The Rise of the IPO

2020 has seen the highest number of IPOs in recent decades with the US raising $149bn this year through IPOs and Special Purpose Acquisition Companies (SPACs), otherwise known as Blank Check companies. The majority of these IPOs have been seen in the tech sector, with companies like Snowflake and Airbnb going public. What is driving this activity and is the market simulating what investors saw before the 90s dotcom bubble?

Last week DoorDash, a food delivery and takeout service, went public and on its first day of trading saw its shares jump by roughly 70%. This is in contrast to similar tech companies that were listed last year such as Uber and Lyft who were not met with the same demand as the likes of DoorDash, Airbnb and Snowflake who have all gone public in 2020. But why is this?

One of the reasons why the uptake of tech IPOs has been so popular is because the Federal Reserve and the US government have unleashed record stimulus support to battle the economic fallout of the pandemic. This is one of the reasons why investors have been willing to buy shares in companies, even when their valuations are far from the norm.

Retail investors have pumped-up the gains in US stock markets by piling into equities with all the extra cash that they have in hand, which has led to the bidding up of shares of these newly listed companies as everyone is eager to get a slice of the pie.

One of the main reasons for a company to go public is to raise capital. This capital can be used to fund research and development, fund investment projects, or even used to pay off existing debt. With many businesses hit hard by the coronavirus pandemic, going public is likely to provide them with the capital they need to improve the financial health of their company. Tied with increasing investor confidence, and consumers having more cash in hand, it seems the perfect time to go public.

However, with institutional investors performing extreme due diligence, and putting together rigorous valuation frameworks for the stock’s debut to then produce incredible results, this poses the question as to whether this fresh investor confidence is causing a divergence of stock prices away from their true valuations.

According to First Eagle Investments, after-market trading can get frothy and it is an expression of investor’s confidence, where there may be too much confidence at the moment. Albert Edwards, a stock strategist at Société Générale stated that the US tech companies could soon face a massive crash like the dot-com bubble in 2001. The miraculous growth in companies like Apple, Google and Microsoft, as well as newly listed tech companies such as DoorDash and Airbnb has been at a time where the rest of the world has struggled with the economic toll of the pandemic. Edwards explains that these companies have been mistakenly labelled as growth stocks and that their bull run won’t last long.

The dramatic increase in the number of IPOs and their amazing debuts comes at a time where investor confidence is high on the back of news of a vaccine and a potential return to normality. However, with this growth comes market froth and the potential of a new bubble forming. Only time will tell whether this is true or not, or whether the positive economic outlook is causing huge flows of capital which has been locked up during the months of the pandemic.