U.S. stocks slipped slightly this week, but a couple of initial public offerings (IPOs) made a splash. DoorDash (DASH), and Airbnb (ABNB) stocks went from private to public this week to much fanfare. IPOs grab headlines and the imaginations of investors, but are they worth chasing?
As always, we follow the evidence when making investment decisions. The evidence around IPOs is well documented. On average, IPOs have tended to underperform the broader market in the years immediately following the offering. Demand and enthusiasm around IPOs can outstrip fundamentals, resulting in a price on the first day of trading that is not justified by the business outlook. This dynamic is believed to drive the subsequent underperformance. Even big long-term market winners like Facebook stumbled post-IPO. Facebook fell over 50% in the weeks following its IPO. Investors who were patient and let the dust settle have enjoyed a 10x return from the bottom as profits materialized.
For every 10x IPO, there are hundreds that fell short or worse. Investing in IPOs or other speculative investments can be fun if you have money to spare, but they belong in the portion of your portfolio dedicated to entertainment, not retirement. We would recommend dashing away from these gambles.
Headlines This Week
- Prime Minister Boris Johnson said there is a “strong possibility” of the United Kingdom (U.K.) departing the European Union (EU) without a free trade agreement.
- He also said that British negotiators would go the extra mile to reach a deal, but the EU wants to keep the U.K. locked into its legal system or face punishments such as taxes on imports, making things difficult.
- The U.K. is preparing to trade by the World Trade Organization (WTO) rules, which is a default for countries with no trade agreements.
- Negotiations surrounding a fifth coronavirus relief package have made little progress.
- A White House proposal includes $600 stimulus checks, but it does not include enhanced unemployment benefits.
- Nancy Pelosi said that negotiations over the relief package could stretch beyond Christmas, while the lawmakers are trying to buy more time by passing a one-week extension on government spending.
IPO like its 1999
- DoorDash (DASH) and Airbnb (ABNB) made a big splash on Wall Street after launching their stock public this week.
- The Initial Public Offerings (IPO) were sold to new investors at huge premiums, with many investors reminiscing the tech bubble in 1999.
- Neither company is making any profits, yet Airbnb’s market value of around $80 billion is bigger than both Marriot and Hilton market values combined.
- DoorDash (DASH) was valued at over $70 billion on Thursday, after moving over 85% higher in its first day as a public company.
- While many experts came out to criticize the valuations, both stocks had no trouble finding buyers.
The Week Ahead
All Eyes on Deals
With no stimulus bill nor notable progress on a Brexit deal this past week, those two items will dominate the headlines next week.
- Time is running short; Congress needs a stimulus deal before Christmas recess.
- Brexit faces a year-end deadline; otherwise, the long drawn out divorce will end with the U.K. leaving the union without a deal.
Trip to the Bank
Both the Federal Reserve Bank and the Bank of Japan have a year-end rate decision next week.
- While no change is expected, policy statements for future action and economic projects will be of interest to markets.
Lost in the Shuffle
With two big deal negotiations and central bank meetings, economic data may be overlooked.
- Import/Export Price Index, Industrial Production, Retail Sales, Market Purchasing Managers’ Index (PMI), Housing Permits, and Housing Starts may all be lost in the shuffle.
- On the other hand, Thursday’s weekly initial jobless claims and continuing claims may receive more coverage than the last few, especially if job losses continue to accelerate into the holiday.
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