a similar way.
“That doesn’t tend to end well historically, but for the time being it’s the nature of the beast,” he said. “But it didn’t take long after 2000 to see that cohort of day trader types fade into the sunset, not really come back until really March and April of this year when things exploded again.”
This article was provided by Bloomberg News.