Roblox and Affirm, two companies set to IPO before year’s end, delayed their public offerings as the world tries to make sense of soaring tech valuations, WSJ reports.
Why It Matters: Last week, DoorDash exploded 86% up and Airbnb more than doubled in their respective public trading debuts. The unexpected turn of events left Airbnb CEO Brian Chesky speechless in a Bloomberg TV appearance, “while multiple investors in the two blistering offerings said they were puzzled by the extraordinary enthusiasm in the market.” We’ve reached the highest IPO levels since the dot-com bubbles, relative to company revenues, which is why Roblox and Affirm are taking a breath as investors find their bearings.
Numbers To Consider:
- DoorDash is worth $56 billion, and Airbnb is valued at $84 billion. Snowflake, which IPO’d in September, is now valued at more than $100 billion.
- Investors are valuing newly public tech companies at “a median of 23.9 times the revenue they reported in the 12 months before going public,” according to University of Florida business professor Jay Ritter.
- It’s the highest measure, by far, in the past two decades, which is usually “around six times its revenue in the prior 12 months.”
- Go to the Nasdaq Composite Index, and that number is 4.3, per FactSet data.
While these valuations mean investors are “counting on years of continued rapid growth by these companies,” there is a good reason.
- The pandemic accelerated the rise of “software and cloud-computing services, while more consumers are comfortable with ordering food or rooms on apps.”
But, and there’s definitely a but: “Meeting the high expectations of stock-market investors could prove difficult. While a few standouts like Amazon.com Inc. and Alphabet Inc.’s Google have shown an ability to keep expanding quickly at large scale, most companies are unable to maintain the soaring growth rates of their early years as they mature and get bigger.”
The Final Word: Public markets used to be a gut-check to lofty private valuations (see Uber or WeWork). That’s changed. Retail investing is surging in popularity, and many are chasing the next buzzy stocks. As long as there is demand, the IPOs will keep coming.
During a traditional IPO process, a company needs to secure large anchor investments from large, sophisticated institutions. Usually banks try to price a slight discount for these institutions and aim for a small “pop” once the stock starts trading.
This year’s buzzy IPOs like DoorDash ($DASH) and Airbnb ($ABNB) have shown that the valuations at which the sophisticated institutions are willing to buy growth stocks are much lower than what the current market is willing to buy them at.
This dichotomy worries me and shows a level of retail investor euphoria. Crumbs of evidence like this should influence our investment decisions over the next couple years.