Dot-Com Angst Overrun in IPO Market as DoorDash Extends Craze

(Bloomberg) -- Some day, investors will be overwhelmed by all the fresh stock coursing into the U.S. equity market, and maybe even regret bidding up buzzy businesses that haven’t earned any money. But that day has not yet come.

Even in an uncharacteristically painful session for tech bulls, with the Nasdaq 100 suffering its worst drop in a month, appetite for new issues remained voracious Wednesday. Two initial public offerings -- DoorDash Inc. and C3.ai Inc. -- scored huge gains on their debut, each rising at least 85%. Another IPO, from Airbnb Inc., is expected to price above its targeted range after the close.

While the robust reactions underscore a healthy market, they are grist for market veterans who lived through the dot-com bust, who can’t help but warn that a bubble is building again. The rush to chase gains in unprofitable companies is of particular concern. Among some 200 firms that went public this year, 80% have yet to earn money. Their stocks surged an average 27% on the first trading day, data compiled by Bloomberg show.

“It feels like the markets are partying like 1999 all over again,” said Gene Goldman, chief investment officer at Cetera Financial Group. “Companies are using this opportunity because the market is so thirsty.”

With the Federal Reserve and retail investors providing support, stocks have staged an epic rally from their bear-market low in March, adding $18 trillion in value. Positive vaccine news and government stimulus ignited animal spirits. Besides newly public shares, small caps and companies with shaky finances have been the beneficiaries.

Wall Street alarms over investor euphoria are growing louder. Earlier this week, Goldman Sachs Group Inc. strategists led by David Kostin joined counterparts at Citigroup Inc. and Deutsche Bank AG in warning that extremely stretched investor positioning could foreshadow a pullback.

As of Friday, the S&P 500 was trading 17% above its average price over the last 200 days, the furthest the benchmark had been from its trend-line since 2009, and just about as disconnected as the benchmark ever got during the dot-com days.

Broadly, the caution proved prescient Wednesday, with the S&P 500 sliding from a record and the Nasdaq 100 erasing about a third of the rally it recorded over 10 straight days of gains.

Not so in the new-issue space. Shares of food delivery platform DoorDash jumped 86% from their IPO price in their trading debut Wednesday, a huge pop for an unprofitable company that’s gotten a boost from pandemic-era eating habits. C3.ai, the software maker founded by former Oracle Corp. executive Tom Siebel, rose 120% after raising $651 million in its offering above the marketed range.

While retail newbies are never far from any market craze in 2020, their fingerprints can be gleaned in a pop like DoorDash, a company that has been available for investment by institutions for years. At the close Wednesday, its market cap of $60 billion was almost four times more than its last private-funding round valuation of $16 billion.

“It’s a combination of the market doing well. Eventually, higher prices bring on enthusiasm, eventually people capitulate into the bullish camp. We’d seen plenty of it among the short-term trading crowd,” said Liz Ann Sonders, Charles Schwab’s chief investment strategist. “I’m a little bit worried about sentiment conditions having gotten pretty frothy.”

While big losses such as Wednesday’s heighten concern that the eight-month rally may be poised to reverse course, the late 1990s showed one bad day doesn’t spell the end of a bubble inflating. In 1999, the Nasdaq 100 fell more than 2% on 40 separate sessions while the benchmark was on its way to doubling.

New listings on U.S. exchanges have raised more than $150 billion this year, roughly half by special purpose acquisition companies, or SPACs, according to data compiled by Bloomberg. Airbnb Inc. will price shares in a long-awaited initial offering Wednesday, raising as much as $3.1 billion and valuing the home-rental company at $42 billion.

Investing in the Renaissance IPO exchange-traded fund at the start of the year would have yielded returns of 108%, more than seven times the advance of the S&P 500 Index during the same time. The fund’s top holdings include Zoom Video Communications Inc., which went public last April, and Crowdstrike Holdings Inc., which debuted last June. Zoom is up 466% this year, while Crowdstrike has jumped 233%.

“Central bank policy that keeps markets operating at a high high level has helped to create this dynamic where issuance is off the charts,” said Yousef Abbasi, global market strategist at StoneX. “A lot of these firms are growth companies, long-duration investments, and people are paying a high multiple for what promises to be a massive growth over a long period of time. There’s no guarantee that this will actually happen.”

©2020 Bloomberg L.P.