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Why this analyst says 2020 will be known as the year of the ‘IPO comeback’

Renaissance Capital Principal Kathleen Smith joins Yahoo Finance Live to discuss why more companies are filing for IPOs this year and what the IPO market will look like in 2021.

Video Transcript

- Two big tech names, DoorDash and Airbnb, looking to round out what has been a surprisingly strong year for IPOs this year. Despite the volatility in the markets, 184 IPO pricing. That's about a 23.5% bump from the same date last year. Let's bring in Kathleen Smith with Renaissance Capital. She's a principal there. And Kathleen joins us on the phone today.

Kathleen, good to talk to you. Let's talk about these two names, because when we talk about the strength of the IPOs, it's been relatively strong in the tech names in that there have been more than anticipated coming to market. But the performance after the initial day, that initial pop, hasn't been as strong. When you look at how things have transpired, where do you think the appetite is for DoorDash and Airbnb?

KATHLEEN SMITH: Well, I think that I'd start out by saying that 2020 is not just going to go down as the year of COVID, but it's going to be known as the year of the IPO comeback. The returns, in fact, have been very strong. The Renaissance IPO Index is up 78% year to date. That is a basket of the largest, most liquid companies that have gone public over the last two years.

So when investors earn strong returns on newly public companies, IPOs happen, and that's what we're seeing. You mentioned the numbers of IPOs and the dollar volume of almost $64 billion. And if you look at the last couple of months, you'll see that we are hitting records of any other month of IPO issuance than we've seen in over 20 years.

So we are breaking records now. And I think we'll bump up into 2014 where we had $85 billion raised. So far, we have $65 billion. But we're not going to be that far away, especially knowing we've got some very big deals coming down the road, including DoorDash and Airbnb and many others.

- And Kathleen, you mentioned your fund's performance there and the Renaissance IPO ETF, the largest holdings there Uber and Zoom. And as we prepare for DoorDash. I mean, Zoom always stood out to me as a standout from last year's group because they were profitable. And I wonder how much of that emphasis has maybe changed here in 2020 and heading into 2021.

When we look at DoorDash, I mean, they are very close to being profitable themselves and seeing some incredible growth, as Akiko and I discussed last week when we got the S1. Where do you see investors placing emphasis now in terms of profitability? And how does it compare to last year?

KATHLEEN SMITH: I think investors, they're more enthusiastic for sure. But there's still a focus on profitability, or at least understanding how soon a company is going to make money or have positive cash flow. So as you mentioned, DoorDash is turning profitable, and the focus here is going to be the sustainability of this big improvement in their revenue and earnings because of COVID and how much that's sustainable.

But if you look at, for example, this week, there are two very profitable PE backed IPOs on the calendar. Each are going to raise over $1 billion. One is called Maravai Life Sciences. It's growing at 16% and has EVA margins at 53%. So as we all focus on some of these other well-known names on the calendar, it's this company Maravai Life Sciences.

Then we're going to also look at Sotera Health. It's going to be a $1 billion IPO. And that one has, similarly, 50% EVA margins, not so high in growth, 4% or 5%, but very profitable. These deals are going to get done, and they're going to get done at, I think, reasonable models for investors. So there is a focus on-- I mean, growth clearly is an important thing to investors as well.

And so there's that sort of combination of we don't want the growth at all costs, but we still want growth, because with interest rates, this growth is very valuable, since the present value of future growth, the discount rate, is hardly anything, given where interest rates are. So investors are really interested in growth. There is a lot of momentum. But there's still a focus on profitability. And I think you will still see it through the calendar.

I do want to point out that one of the holdings in the Renaissance IPO ETF is Moderna. So that's a top 10 holding. Fortunately, putting together a basket of newly public companies, you get a variety of them, because I do know right now Zoom is trading off. It had a huge valuation, a great run with a stay-at-home, work-at-work home a time frame.

And the market's kind of discounting right now us moving forward to getting back into offices with these vaccines. But there still are many digital companies that are going to thrive, even after we go beyond the stay-at-home timeframe.

- Yeah, and when you talk about a name like Moderna, that stock of course, getting a big pop today in the session, up about 8%. Kathleen, when you talk about the tech sector, and startups there, you know, we often look at them in tandem between what's happening in the public markets and then sort of the private funding grounds. And on that front, it does look like things have been equally strong this year, about 71 companies that have been able to reach a valuation of $1 billion or more.

When you look at what's happening on the private side, what does that suggest in terms of the momentum of some of these, you know, some of these unicorns to come to market when you look to next year? Do you see this momentum that you've talked about in 2020 being sustained going into Q1 of next year?

KATHLEEN SMITH: Well, clearly, we have to look at our index or just the overall market. It has to be constructive. But if all else being equal, 2021 should be a very good year. I mean we started out 2020 with a challenging proposition when the market collapsed around the COVID pandemic and then had to recover.

So without that, 2021 should be a really strong year. Now remember, the IPO market, we have the regular way IPOs, which are parsing through companies like DoorDash, Airbnb, and others that we see on the calendar, like Wish, Qualtrics, Affirm, Robinhood. We think we're going to see those deals before year end.

But also the SPAC market is starting to be an outlet for some of these highly valued, maybe less close to profitability private companies that need to get out and get liquidity. So the SPACs have raised a lot of money and are probably going to pick up a number of these companies that might be a little harder for investors to analyze here.

But we are optimistic about 2021 given what we're seeing at the latter part of this year and even with the fact that it'll be a different kind of market, maybe moving away from the work from home into work from the office. But still the digitization of the economy is not going to stop. And these kinds of stocks tend to be the bread and butter of the IPO market.

- Kathleen Simith, Renaissance Capital Principal. It's good to talk to you. I appreciate your time.