The euphoria of the newbie analyst merchants leaves glowing US IPOs with cash on the desk
© Reuters. FILE PHOTO: The Nasdaq market page displays an Airbnb sign with CEO Brian Chesky on the billboard on the day of its IPO in Times Square
By Joshua Franklin and Krystal Hu
NEW YORK (Reuters) – Wild stock gains on first day of trading by Airbnb Inc and DoorDash Inc show how unprecedented individual investor demand this year is making it difficult not to leave big money on the table, investment bankers say.
In the biggest week for initial public offerings (IPOs) in the US this year, the food delivery app DoorDash raised $ 3.4 billion, only to see shares surge up to 92% on its first day of trading. If the offering had been rated higher it could have raised an additional $ 2 billion and still had a strong 20% pop on day one.
Airbnb shares rose as much as 142% on Thursday's first day of trading after the home sharing company raised $ 3.5 billion in its initial public offering. It could have doubled and had a 20% pop too.
Leaving money on the table is nothing new for high-profile stock market debuts, but the constant gap between going public and trading prices on the first day is unique until 2020. It highlights the challenges of anticipating demand from a growing pool of investors. According to Millennial Bankers, during the COVID-19 pandemic, millennials are working from home and trading stocks through the Robinhood app.
"One thing that has emerged with the new issue market over the past 12 to 18 months is the retail component, which seems to have an insatiable demand for some of these newly issued stocks," said Brad Miller, co-head of equity markets at UBS Group AG (SIX :), which signed DoorDash's IPO.
Fourteen of the 30 first-day IPOs with the highest closing profits in 15 years were in 2020, according to Dealogic. Nineteen company IPs in 2020 had stocks that more than doubled in value on the first day of trading, most since 2014 when it was six were.
Some of the reasons behind the surge in demand for newly issued shares are the same that have propelled the stock market to record highs this year: low interest rates, a gradual economic recovery, and the prospect of vaccine rollout swiftly to surpass pandemic demand .
Others, however, can only be found on IPOs and are a challenge for bankers to price ahead of time. The rise of affordable, easy-to-use trading apps has sparked a flood of funds for retail investors in stocks. Retail investors accounted for up to 25% of stock market activity this year, up from 10% of the market in 2019, according to brokerage Citadel Securities.
Bankers and investors say the new demand is exacerbating what's already a mess for new listings. Underwriters reserve most of the new shares in red-hot IPOs for top-tier institutional investors, excluding mom and investors who can't buy in until the stocks start trading.
This surge in demand coupled with the relatively tight supply of new stocks has always contributed to a pop on the first day of trading. The influx of new retail money is making this pop deeper and more difficult to predict for businesses and their bankers now. While underwriters in Wall Street's elite circles have a fair amount of insight into IPO demand, they cannot predict how many Robinhood users will buy the new shares.
As a result, many newly listed companies, especially tech companies like Snowflake Inc and C3Ai Inc, are trading a record high valuation multiple this year.
"The animal spirit frenzy that occurs when these companies go public are smaller investors flocking to them like piranhas for fresh steak. That's why valuation metrics are being thrown out the window," said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
There's no sign that companies that have left money on the table are upset with their bankers. Tony Xu, CEO of DoorDash, told Reuters in an interview this week that the company rated its IPO as "a real reflection of our fundamentals."
When Airnbnb CEO Brian Chesky found out about the first day's trading reaction to the IPO during a Bloomberg television interview on Thursday, his reaction was more of a surprise than an anger at his bankers. "I'm very humble about it," said Chesky.
Many companies looking to raise money on a stock market debut feel that they don't have a good alternative to using IPO underwriters. A non-underwriter-based route to the stock market known as direct listing does not currently allow companies to raise funds. Mergers with black check acquisition firms, which allow companies to go public and raise money at the same time, can be very dilutive for their owners.
Jay Ritter, professor of finance at the University of Florida, said his analysis of IPOs over the past decade showed that the most prolific underwriters – Goldman Sachs Group Inc (NYSE :), Morgan Stanley (NYSE 🙂 and JPMorgan Chase & Co (NYSE 🙂 Inc – IPOs are the most undervalued compared to when stocks were traded.
He attributes this to the big investment banks who want to keep their main customers like hedge funds buying the new stocks happy. He said many companies aren't backing off because the IPOs beat their valuation expectations.
"When companies like Airbnb started the process, they didn't know what market conditions would be months later, and they're glad the deal is going to close, especially if the asking price is increased," said Ritter.
Goldman Sachs, Morgan Stanley and JPMorgan declined to comment.