Lofty valuations for tech companies are leading the industry into bubble territory not seen since the late 1990s, experts have claimed.
The warning comes after Airbnb shares more than doubled in their trading debut on Thursday, propelling the home-rental company to about a $100bn (£75.7bn) valuation in one of the biggest first-day rallies on record.
In the same week, food delivery company Doordash’s market debut saw its shares soar to $189 in New York on Wednesday after being priced at just $102 a day earlier. The surge valued the company at $72bn, twice the market cap of Barclays.
Meanwhile Snowflake, a cloud storage computing firm which listed earlier this year, saw its valuation surge to $116bn, with its shares rising by 242pc since it floated.
“This speaks to a market that has clearly lost all sense of perspective,” said Michael Hewson, an analyst at CMC Markets.
“I am staying well clear until there is some rationality,” added Richard Windsor, founder of research company Radio Free Mobile. “Valuations are being ignored and instead being supported by hype, speculation and blue sky thinking.”
Tech IPOs raising
According to data compiled by University of Florida Professor Jay Ritter, Airbnb was the 19th company in 2020 to double in its first day of trading, the most since 2000.
His analysis also shows this year’s average first-day return was 37pc, compared with 56pc average in 2000. Together, Airbnb and DoorDash propelled IPO volume to all-time high for December, surpassing the $8.3bn mark set for the month in both 2001 and 2003.
More than $300bn is expected to be raised globally through IPOs in what could eclipse a peak last seen in 2007.
The flurry of tech firms including online shopping business Wish and food delivery company DoorDash will help this year’s haul reach at least $278bn, according to recent figures from Dealogic. Airbnb’s monstrous float means the final year figure will likely push past the $298bn raised in 2007.
“We haven’t seen this level of IPO pricing variability in a long time, perhaps since 1999 and 2000,” added Notre Dame Law School associate professor Patrick Corrigan, who specialises in IPOs and venture capital.
Simon Edelsten, a fund manager and British investment group Artemis, said there were sure signs of a bubble. Several factors were driving this, he said, but the most pertinent was one that mirrored the dotcom bubble.
“I am nervous. We are in a market where the new shiny thing is priced higher than proven companies which is what we saw happen in 2000. The accounting being used needs adjusting. When companies don’t produce profits people value them on sales, which is not simple and can be misleading.”
Mr Edelsten said investors valuing stocks such as Airbnb, and even electric vehicle maker Tesla whose share price has grown fivefold this year, were assuming current sales growth would continue exponentially. “The opportunities are exciting but extrapolating current conditions on the idea these companies will face no competition is hazardous,” he added.
Tech Bubble v Dot com Boom
Ally McKinnon, manager of the Scottish Investment Trust, a global stocks fund, said present day IPO valuations were more unjustifiable than at the start of the century.
“At least in the dotcom era they were new companies and it was exciting technology. But Airbnb has had 12 years of trading and hasn’t made any money.
“When you get IPOs like this it is a complete change. Venture capitalists fell over themselves to invest, but now need an exit after funding loss-making companies. This IPO passes the bag to the public markets.”
Many believe the market is being driven by retail investors, causing the level of sophistication in trading to plummet.
Apps such as Robinhood, which have increased in popularity the past few years, allow individual investors to buy a fraction of a single share, lowering the barrier to entry.
“It seems like a stretch to say that fractional share programs arriving at major retail brokerages and IPOs going stratospheric at the open is just a coincidence,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advice.
There have been 420 IPOs on US markets so far this year, some 88 percent more than at this point a year earlier, according to StockAnalysis.com.
There are still more market debuts to come.Video-game company Roblox, installment loans provider Affirm Holdings and ContextLogic, the parent of online discount retailer Wish, are all set to go public.
“Time will tell whether the current valuation of Airbnb is sustainable, or even realistic (it isn’t),” said Hewson. “But unless the business can display anything like a level of long-term profitability the froth could well come off quite quickly.”
Others were more sanguine about the state of the market. Taymour Tamaddon of US investment firm T. Rowe Price, said the “service-as-a-software” model operated by the likes of Airbnb and Doordash had staying power, unlike the “more flash than substance” listings in 2000.
“The market’s recent excesses do not compare to the dotcom bust. The technology‑driven changes taking place throughout the economy are widely acknowledged,” he added.
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