Back in ’99 and 2000 the tech companies going public were very young and smaller than Doordash and Airbnb: Professor

Jay Ritter, University of Florida Joseph B. Cordell Eminent Scholar in the Department of Finance joins the Yahoo Finance Live panel to discuss the 2020 IPO roundup.

Video Transcript

ZACK GUZMAN: I also want to spotlight the action we're seeing continue to play out in some big name IPOs we brought you earlier this week, not just Airbnb, the biggest one of 2020, but also DoorDash, shares today under pressure, as we've talked about potential over-exuberance, shall we say, in some of the retail investors spotlighted here in that post-IPO pop.

We've been trying to get some comparisons back to 1999 and want to kick off the back half of the show here today with the focus on just that with our first guest in the back half of the show. Jay Ritter is a professor at the University of Florida, as well as an expert when it comes to data around IPOs. He's been tracking this for decades.

So Professor Ritter, it's-- it's a privilege to have you on with us today. There's been a lot of talk about comparisons back to the tech bubble back in '99 and 2000. Your data shows that while it's the-- it's the highest number of companies we've seen double in their first day of trading, it's still pretty far from the number that we saw back in '99. Talk to me about that comparison.

JAY RITTER: Right. This year, we've seen 19 companies double in price on the first day of trading. But in 1999 and 2000, it was well over 100. It was a very common occurrence. But a big difference is today, sometimes, like with Airbnb, are really big companies, rather than just tiny companies doubling in price.

AKIKO FUJITA: Professor, there's been a lot made about where the IPOs were priced at versus where they started trading. This retail or this hybrid auction model certainly didn't seem to work, given the huge pop that both of these stocks got. What do you attribute that to? Is this about the bankers mispricing it? I mean, why was there such a-- such a gap?

JAY RITTER: Well, I think the hybrid auctions that DoorDash and Airbnb used were partly successful, that if they hadn't forced investors to submit a price along with a quantity order that the underwriters might have recommended even lower offer price. I think both the underwriters and issuers were surprised at just how strong the demand was. But the underwriters had a pretty good idea that the price was going to jump, that they weren't as aggressive as they could have been at increasing the offer price.

ZACK GUZMAN: And Jay, I mean, just to compare, again, back to the tech bubble, because any time you see, you know, these numbers approach what we saw back then, it's going to send some nerves-- some nervousness, you know, into the market, but-- but in your estimation, what's the biggest difference between the companies we're seeing come out now versus the ones back then? Because it does seem like, at least when you look at an Airbnb or a DoorDash, they do have a bit of a resume to point to in terms of growing revenues, and then also the fact that they've been around for so long on cheap VC money here. These are much more established companies than what we saw back in '99, it would seem.

JAY RITTER: Very definitely. Back in 2000, and especially this year, there have actually been a lot of biotechs going public. But typically, they're much smaller companies and don't attract all of the attention that a DoorDash or an Airbnb gets. But back in '99 and 2000, the tech companies going public were typically very young and had very uncertain prospects. They were fighting for what back then was called first mover advantage, the same winner-take-all idea that is still true with Airbnb.

But the difference now is a company like Airbnb has demonstrated that we've won the battle, that there's basically no uncertainty that this company is going to fail and disappear. The only question is, how big will it get? How profitable? And what's a valid valuation for the company?

AKIKO FUJITA: When you look at the big pops that we've seen in some of these IPOs, particularly the well-known tech names, how much of that do you think has to do with the large number of retail investors that have got into the market? And if they are contributing to that, is there a case to be made for retail investors to be included in the price discovery before the opening trade?

JAY RITTER: I think retail investors are certainly pushing up the price of some of these stocks. But on the other hand, you've got institutional investors holding them as well. Tesla is not held all by retail investors, there are lots of institutional investors, many of whom are concerned about the valuation of Tesla. Some of them might be indexers, others are momentum players, where there's a danger with momentum players, once the stock stops going up, they might want to get out. And if too many want to get out at once, there could be a really severe crash.

ZACK GUZMAN: Yeah, and the other thing, too, when we're talking about retail investors that's been a theme this year are SPACs. We've seen 220 this year, according to your data. That's three times as many we've seen in any year before. So talk to me about that theme here and why you might think that's going to continue, considering the trend we saw this year, and what that might do to bid up prices, as well, considering, you know, there's-- there's a shortage of some of these deals out there.

JAY RITTER: Yeah. Actually, this week, 23 SPACs are going public. It's amazing. This year, more than three times as many SPACs as any previous year have already gone public. These companies then go out and look for a company to merge with, with the cash that they raised in the IPO. And so what we've got now is hundreds of these companies with cash looking for a merger partner.

So a lot of companies that-- mainly smaller companies that otherwise might have done an IPO, instead are probably going to merge with a SPAC. But on the other hand, with so many of these SPACs looking for merger partners, an operating company that is considering this is able to play them off against each other and take the highest bidder. And if the operating companies have all that bargaining power, there's a danger that the SPACs might wind up overpaying for their deals.

ZACK GUZMAN: And lastly, right before we let you go, just a real quick question just to kind of put a pin in all of it. It sounds like you're saying we're not quite there at the tech bubble exuberance that we saw before. That would seem to be a fair takeaway, no?

JAY RITTER: Yes. But we're getting pretty close to the tech bubble from 20 years ago.

ZACK GUZMAN: All right, we'll keep watching some of these more IPOs. It's not over yet. We've still got more to come out, so we'll see what the final tally is. Professor Jay Ritter at the University of Florida, appreciate you taking the time to chat with us today.

JAY RITTER: Thank you.