Are public markets more enthusiastic than reasonable?
After pricing above its raised range last night, Airbnb opened this morning at $146 per share, up around 115% to kick off its life as a public company.
The company is now worth $158 per share. Using its IPO share count inclusive of shares reserved for underwriters, the company is worth $95.1 billion, but on a fully diluted basis, including shares that could be exercised or awarded in the future, Airbnb is worth much more.
The home-sharing unicorn initially targeted $44 to $50 per share in its debut, later raising that range to $56 to $60 before pricing at at $68 per share. To open at such a premium is not shocking given how the debuts of DoorDash and C3.ai performed earlier in the week.
Taken as a trio, the companies’ amped public debut are stoking concerns of mispriced IPOs.
However, taken as a trio, the companies’ amped public debut are stoking concerns of mispriced IPOs and, at least in my head, public markets that are more enthusiastic than reasonable.1
The explosive debuts of the enterprise AI company, the home-sharing giant and the food-delivery leader were not the first IPOs of 2020 to set off fireworks when trading began. Snowflake, another megadebut, gained more than 100% in its first trading day, despite pricing above its own raised IPO price range.
What’s going on? Let’s use Snowflake as a prism through which we can figure it out. Lemonade, the summer insurtech IPO, will also provide some useful guidance.
Was Snowflake underpriced?
When Snowflake’s IPO went out with a thunderclap, it was more ammunition for critics of the traditional public offering. The company and its private investors had done so much work to get Snowflake to the public markets, complaints seemed to go, and then some idiot bankers mispriced its debut by 100%, rewarding their clients and screwing the company? Awful!
So went the argument. However, as I wrote at the time, leaning on the work of Forbes’ excellent reporting, Snowflake’s CEO was not fully bought into the concept:
Alex Konrad at Forbes — a good chap, follow him on Twitter here — caught up with Snowflake CEO Frank Slootman about the matter. He called the “chatter” that his company left money on the table “nonsense,” adding that he could have priced higher but that he “wanted to bring along the group of investors that [Snowflake] wanted, and [he] didn’t want to push them past the point where they really started to squeal.”
This is the “long-term investor” argument that you will hear on any call with a CEO on their IPO day. It goes like this: If you want long-term holders of the stock, you have to find a price that they will accept; that price may be different than what retail investors will pay when the company begins to trade. So, the gap, or pop, is fine as you are trading one thing for another.