Tread Carefully in a Hot IPO Market

Be wary of high-priced debuts in a market that’s stacked against you.

- Adam Shell

IT’S 2021, BUT ON WALL STREET it feels like the exuberant days at the turn of the cen­tury. Initial public offerings (IPOs) are hot again. A new wave of young companies, many that have yet to post a profit, are selling stock to the public for the first time. And the reception from in­vestors has been bullish.

Maybe too bullish, IPO watchers warn. “There’s definitely froth” in the mar­ ket, says Lindsey Bell, chief investment strategist at Ally Invest. The market’s power­ful rebound from last year’s pandemic­related plunge put investors in a buying mood. Eye­popping IPO gains are fueling the hype.

Big first­day pops have caught investors’ attention. Shares of Airbnb jumped 113% and food­delivery ser­ vice DoorDash rose 86% in their trading debuts late last year. The average first­ day return for IPOs in 2020 was nearly 42%, the best day­one showing since 2000, according to Jay Ritter, finance professor at the University of Florida. Last year’s average annual IPO gain of 75% was the highest in 20 years, accord­ ing to IPO experts at Renais­sance Capital. The 218 IPOs in 2020 were the most since 2014, and IPO momentum will likely continue in 2021 amid expectations for an im­ proving economy and strong market as the COVID­19 vaccine rolls out.