Robinhood customers actually purchase something new at actually any value
Something strange is happening on Wall Street. It is so strange, in fact, that those who are best able to benefit from it should take a step back rather than dive in. We’re, of course, talking about the pretty insane ratings the market has assigned to Airbnb and DoorDash, respectively, which are now worth roughly twice what they were a few days ago when they were listed, and this after both of them repeatedly increased their IPO range and eventually had set the price well above the increased spreads.
The response was so great that video game company Roblox Corp. Conducted his own planned IPO to understand the market. Another startup, financial technology firm Affirm Holdings Inc., also postponed its planned IPO over the weekend, although the exact reasons were not clear. According to Jay Ritter, an economics professor at the University of Florida who is tracking the IPO, investors this year rated public tech companies at a median of 23.9 times the sales they reported in the twelve months prior to going public. This measure is by far the highest in the last two decades. For most of the 2010s, the median multiple of a tech company after its first day of trading was about 6 times its sales in the past 12 months. The same measurement for stocks in the Nasdaq Composite Index is 4.3, according to FactSet.
“I have great difficulty understanding the reviews of some of these companies,” said Ritter.
You can surely understand why Roblox and Affirm want to crack some new numbers before valuing their IPOs so that they don’t leave billions and billions of dollars on the table. At the same time you can easily understand Ritter’s perplexity. What’s behind the madness? It’s the same thing behind the insatiable appetite for literally worthless stocks, the 10x rise in the shares of a company that may have received a government loan – but not – and Jeff Gundlach’s nightmares: It’s the bored players who market the stock ‘ Stoolies and Robinhoods many (sometimes not so) happy men and women.
“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 that signed the IPO of DoorDash…. The rise of affordable, easy-to-use trading apps has sparked a flurry of funds for retail investors in stocks. Private investors accounted for up to 25% of stock market activity this year, compared to 10% of the market in 2019, according to the brokerage Citadel Securities….
The 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 harder 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.
“The animal spirit frenzy that occurs when these companies go public are smaller investors flocking to them like piranhas for fresh steak. For this reason, valuation metrics are being thrown out the window, ”said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
The sizzling tech IPO market leaves investors confused [WSJ]
The euphoria of the amateur analyst traders leaves glowing US IPOs with money on the table [Reuters]