This Bull Market is Spawning a Mad IPO Rush… Just Like 1999?

Shah Gilani|December 9, 2020

Yes, I’m still very bullish. And, yes, maybe my eyes are getting a little glassed over. After all, I’m calling for another 10%-15% rise in benchmarks in 2021 – maybe more.

But that doesn’t mean I’m blind to what’s going on.

In case you haven’t noticed, there are a lot of newly minted SPAC IPO pickup artists cruising the financial highways and byways looking to hook up with private operating companies, merge them into their magic SPACs, and exit the highway, where some will break down, if not blow up, on some dead end.

Even traditional IPOs are coming out fast and furiously, with Airbnb and DoorDash debuting this week.

Everyone in IPO Land is partying like it’s 1999. Is this “déjà vu all over again,” or is this time different?

Here’s the skinny on some fat IPOs, how the bull market’s been driving irrational exuberance in IPO Land, and how to not lose your shirt betting this time is different…

The Danger of Irrational Exuberance

Forget the pandemic. When it comes to IPOs, 2020’s been “sick,” in a good way. To date, U.S. exchanges have seen 401 newly public companies raise $146 billion. That dwarfs the previous record in 1999 when companies going public raised $108 billion, according to Dealogic. And the year’s not over.

Today, DoorDash will debut. Tomorrow, Airbnb will IPO. Those two companies alone are expected to raise at least another $6.2 billion from investors. Expectations are high that they’ll soar once they’ve opened.

Me, I’m not so sure. Just because investors ran after some other highly anticipated IPOs this year doesn’t mean these two will get the same reception. Though this year’s been more than kind…

Three of the year’s biggest IPO stories, Palantir Technologies Inc. (NYSE:PLTR), Snowflake Inc. (NYSE:SNOW), and Warner Music Group Corp. (NasdaqGS:WMG), offer promise.

WMG debuted in June and is up 39% from its IPO price.

SNOW came out in September at $120, opened for trading at $253, and on its high this year was up 257%.

PLTR had it even better. Its IPO was priced at $7.25, at its high this year it was up 362%.

DoorDash is going to be interesting today, and Airbnb may be a “Debbie Downer” tomorrow.

That’s because investor interest in DoorDash caused underwriters and the company to raise the price range for the IPO from $75-$85 to $90-$95. At $95 a share, DoorDash would have a market valuation of $36 billion. Good for them. But maybe not so good for buyers of the stock.

Based on invested money and the “price” of investment rounds, which determines the valuation of a company, a bizarre game in which valuation has everything to do with what investors put in, and little if anything to do with earnings or other important financial metrics, DoorDash was valued at $0.5 billion in 2015.

In early 2018, Softbank put in $535 million, valuing the company at $1.4 billion. Another round of funding got its valuation up to $4 billion. In February 2019, investors put in $400 million, magically valuing the company at $7.1 billion. Then only a few months later, investors put in another $350 million, and based on how much they paid for their shares, raised the valuation of DoorDash to $12.6 billion.

Today, if DoorDash comes out at $95 a share, its valuation will be $36 billion. That’s 25 times what it was valued at in 2018 and almost three times what it was valued at six months ago.

I say, good luck with that. Why? Because the company loses money for one thing. For another, it’s just stupid. It’s irrational. It’s like 1999, in the worst way.

Don’t get me wrong, just because DoorDash’s valuation is egregious doesn’t mean there won’t be interest in the stock. Investors are just that giddy, especially when they look at the likes of WMG, SNOW, and PLTR. But I’ll say it again, good luck with that.

On Thursday, Airbnb debuts. If it’s coming out party isn’t ruined by DoorDash becoming an unwelcome mat, it could fare better.

Airbnb was valued at $31 billion right before the pandemic hit. Then, it needed an injection of $1 billion, some of which took the form of a loan at 10% interest, and some in the form of cash for warrants that valued Airbnb at $18 billion. That’s a big come-down, but not really a big deal, because it’s just the ‘cost’ of those warrants. Chalk that “down round” up as a win for investors, Silver Lake, and Sixth Street Partners, who were there first when the company needed money.

Still, Airbnb has raised its expected IPO range from $44-$50 to $56-$60, which, if the IPO gets priced at $60, would raise $3.1 billion and create a valuation of $42 billion.

While I like Airbnb, that high range valuation is a hefty 35% higher than what the company was valued at (as made up as that number is in the first place) right before the pandemic.

Without earnings visibility going forward, as the pandemic rages, with the future still unknown, though hopeful if not optimistic, I’m not sure a public valuation of $42 billion makes sense. But we’ll see.

As a “conservative” investor, when it comes to IPOs, I wouldn’t touch DoorDash with a ten-foot pole. The pumped-up valuations may fool some investors into believing the company’s more valuable every day and you better get in while it’s still cheap.

Me, I see the valuation game as a dirty come-on, as a way to pump up the valuation of the company right before it goes public, when the suckers line up to buy the fairytale.

If you want to own DoorDash, wait. You’ll be able to buy it a lot cheaper not too long from today.

As far as Airbnb, I want to own it. I just don’t think it’s worth $42 billion without the earnings visibility I’d like it to have. So, I’m going to wait and see if I can get it lower, maybe a lot lower. But this one might get away from me.

One way to play Airbnb if you have to own it, is to apply part of your commitment to it if it opens up reasonably priced, and add to your position if it goes lower in the months ahead, especially since there’ll be a lot of stock for sale when the lock-up period ends and insiders and employees cash in.

Then there are the SPACs.

If this is 1999 all over again, and the market’s going to get weighted down by a bunch of egregiously stupid IPOs, it will be the SPAC attack that tips the scales.

If you want to know the truth about SPACs, just wait. I’m going to rock your world.

Sincerely,

Shah

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