Big gains from Doordash, Airbnb IPOs out of reach for many everyday investors

Click to play video: 'Airbnb hosts looking for long-term tenants' Airbnb hosts looking for long-term tenants
After losing bookings from visitors during the pandemic, Airbnb hosts are now looking for long-term tenants – Jun 8, 2020

Demand from everyday investors may have driven the eye-watering stock price jumps experienced by Doordash and Airbnb in their first day on the market last week, but it’s big investors who are likely pocketing most of the gains, says Jay Ritter, a University of Florida finance professor and one of the world’s leading experts on initial public offerings (IPOs).

READ MORE: Airbnb IPO filing shows pivot during coronavirus pandemic

When the U.S.’s largest food-delivery company and the world’s No. 1 home-sharing site debuted on the stock market a few days ago, they both saw their share prices skyrocket — by 86 per cent and 113 per cent respectively — in the first day of trading. Stocks of Doordash soared from an initial public offering price of $102 to close the day at $189.51. Airbnb started with an offering price of $68 and closed at $144.71. (All prices are U.S. dollars.)

Story continues below advertisement
Click to play video: 'How India’s 130-year-old food delivery system works' How India’s 130-year-old food delivery system works
How India’s 130-year-old food delivery system works – Jan 30, 2020

But those outsized gains were out of the reach of many small investors. DIY investors who buy and sell stocks through brokerage accounts often can access blockbuster IPO shares only when they become available on the stock market. By that point, though, steep price spikes like those seen for Doordash and Airbnb have already happened.

When Doordash shares started trading on Dec. 9, the price had climbed to $182, just a few dollars below where they would close, while Airbnb’s opened at $146, above its closing price for the day.

READ MORE: Food delivery app DoorDash reports data breach affecting 4.9M users

Both companies have since seen their share price stumble. Doordash shares closed at $160 on Monday, Dec. 14, while Airbnb stocks stood at $130 at the end of the trading day.

Story continues below advertisement

“The big gain is for those who bought shares at the offer price,” Ritter says.

The offer price is the price at which investment banks acting as underwriters make the shares of the IPO company available to a usually small number of investors before they become available to everyone. In a typical IPO, at this stage, 90 per cent of the shares go to institutional investors like mutual funds and hedge funds, according to Ritters.

Click to play video: 'Beyond Meat stock surges 734 per cent since IPO' Beyond Meat stock surges 734 per cent since IPO
Beyond Meat stock surges 734 per cent since IPO – Jul 24, 2019

For small-time investors using widely available investment platforms, by contrast, there are usually few options to participate in IPOs at this stage. For example, Robinhood, the popular U.S. stock-trading app, lets users queue up to buy a company’s stock in advance of opening day in some cases but those client orders are only executed when the shares start trading publicly.

In Canada, it’s the same for customers of Wealthsimple Trade, which allows users to trade stocks and exchange-traded funds on their mobile phones. Discount brokerage Questrade offers users access to some pre-IPO shares but only for a limited number of Canadian companies.

Story continues below advertisement

READ MORE: The Bitcoin craze is back. Is it different this time?

Exchange-traded funds (ETFs) that focus on IPOs buy the stocks after they have started trading, meaning investors who hold the funds in their portfolios are also excluded from any big price pops that happen before the shares have gone public, Ritter says.

Mutual funds can access IPO stock at the low offer price but often pay steep commissions to the underwriters, reducing the potential gain for mutual fund clients.

And yet, it was likely because of small investors that the Doordash and Airbnb IPOs saw such a big discrepancy between the companies’ offering price and the opening price at which the stocks hit the market, according to Ritter.

“Part of what’s going on is that there are institutional investors who are anticipating that individuals are going to put in buy orders as soon as they’re allowed to,” Ritter says.

Click to play video: 'Investing with robo-advisers during recessions' Investing with robo-advisers during recessions
Investing with robo-advisers during recessions – Dec 15, 2018

Hedge funds, in particular, are “buying with the expectation that they’ll be able to make a profit by flipping the stock,” he says.

Story continues below advertisement

Small investors’ interest in IPOs comes as the pandemic has prompted scores of 20- and 30-somethings to try their hand in the financial market for the first time. The stock price crash that accompanied the first round of government-mandated lockdowns in the spring provided an affordable access point for young investors hoping to buy cheap. Working from home likely means more people have time to devote to DIY investing, while user-friendly trading apps have made it easy for beginners to place buy and sell orders.

READ MORE: How COVID-19 is luring Canadians into the stock market

IPOs can net small investors big gains if prices surge after the stocks have gone public. That’s what happened, for example, with plant-based meat producer Beyond Meat, which began trading at $25 a share on the Nasdaq stock exchange in May 2019 and closed the day at $65.75, a 163 per cent increase.

But the volatility of IPO shares can also translate into losses. Uber shares, for example, slid more than seven per cent in their first day on the market.

Over the long term, though, lPO shares from larger companies tend to earn normal returns, while those from smaller firms tend to underperform, Ritter says.

But Doordash and Airbnb are just the latest in a string of hot IPOs this year that’s starting to worry him.

Story continues below advertisement

I’m beginning to think that the situation this year is similar to what we saw in 2000,” Ritter says, alluding to the IPO euphoria that preceded the dot-com bust.

“Twenty years ago, we had the Internet bubble where lots of tech companies went public, shot up in price on the first day of trading and a lot of them later on collapsed,” he says.

In 2000, a weighted average of the first-day performance of IPO stocks showed a return of a whopping 46 per cent on the offering price, according to Ritter. This year so far, the same measure yields an even higher return of 49 per cent, Ritter says.

“The valuations in the market have gotten so high that the upside potential is getting more and more limited.”

Sponsored content