By Eliot Brown and Maureen Farrell
A frenzy has hit the market for newly listed tech stocks.
Last week, searing demand sent DoorDash Inc.'s stock up 86% in
its trading debut Wednesday, while Airbnb Inc.'s shares more than
doubled in their debut a day later. Airbnb Chief Executive Brian
Chesky was at a loss for words in a Bloomberg TV appearance when he
was told of the company's opening share price, while multiple
investors in the two blistering offerings said they were puzzled by
the extraordinary enthusiasm in the market.
The reception was so strong that videogame company Roblox Corp.
pulled its own planned initial public offering as it tried to make
sense of the market. Another startup, financial tech company Affirm
Holdings Inc., also delayed its planned IPO over the weekend,
although the exact reasons weren't clear.
Valuations of recent IPOs are at their highest levels since the
dot-com bubble, relative to the companies' revenue, sparking
concerns among investors about the level of froth.
The result has been that the market capitalizations of many
money-losing upstarts have become larger than giant, highly
profitable stalwarts of corporate America.
DoorDash is valued at $56 billion, just shy of General Motors
Co. Airbnb is worth over $83 billion, more than FedEx Corp.
Cloud-software company Snowflake Inc. is worth over $100 billion,
more than Goldman Sachs Group Inc.
Investors this year have valued 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, who tracks initial public offerings. That
measure is by far the highest of the past two decades. For most of
the 2010s, the median multiple for a tech company after its first
day of trading hovered around 6 times its revenue in the prior 12
months. The same measurement for stocks on the Nasdaq Composite
Index is 4.3, according to FactSet.
"I have a great deal of difficulty understanding the valuations
of some of these companies," Mr. Ritter said. The difference in
enthusiasm for the unprofitable young companies and old corporate
giants with consistent profits is "night and day," he said.
The valuations imply investors are counting on years of
continued rapid growth by these companies, hoping some will
dominate their industries and churn out large profits, Mr. Ritter
Tech enthusiasts and some observers say there are concrete
reasons for the enthusiasm, as businesses across the country spend
more on software and cloud-computing services, while more consumers
are comfortable with ordering food or rooms on apps.
"There still is, without doubt, there's a major transformation,"
said Jeffrey Sonnenfeld, a professor at Yale University's School of
But the ballooning valuations are driven even more, experts say,
by surging demand from investors for stocks that show growth and
have buzz. Retail stock trading has surged in popularity during the
pandemic, tech giants' growing profits have cast a halo on
upstarts, and falling interest rates have led more investors to
chase returns in stocks.
The tech IPO bonanza marks a change in fortunes between the
private and public markets.
For much of the 2010s, the stock market was a check on the
frothy valuations of startups heavy on losses that were funded by
venture capitalists. As the roster of multibillion-dollar startups
grew and grew, valuations in the private markets were considered to
be significantly higher than those in the public markets.
Uber Technologies Inc., once the country's most valuable
startup, had a disappointing public debut in 2019 at a lower share
price than its private investors assigned it years earlier. WeWork
Cos. ended up pulling its planned IPO after potential investors
were repelled by details about the company's finances and corporate
governance that were revealed in the lead-up to its expected
listing. Its private valuation fell by $39 billion, to $8
Now investors see a change.
"The valuations are better in the public markets than private
markets, which was not the case in '19 or '18," Rajeev Misra, who
runs SoftBank Group Corp.'s $100 billion Vision Fund, said in a
conversation with an analyst at New Street Research LLP last month.
"The public markets are very buoyant." SoftBank was by far the
largest investor in startups in the past few years, flooding
companies like WeWork, Uber and DoorDash with cash.
The valuations of the newly public companies are dwarfing older
rivals. Airbnb is worth more than Marriott International Inc.,
Hilton Worldwide Holdings Inc. and Hyatt Hotels Corp. combined, by
market capitalization. It is worth about the same as online travel
giant Booking Holdings Inc., a slower-growth company that had more
than double Airbnb's revenue in the 12 months through September and
had a $1.3 billion profit. DoorDash is worth nearly double
fast-food operator Yum Brands Inc., the owner of Pizza Hut, Taco
Bell and KFC.
The enthusiasm extends further than buzzy companies known well
to consumers. Business-software companies have been in particularly
high demand. Software company Snowflake Inc., which went public in
September, is worth more than 200 times the $489 million in revenue
it made in the 12 months through October. Data-analysis firm
Palantir Technologies Inc., which went public in September at a
roughly $21 billion valuation, is now worth $50 billion, or 50
times its revenue.
At least three electric-vehicle companies valued at over $2
billion have gone public this year with no revenue, while numerous
other tiny companies with large private valuations in the
electric-vehicle sector are planning public listings.
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
Airbnb's annual revenue growth slowed from 80% during 2016 to
31% during 2019. Bookings tanked early in the pandemic, and revenue
in the first nine months of 2020 was down 32% from the year-earlier
period. Still, business has been robust since the lows of the
spring, and the company expects to return to growth after the
Whatever the challenges, if the market's appetite for such tech
companies continues, venture capitalists see a surge of additional
"A lot of entrepreneurs now realize it's a very receptive and
attractive public market," said Rich Wong, a partner at
venture-capital firm Accel, an early investor in Slack Technologies
Inc. and Facebook Inc. If the rally stays apace, 2021 "will
definitely be the most active IPO market in the last 20 years," he
Write to Eliot Brown at firstname.lastname@example.org and Maureen Farrell
(END) Dow Jones Newswires
December 13, 2020 09:14 ET (14:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.