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Expect 2021 to be a big year for biotech IPOs: Professor

Jay Ritter, University of Florida Finance Professor, joined Yahoo Finance to discuss the IPO outlook for 2020 and 2021.

Video Transcript

ADAM SHAPIRO: Call it a good old fashioned IPO. We got the S-1 from Airbnb. We also got DoorDash last week. So here they come to market, but buyer beware. To discuss what you should be on the lookout for, we invite into the stream Jay Ridder, University of Florida Finance Professor. It almost feels like that old game show-- no whammies, no whammies, no whammies. What is the one you want to bonk on the head, what's the other one you want to let fly, Jay?

JAY RITTER: Well, I think both of these are exciting companies, but I think Airbnb has the greater potential. It's in more of a winner take all market, whereas DoorDash is facing a lot of competition in the delivery business-- food delivery business, as well as potentially delivering other things. But it's a competitive industry that doesn't have a winner take all feature to it.

SEANA SMITH: Jay, what are your on these two companies trying to go public before year end-- and they're by far not the only ones. Our colleague Melody Hahm was talking about the fact that there's over 230 companies that have filed to go public this year, which is up from a year ago. But why now for a name like Airbnb and for a name like DoorDash?

JAY RITTER: Well, the stock market is near an all-time high, or depending how you measure it, at an all-time high. If you're not going to go public now, why not?

ADAM SHAPIRO: OK. So let's look, again, at Airbnb. Because as you've pointed out, they have a potential for large profit in their future. Before the pandemic, they were cash flow positive. One metric you can look at, actually-- and it's weird to consider it this way-- but the airlines. If you look where the airlines are flying people right now, it's to beaches. It's to Mexico. That's actually, although down year over year, it's higher than everything else. That's the kind of thing that would indicate Airbnb is going to be on the upside of this, right?

JAY RITTER: Well, Airbnb pivoted earlier this year when it became apparent that air travel was collapsing. And it's turned out that a lot of people wanted to rent a place for a short term within an easy driving distance. In Florida, a lot of local residents who live in Orlando decided, I'd like to take a week at the beach. And a lot of them decided, I don't want to be in a big hotel, I'd rather rent an Airbnb property.

SEANA SMITH: Jay, one of the risk factors, though, that Airbnb did list in its S-1 was when they did talk about future profitability. And they were basically saying that they've incurred net losses in each year since their inception, and that they might not be able to achieve that profitability. I'm curious just how you think investors are going to perceive this and whether or not you see that affecting investor interest. Because I think we've gotten mixed signals on that front when you take a look at what's happened over the past couple of years.

JAY RITTER: Well, Airbnb and DoorDash have been focusing on growth, just as Lyft and Uber have been. With Airbnb, I think it's an entirely sensible strategy to have focused on growth, become the dominant player where it's the first choice of people when they want to go to a website and look for a rental in some city that they want to travel to or that they have to travel to. And they've got an international market.

And they can become profitable when they are able to cut some of their expenses that have been high for building this expansion. And secondly, the fraction of revenue that goes to them is something that's partly under their control as well. And so I don't see any reason to think that the company won't become profitable at some point.

ADAM SHAPIRO: Jay, I started this off by saying, good old fashioned IPO. But lots of average investors complain about IPOs, because average investors get cut out of that by the underwriters at the beginning. So then there's the SPAC market, which I think this year went $35 billion-plus. But that also used to be the playground of charlatans. So how does an average investor get in on a traditional coming to market of a public IPO, and protect themselves in both of these scenarios?

JAY RITTER: Well, with SPAC IPOs, typically they go public at 10. They start trading at or $10.02. And then at some point, they're going to propose a merger. Excuse me. I think that, you know, for individual investors, that's fine. They can then get in on the merger, but some work out, some don't.

SEANA SMITH: Jay, looking ahead to the IPO market in 2021, and keep up with this record setting pace we've seen over the last couple weeks-- a lot more companies I'm sure will be anxious to go public. What sectors do you see leading the way next year?

JAY RITTER: Well, I think biotechnology is going to continue. We've had eight years in a row where about 40% of the IPOs have been biotech and pharmaceutical companies. And I think that's going to continue. They don't get the big headlines, but there have been a lot of deals in that sector and will continue to be.

ADAM SHAPIRO: OK. Jay Ritter is a Finance Professor at the University of Florida. Go Gators, and thank you for joining us here on Yahoo Finance Live.

JAY RITTER: Thank you.