The Rush to Public
Thursday, January 7, 2021
Over the course of 2020, the global IPO market was on fire. For these purposes, I'd like to focus on the United States market.
The stock market crashed in March when it was evident that COVID would not subside soon; most investors believed that both public, and private, particularly venture capital would dry up. This turned out not to be the case. In fact, quite the opposite occurred.
With traditional listings, direct listing and the adjuration of SPACs on various exchanges, the ease of public issuance and exits of PE firms is now easier than ever.
To briefly summarize: by traditional listings, the term IPO is used. The classic form involves an investment bank issuing a number of shares, matching buyers and sellers to raise a certain amount of capital to fund corporate operations, expansion, or various other avenues. Direct listings often take out the "middle man", the investment bank, to take its fundraising directly to shareholders.
SPACs, however, require a bit more explanation and add a layer of complexity to the situation. SPACs, Special Purpose Acquisition Companies, or "blank check companies," groups of activist investors, investment banks, or wealthy individuals or entities take a "blank" entity public. They do not know what company the funds will ultimately help to take public.
For obvious reasons, SPACs are often very risky, yet offer an attractive opportunity to help take smaller entities public at a later date. A few examples of high-profile SPACs in 2020 were UTZ Snacks, Nikola Motors (an electric vehicle manufacturer), and DraftKings (the online sports betting company).
No matter how the companies of 2020 went public, there is no doubt that 2020 was a blockbuster year for these entities. A confluence of conditions came together to make this possible.
There were 480 IPOs on the US stock market in 2020, an all-time record. This is +106% more than in 2019 with 233 IPOs. It is also 20% higher than the previous record IPO year of 2000, which had 397.
Source: StockAnalysis.com
With the precipitous drop after COVID striking the world with the lowest 10-year yield on record, negative oil prices, and a bear market stock performance, VCs, PEs, and the like needed to raise funds to offset their loss leaders. Additionally, industry boom trends such as electric vehicles and cloud solutions increase the demand for more names so investors can get in on the action.
Let's take a look at two major themes driving the markets in 2020; the Tesla phenomenon, and delivery as a new COVID trend:
Tesla & Battery Technology Trend
During the past year, Tesla stock surged over 750 percent. While vehicle deliveries did wain a bit, this stock has become such a household name among individual investor trading platforms like Robinhood and E*TRADE, that it's quite difficult for the oxygen to leave the stock. This is on top of a 5:1 split; and Tesla's addition to the S&P 500 late last month.
Some will argue that Tesla, in the end, is just a battery technology company, utilizing its vehicles as a showcase of its storage and capabilities. Whatever Tesla's end game is as a company, it forced many private entities to go public. Companies such as Lordstown Motors, NIO, and Nikola were all attempting to capitalize on the trend. And so far, all have been successful. Just since Lordstown went public, shares have more than doubled in just a year's time. In NIO's case, it went from a $5 per share startup to a company worth over $83 billion in market capitalization.
Retail investors and institutional investors, alike, are starting to hedge bets on which battery company will be the next to revolutionize how we drive and more importantly: master energy storage. Bloom Energy, which did not debut on the public markets this year, went through a bit of a fad a number of years ago; though it seems to have latched on to this trend of finding its momentum in the energy storage space. Once an idea with no markets, it is now worth more than $5 billion.
The COVID Trend
COVID arguably has not revolutionized how we work and live, but rather sped up these factors five to ten years sooner than would have otherwise occurred. Aside from the breakthroughs in mRNA technology that the vaccines have provided (yes, another multi-decade trend). COVID has allowed companies like DoorDash, whose revenues may have peaked, pre-vaccine, to take advantage of its public financing round. Correlations are almost everything in any trading securities. The idea that a decrease in COVID cases will automatically trigger programmed trades to sell DoorDash, Uber, and GrubHub, for example. When the vaccine reaches escape velocity, especially on the second round of doses, it will explain why now was the right time for DoorDash to go public; to maximize its value to shareholders.
The company [DoorDash] is part of a cadre of consumer-facing, web-based businesses that are expected to go public in December -- including home-rental platform Airbnb Inc., which is seeking to raise as much as $3.09 billion in its IPO Wednesday.
Source: MSN Money/Bloomberg
The second name in the quote above, may also come as no surprise to you: Airbnb. With hotels collapsing due to closures and abysmal occupancy rates, airlines at half-capacity (at best); travel has come to a halt on a global scale. What has not is the weekend getaway. Unlike DoorDash, it's timing in the public markets is a bit stickier to a sustainable business model. Even with vaccine distributions, and slowing rollouts at that, families who work at home will inevitably travel by car to local destinations to rent for a long weekend or two.
Hotels have to climb back from a reduction of at least half their business. While Airbnb is not immune to COVID, so to speak, it is in a direct position and threat to the traditional hotelier businesses that will not go away once COVID is a virus of the past.
Looking Forward to 2021
As this January progresses, entities such as Affinity, Roblox, and Coinbase are all looking to go public. Looking at evolving industries such as mobile payments, gaming, and the crypto-craze are going strong at least throughout the first half of '21. If these are successful, look for these sectors to heat up as public dollars will compete for the retail and institutional investor. The fear of missing out has always been a theme of investors both seasoned and new. What evolves throughout 2021, thus far, seems to be no different.