“I have a great deal of difficulty understanding the valuations of some of these companies.”
That’s Jay Ritter, a business professor at the University of Florida quoted in The Wall Street Journal, speaking about a confounding trend currently dominating the stock market. As the paper reports, valuations of tech companies that have recently received IPOs “are at their highest levels since the dot-com bubble, relative to the companies’ revenue.”
Despite the pandemic and, to be frank, common sense, hot tech stocks are skyrocketing — and experts like Ritter aren’t quite sure why.
The Journal points out the examples of Airbnb and DoorDash, which both had initial public offerings last week, and Snowflake, which went public in September. All of them, through these stock market debuts, are not only valued higher than their profit would suggest, but higher than some of the largest corporations in the country. For comparison’s sake, they note that Airbnb is valued higher than FedEx, DoorDash is in the ballpark of General Motors, and Snowflake, a software company, is higher than Goldman Sachs.
“Investors this year have valued newly public tech companies at a median of 23.9 times the revenue they reported in the 12 months before going public,” the Journal writes, citing Ritter. “That measure is by far the highest of the past two decades. For most of the 2010s, the median multiple for a tech company after its first day of trading hovered around 6 times its revenue in the prior 12 months.”
What’s causing this run on tech stocks? Some cite the pandemic’s acceleration of tech’s domination, changing how people work, travel and eat. Others cite a more ephemeral reason: that, like the dot-com bubble, investors are interested in “stocks that show growth and have buzz.”
Whether the frenzy continues or the stock market comes back down to earth (thankfully, even buzzworthy tech companies seem to be proceeding with caution), it looks like the IPO will be reclaiming its pole position in 2021 ahead of the SPAC.
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