Evaluation-Beginner merchants’ euphoria leaves red-hot U.S. IPOs with cash on the desk


© Reuters. FILE PHOTO: The Nasdaq market web site shows an Airbnb signal that includes CEO Brian Chesky on their billboard on the day of their IPO in Instances Sq.

By Joshua Franklin and Krystal Hu

NEW YORK (Reuters) – Wild inventory positive aspects on the primary day of buying and selling of Airbnb Inc and DoorDash Inc present how unprecedented demand this yr from particular person traders is making it tough to not go away huge cash on the desk, funding bankers say.

On this yr’s greatest week for U.S. preliminary public choices (IPOs), meals supply app DoorDash raised $3.4 billion, solely to see its inventory rise as a lot as 92% on the primary day of buying and selling. If it had priced the providing increased, it may have raised an extra $2 billion and nonetheless have a powerful 20% first-day pop.

Shares of Airbnb rose as a lot as 142% on their first day of buying and selling on Thursday after the home-sharing agency raised $3.5 billion in its IPO. It may have raised double that and likewise had a 20% pop.

Leaving cash on the desk is nothing new for high-profile inventory market debuts, but the persistently giant hole between the IPO and first-day buying and selling costs is exclusive to 2020. It underscores the challenges of anticipating demand coming from an increasing pool of traders, akin to millennials working from residence through the COVID-19 pandemic and buying and selling shares on the Robinhood app, IPO bankers say.

“One factor that has emerged in final 12-18 months with the brand new difficulty market is the retail part, which appears to have an insatiable demand for a few of these newly issued shares,” stated Brad Miller, co-head of fairness capital markets at UBS Group AG (SIX:), which underwrote DoorDash’s IPO.

Fourteen of the 30 IPOs with the most important first-day-close positive aspects of the final 15 years have been in 2020, in response to Dealogic. Nineteen IPOs of firms in 2020 had shares whose worth greater than doubled of their first day of buying and selling, probably the most since 2014, when there have been six.

Among the drivers behind the surge in demand for newly issued shares are the identical as people who have pushed the inventory market to report highs this yr: low rates of interest, a gradual financial restoration and the prospects of a fast rollout of vaccines to beat the pandemic.

However others are distinctive to IPOs and are difficult for bankers to cost prematurely. The rise of low-cost, easy-to-use buying and selling apps has unleashed a flood of retail investor cash into shares. Retail traders have accounted for as a lot as 25% of the inventory market’s exercise this yr, up from 10% of the market in 2019, in response to brokerage Citadel Securities.

Bankers and traders say the brand new demand exacerbates what’s already a scramble for brand new listings. Underwriters reserve a lot of the new shares in red-hot IPOs for high institutional traders, slicing out mom-and-investors who can solely purchase in as soon as the shares begin buying and selling.

This build-up in demand, coupled with the comparatively scarce provide of the brand new shares, has at all times helped drive a pop within the first day of buying and selling. The inflow of latest retail cash is now making this pop extra profound and arduous for firms and their bankers to foresee. Whereas the underwriters have nice visibility into IPO demand amongst Wall Road’s elite circles, they can not predict what number of Robinhood customers will purchase the brand new shares.

Consequently, many newly listed firms, particularly expertise corporations akin to Snowflake Inc and C3Ai Inc, are buying and selling at record-high valuation multiples this yr.

“The animal spirit frenzy that occurs as these firms are dropped into the inventory market is smaller traders flocking to them like piranhas to recent steak. That’s the reason we’re seeing valuation metrics get thrown out the window proper now,” stated Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.


There isn’t a signal that firms that left cash on the desk are upset with their bankers. DoorDash CEO Tony Xu informed Reuters in an interview this week the corporate priced its IPO as a “true reflection of our fundamentals.”

When Airnbnb CEO Brian Chesky discovered of the first-day buying and selling response to the IPO on Thursday throughout a Bloomberg TV interview, his response was considered one of amazement moderately than anger together with his bankers. “I am very humbled by it,” Chesky stated.

Many firms searching for to lift cash throughout a inventory market debut really feel they haven’t any good different to utilizing IPO underwriters. A path to the inventory market that doesn’t depend on underwriters, referred to as a direct itemizing, doesn’t at present enable firms to lift cash. And mergers with black-check acquisition corporations, which allow firms to go public whereas elevating cash, may be very dilutive to their house owners.

College of Florida finance professor Jay Ritter stated his evaluation of IPOs of the final ten years confirmed that probably the most prolific underwriters – Goldman Sachs Group Inc (NYSE:), Morgan Stanley (NYSE:) and JPMorgan Chase & Co (NYSE:) Inc – underpriced IPOs probably the most in contrast with the place shares began buying and selling.

He attributes this to the large funding banks searching for to maintain their main clients akin to hedge funds, who’re shopping for the brand new shares, completely happy. He stated many firms don’t push again as a result of the IPOs exceed their valuation expectations.

“When firms like Airbnb began the method, they did not know what market circumstances have been going to be like months later, and they’re completely happy that the deal is being accomplished, particularly when the provide value will get raised,” Ritter stated.

Goldman Sachs, Morgan Stanley and JPMorgan declined to remark.