Despite what many investors may have expected towards the beginning of 2020, it turned out to be a record year for the stock market in general and initial public offerings in particular. The combination of recovery optimism, Federal Reserve stimulus money and yield starvation due to ever-lower interest rates meant the market was hungry for new places to allocate capital in search of rapid growth.
In total, 2020 saw approximately 1,591 listings for a total consideration of $331.47 billion, up 42% compared to 2019. The market heated up even more in the U.S. with 480 IPOs, representing a new all-time record and a 106% increase compared to 2019.
While investors snapped up shares of the record number of IPOs, hoping to get in at a good price and benefit from future growth and the bull market, many companies exercised a higher degree of caution in their offerings than was the norm in the past.
For example, special purpose acquisition companies, or SPACs, gained significant ground against traditional direct-to-market IPOs during the year, which is likely due at least in part to the fact that they are less risky for the companies themselves. When a SPAC takes a company public via acquisition, the owners of the SPAC pay a set price for the purchase and become the new owners of the company, which means less upside but also less downside potential for the original owners of the company.
In other words, while 2020 was a record year for IPOs, it was also one of the riskiest years to go public in recent history. Due to the hype surrounding their highly anticipated IPOs, many stocks managed to raise millions or even billions in capital right off the bat, but while some turned out to be profitable investments by the end of the year, others have seen their prices drop since the initial excitement. Others have been accused of using their IPOs as a last resort to repay their staggering amounts of debt without having to file for bankruptcy.
With all of this in mind, let's take a look at three of the biggest and most anticipated stocks that made their public debut in 2020: Snowflake Inc. (SNOW, Financial), DoorDash Inc. (DASH, Financial) and Airbnb Inc. (ABNB, Financial).
Snowflake
Snowflake made its public debut on Sept. 16 at the price of $120 per share in a deal worth $3.36 billion. By Dec. 31, the stock had gained 134% to trade at $281.40, though the price has since pulled back to $268.96 as of Jan. 5.
Snowflake's core product is a cloud-based data warehouse that seamlessly operates across the three major public clouds. Founded in 2012, it seems that the founders of the company anticipated the shift to the cloud as they began to build a cloud computing data warehouse right near the beginning of the cloud's rise in popularity.
Taking advantage of the trends of big data processing and the public cloud, Snowflake can take all of the data from a company (regardless of the source) and make sense out of it, essentially providing unique value-added services that competitors have yet to replicate. This could become a potential source of moat for the company if it can continue its rapid growth and become the undisputed leader in its niche before direct competitors can get a foothold.
In the six months through July 31, the company reported a 133% year-over-year revenue increase to $242 million, and it estimates that revenue for full-year 2020 is on track to reach $500 million. As of the end of July, the company had 3,117 customers, up 101.5% from the same time last year. Although Snowflake has a cash-debt ratio of 2.93 following strong fundraising efforts, it should be noted that the company is not yet profitable.
The most notable guru shareholder of the stock is Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A)(BRK.B) with 2.21% of shares outstanding, followed by Philippe Laffont with 1.46% and Frank Sands (Trades, Portfolio) with 0.86%.
DoorDash
DoorDash had its IPO on Dec. 9 at the price of $185 per share in a deal worth $3.37 billion. By Dec. 31, the stock had lost 22% to trade at $142.75, and the price has since pulled back further to $140.01 as of Jan. 5.
DoorDash is a food delivery service that connects customers with local restaurants. Launched in Palo Alto, California in 2012, the company has since grown to have the largest share of the third-party food delivery market in the U.S.
Unfortunately, DoorDash shares the same problem as its peers in the third-party food delivery business – it just can't seem to make the turn to overall profitability. Though the food delivery industry has seen a dramatic uptick in activity in 2020 as more customers have ordered food to be delivered to their homes during the pandemic crisis, this has not translated to greater profitability for DoorDash and its peers, underscoring the fact that this structural problem is likely to continue.
This has led several market analysts to dub DoorDash "the most ridiculous IPO of 2020." Despite the high price it fetched from enthusiastic investors, a company that loses money with each sale it makes will only lose more money as it scales, essentially eating investor capital until it either consumes itself or makes a turn to profitability.
Airbnb
Airbnb debuted on Dec. 10 at the price of $146 per share in a deal worth $3.51 billion. By Dec. 31, the stock had gained 0.54% to trade at $146.80, though the price has since pulled back to $142.82 as of Jan. 5.
Founded in 2008, Airbnb is an online marketplace that connects renters with lodging in a way that offers an alternative to traditional hotels or short-term rentals. Since its small beginnings, the marketplace has grown to reach over 100,000 cities around the world.
The company's operations are community-based and, much like ridesharing, simply provide an online locale for guests to find hosts that are offering the kind of short-term rental that they are looking for. At the time of its founding, Airbnb offered a unique service that customers wanted and it has further solidified its position in the market over the years by the strength of its reputation and the increasing scale of its network.
For years, Airbnb had been a rarity among tech unicorns due to its profitability – unlike most large-cap and fast-growing new companies, it was earning more money on its business than it was paying out in expenses. However, in the couple of years running up to its IPO, the company needed to invest in things like tech upgrades and how to better deal with safety issues. It also chose to focus on further growing its user base at cost. Thus, although Airbnb has proven profitable in the past, it will need to tackle its host of issues before figuring out how to return to the green.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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