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.
Don’t buy into the hype. For every highprofile IPO that doubles on its first day, there are many newbie stocks that disappoint investors. In fact, the long term performance of IPOs is underwhelming. About half of IPOs “will produce negative returns” in their first five years as public companies, Ritter says. “My advice now is to stay away from IPOs,” he says. His caution stems from expensive valuations that tend to limit future gains. Investors are again paying top dollar for tech IPOs. The median tech IPO in 2020 at its first day closing price traded at 23.3 times sales—more than three times higher than average, Ritter says.
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