Which bubbles eventually burst: are the 2020 tech IPOs the way to the first post-pandemic crisis?

January 23, 2021

News Highlights: Which bubbles eventually burst: are the 2020 tech IPOs the way to the first post-pandemic crisis?

“It doesn’t have to be that someone else has to lose to win. […] We can work hard to design better systems for everyone, no doubt about that ”- Brian Chesky, The CEO of Airbnb

2020 was a “bust-and-boom pandemic yearFor financial markets, especially in the United States. In fact, December was the hottest month when it came to what big investors are put real money in itto: tech IPOs. After all, with their expansionary measures, central banks and governments try to support sectors affected by crisis. In a way, these measures maintain market instability, which makes it difficult to predict return on investment in proportion to their actual risk. So buyers are putting their money into “increasingly risky bets, propelling valuations of unprofitable start-ups to levels that separate from realityy. “Against this background, it is” current IPO craze is starting to look a lot like the 1999 tech bubble. “Will it burst?

What is this all about?

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An IPO (Initial Public Offering) is the most typical procedure whereby a company can “become public”. This means that “the general public has the opportunity to buy shares” that were previously held “private”. An IPO usually involves some bureaucratic procedures followed by the issue of shares. Then companies have to set a price where they will be offered to institutional investors. The profitability of the operation for the business depends on how much more valuable its stocks are at the end of the day. However, investors should be careful. It is not uncommon for markets to do this shoot through IPO stock quote. This is especially true in the case of tech businesses.

Figure 1 An IPO (Initial Public Offering) is the most typical procedure by which a company can go public. © RupeeIQ

It is reasonable to assume that the tranche of the shares sold during an IPO would have been thoughtfully priced. Thus, the company’s initial listing on the day it goes public is one reasonable accurate measure of its true worth. Nevertheless, a certain variation will always be registered. In fact take “insurers and market participants Extra information in the valuation ”of the company’s offering, one of these factors obviously being the perceived risk. The ratio of this difference to the initial price could be called the jump from day one.

The battle for returns

Nevertheless, prices should not fluctuate too much towards the end of the first day of public trading. Assuming that stock prices reflect the true value of a company’s activity realistic growth opportunities. After all, it’s illogical to assume that the fundamentals of a business can change dramatically within hours.

Therefore, the difference between the value of IPO shares and their end-of-day listing is an important indicator. First, the jump on day one reveals insurers’ potential profits on the first day of trading. In other words, it reveals the magnitude of the “transfer of assets from the shareholders of the issuing company to these [early] investors. Second, it can be seen as a tool to ‘quantify’ – or rather, approximate the gap between financial markets and the real world.

The jumps on the first day of IPOs in pre-pandemic times were quite predictable. In the period between the start of the end of the dotcom bubble in 2002 and December 2019, the first day jumps of tech IPOs jump average 50.7%, meaning stock prices were an average of $ 2.70 higher at close of the market. This predictability disappeared in 2020.

Chart 1 In 2020, the average IPO saw a price increase of 88.4% on the first day. There are worrying signs that IPOs could trigger another market bubble once the pandemic is over. Map: FA Telarico. Source: Jay R. Ritter.

Last year, the average jump on the first day was almost 88.4%. For example, the average technology IPO over the past 12 months jumped $ 20.48 on day one (see Chart 1). These figures are still not comparable to the 200% registered in 1999-2000. At the time, each IPO stock was worth $ 80 more after the first day of trading. But “the e-commerce start-up Wish, the game maker Roblox and the home buying company OpenDoor also plan to go public this month. So there may be some surprises.

Investors are pouring money into loss-making companies

It is worth noting that the landscape was very different in early 2020. Prices in the effects of the pandemic, many start-ups were “economize pending a delay ”. After all, the failed IPOs of Uber and WeWork in late 2019 had a wave of layoffs. Still, it was too early to claim that the “start-up boom” was “deflate”. As central banks flooded the markets with money, investors have turned to anything that promises positive returns.

Figure 2 The IPO of Airbnb is in many ways paradigmatic for the impending bubble. © Airbnb

Such a misunderstanding of risk paves the way for a return of the divergence between finance and the real economy. The same thing happened before the dot-com bubble burst – and “[o]Now we are again seeing this detachment. “The Airbnb case is paradigmatic in many ways. It shows that”[p]people are interested in the name, not the finances. The truth is that this buoyancy is largely limited to the IPO market. Still, there are reasons to be unsure.

First, the bubble is growing and becoming global. Airbnb followed two other high-performing IPOs in US markets. Earlier in the same week, Kinnate Biopharma made a jump from day one $ 19 / share (or 282% of the IPO price). More notoriously, loss-making DoorDash jump $ 87 / share (or 290%). One day after Airbnb “schedules Chinese toy maker Pop Mart International Ltd. jumped a whopping 112 percent in their debut ”. Second, other incumbents have benefited from the disruptions the pandemic caused in the behavior of actors. Among them is undoubtedly Tesla, which indicates compulsive buying for all markets.

Prediction

Finally, like some analysts have noted, 2021 won’t be 2001 all over again. The bubble now concerns “companies that are 10 years old with very significant income”, as opposed to companies “that were two years old with no income that got a market cap of $ 20 billion.” Maybe it really is that “you can’t missOn the opportunity to take advantage of some of these titles. Still, caution should be the mantra. It is real “crazy seasonPaying attention to the hallmarks of a stable, profitable business can save lives. As of now, the prospects published by Airbnb’s as Airbnb will not allow anyone to say that ‘they are all bad companies’, but’ a good company does not mean the one good stock. “

Via: globalriskinsights.com

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Which bubbles eventually burst: are the 2020 tech IPOs the way to the first post-pandemic crisis?

News Highlights: Which bubbles eventually burst: are the 2020 tech IPOs the way to the first post-pandemic crisis?

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