In a Nov. 24 article for GuruFocus, I opined that the imminent initial public offering of Airbnb Inc. (ABNB) would put the hype surrounding the sharing economy to the test. Judging by the initial market reaction to its public market debut, which saw the stock soar 113% from its IPO price in its first day of trading, Airbnb has passed with flying colors thus far.
Not everyone is convinced, however. Airbnb's success has also added to a growing sense of trepidation among some investors and analysts who remember the frothy days of the dot-com bubble at the turn of the century – and how it ended.
Dot-com deja vu
Airbnb is far from the only scorching hot tech IPO in recent days. DoorDash Inc. (DASH), for example, finished its first day of trading on Dec. 9 up a whopping 86% from its IPO price. Yet, it remains to be seen whether DoorDash's core business can ever be consistently profitable. DoorDash is just one of many companies fueling a massive rally in tech IPOs. As the Wall Street Journal reported on Dec. 13, tech IPO multiples have expanded to a level not seen since the dot-com bubble popped:
"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...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."
DoorDash is hardly the only unprofitable name among the recent IPO highflyers, but its debut has stirred up yet more memories of the dot-com bubble, which saw a wave of overheated internet stocks in the 1990s surge to unprecedented valuation multiples only to collapse spectacularly in 2001.
It's (sort of) different this time
The recent wave of hot tech IPOs has left many investors nervous. The final overheated stage of the dot-com bubble wiped out many overexposed portfolios when it popped. Thus, it is hardly surprising that fear is rising that a similarly severe correction may soon be in the offing. However, there is some reason to think this time might be different, as Barron's Randall W. Forsyth discussed on Dec. 13:
"Maybe this time is different. Those words, supposedly the most dangerous to utter in the investing realm, came to mind amid the frenzied pops in the highly anticipated initial public offerings of the past week. They recalled the wild IPOs at the end of the last century, when the public's enthusiasm for all things dot-com had investors paying crazy prices for new stocks that often lacked earnings, revenue, or, in some cases, actual operations...What is different this time is that the current highflying IPOs are coming from innovative companies that have become major businesses, nurtured by their private-market investors while attracting throngs of fans who wanted to become shareholders as well as customers."
In other words, while the internet stocks that fueled the speculative dot-com bubble were generally little more than websites and often had little to no actual revenue, the supercharged tech IPOs of 2020 are real businesses with often massive revenues (even if they're burning more cash than they're bringing in). Viewed in that light, one might be somewhat less tempted to panic at the prospect of an imminent correction in the vein of the dot-com crash.
My verdict
While this year's scorching tech IPOs are obviously different from the companies that hit the market during the dot-com craze on many levels, I would estimate that there is still ample reason to move with caution when it comes to these names. After all, as Mark Twain famously observed, "History doesn't repeat itself, but it often rhymes."
Every crisis and every bubble is different from the ones that came before, but there are certain signs and portents that have proven common to most, if not all, of them. An overheating market is always something to be wary of. Consequently, my recommendation is to give a wide berth to the recent crop of highflying tech IPOs.
Disclosure: No positions.
Read more here:
- The Federal Reserve Has Created a Corporate Debt Monster
- DoorDash: Flashy IPO Conceals Deep Problems
- Why Carvana Is Not the Amazon of Cars
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