Blockbuster IPO market still calls for cautious approach
LOS ANGELES — Wall Street has rolled out the welcome mat for companies going public this year, boosting proceeds from initial public offerings to the highest level in six years.
IPOs slowed sharply in the spring due to the pandemic, but they surged in the summer as the market recovered from a steep slump and rallied to new highs. And so far, betting on IPOs has paid off.
Companies that have gone public this year have averaged a return of 53.8% above their IPO price, including a return of 23.4% after their first day of trading, according to Renaissance Capital, an IPO research provider.
In the 10 years prior, however, the average return after the first day of trading was 3.2%, a track record that includes some flops and is why many analysts caution investors not to follow an IPO just because of the hype.
Household names like DoorDash and Airbnb are the latest IPOs to whet investors’ appetite for solid returns. Airbnb shares more than doubled in price and closed Thursday at $144.71. The home sharing company raised $3.7 billion in the offering, making it the largest IPO of the year, according to Renaissance Capital.
DoorDash shares surged nearly 86% above their offering price of $102 in their market debut Wednesday. Ahead of the IPO, the delivery service projected it would raise $3.37 billion in the offering.
“This year had a lot of large IPOs,” said Matthew Kennedy, senior IPO market strategist at Renaissance Capital. “And its had the most billionIPOs ever.”
This year is projected to finish with 210 IPOs raising about $80 billion combined, Kennedy said. That would be up from 160 IPOs and $46 billion in proceeds last year, and the highest level since 2014.
The backdrop for companies going public this year has been more than welcoming. The Federal Reserve has kept interest rates near zero since this spring in a bid to support the economy through its pandemic-driven recession. That helped pave the way for stocks to climb to new highs and gave companies confidence to go public.
Airbnb put off a market debut in the spring when the pandemic crippled global travel. The San Francisco company priced its shares at $68 apiece late Wednesday, giving it an overall value of $47 billion. Interest in Airbnb has been high, as the company has seen its business recover faster through the pandemic than hotels.
Some 19 company IPOs have brought in over a billion dollars, including DoorDash and Airbnb. Three others are also expected to cross the billion-dollar threshold.
Still, individual investors may want to consider waiting a few days after a company has its IPO, if not longer.
Consider that about half of U.S.based companies that went public from 2015 to 2019, including Uber Technologies, Fitbit and Blue Apron, were trading below their IPO prices a year later. It took Facebook 15 months to trade above its IPO price.
“Looking back at history, it’s pretty much been a coin toss as to how these stocks perform a year after they go public,” said Lindsey Bell, chief investment strategist at Ally Invest.