Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Despite the market downturn, companies have not been averse to going public. Investors wouldn’t have seen this coming when the market crashed in March. But the results are in, and 2020 has been one of the strongest years for IPOs on multiple fronts.
It is interesting to note the trends that have occurred regarding IPOs. This year has been fraught with exceptional circumstances, and the IPO craze tells us something about investor behavior. Here, we look into the biggest IPOs of the year and the driving factors behind the mania.
How Many IPOs Were There in 2020?
One would think that the uneconomic uncertainty this year would have prevented major IPOs. But neither companies nor investors have shied away from it. Q4 2020 saw the most IPO filings by quarter at 183, at a figure that has not been seen in the last five years.
All-in-all, there were a total of 450 IPOs in 2020. They raised more than $156 billion, more than doubling the $62.5 billion figure of 2019. Since 2000, only the year of 2014 has seen greater investment. According to Reuters, the stock market rise towards the last half of 2020 has led to a fertile IPO market.
This growth might be counterintuitive, but then again, 2020 is not a normal year. The DJIA is already back to pre-lockdown levels, and many companies have even posted substantial growth. This goes for IPOs posted this year too, with BigCommerce Holdings Inc. rising over 300% since its listing in August.
Renaissance Capital, which provides guidance on IPOs, says that roughly $75 billion has been raised from 203 IPOS. When it comes to all IPOs, Bloomberg says that this figure is a record $156 billion.
The most high-profile of recent IPOs are AirBnB and DoorDash. The former’s stock is up approximately 112% from its listing price, while DoorDash is up 82%. Both startups have a strong presence among younger investors, affected differently by the market conditions of 2020.
Many of the companies that have filed IPOs do indeed have growth potential. Combined with a growing millennial demographic and the rise of apps like Robinhood, it is easier than ever to invest. But this craze also has some analysts, who point to companies like BeyondMeat.
Similarities to the Dot-com Era
Analysts have drawn a comparison with the dot-com investment craze, which promptly resulted in a crash. There are indeed some clear similarities between now and then.
The number of debuts is only surpassed by 1999, which saw 117 companies double in value following listing. Airbnb is only the nineteenth such company in 2020, but the same fervor is present. Like 1999, many of these stocks are internet companies.
While it’s true they could be overvalued, it’s isn’t likely that these companies will go bust, like in 2000. These are relatively strong companies in their niche, which grants some protection. DoorDash is perhaps most at risk, as it is a delivery company that could face competition from elsewhere.
Generally speaking, however, the companies could simply be seeing a capital influx from the likes of millennials. The lockdown has piqued their interest, and high gains from IPOs could be self-perpetuating the process.
Many major companies, like Facebook, saw stock prices drop in the short term. Early investors sometimes sell their holdings after their initial lock-in period ends. But, in the long run, if the fundamentals are solid, then the stock tends to grow.
With all its challenges, 2020 has proven to be a year of opportunities for investors. The markets have made a considerable recovery since the crash, and 2021 looks optimistic. Investors should note that the road ahead will be bumpy, and basic investing principles will be critical.
What is your opinion of the IPO surge in 2020? Do you think that these companies are overvalued? Let us know what you think in the comments below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.