An interesting thing keeps happening in the American stock market. Lately, when ownership of young companies passes from the institutions who nurtured them into the much broader arms of the investing public, their valuations double.
It happens fast. After its price was set with professional fund managers the night before, food-delivery service DoorDash Inc. surged 86% in its public debut Wednesday. Software firm C3.ai Inc. jumped 120%. Airbnb Inc. more than doubled a day later, the home-rental company seeing its value surpass $100 billion. The 2020 return in an index of IPO stocks? 111%.
While initial offerings are often occasions for appreciation, this year has been different, with first-day rallies almost three times bigger than the average of the last 40 years. While Federal Reserve stimulus may explain some of the frenzy, it’s hard not to also consider who rules public exchanges these days: the Robinhood posse.
“There is no doubt that the emergence of a much larger cohort of retail investors-slash-traders are moving markets,” said Art Hogan, chief market strategist at National Securities Corp. “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 issues. And sometimes it makes no fundamental sense to anybody.”
In looking for comparisons to similar market episodes, some Wall Street veterans point to the last time individuals took over from institutions in setting the price for newly public companies: the dot-com bubble of the late 1990s. While plenty of them got rich in that episode, many more were burned by the bursting of that bubble and a bear market that lasted years. It raises the question in many minds: Is a similar phenomenon occurring today? Phrased differently: who’s got the valuation call right, the amateurs or the pros?
These days, individual investors make up a fifth of equity trading volume, second only to infrastructure providers like market makers and high-frequency traders, according to Bloomberg Intelligence. Stuck inside, their obsessions in 2020 have been many and varied, everything from airlines and cruise stocks to bankrupt companies and bullish options. Now it’s IPOs, with new issues the hot new get-rich ticket.
Retail investors drove a large portion of the early activity around Airbnb, according to people familiar with the matter. Less than 24 hours after beginning to trade on public exchanges, the company had already cracked a list of users’ 100 most popular stocks on the Robinhood app. Shares of DoorDash and Airbnb immediately landed on the leader board of top orders among online traders tracked by Fidelity Investments.
The number of searches for “IPOs” on Google spiked to the highest level in at least 16 years. Meanwhile, investors poured a record amount of cash into an exchange-traded fund tracking newly public companies and a post on Reddit’s Wall Street Bets forum read “$220,000 Into ABNB. See you in Valhalla!!”
The average first-day return for operating-company IPOs was 41% in 2020, according to Jay Ritter, professor of finance at the University of Florida’s Warrington College of Business.
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.