Business
"Companies' pricing is based on infinite potential if the business model is successful"
Not just Airbnb: The market for initial public offerings of technology companies in the US is open, and many companies, including Israeli ones, are taking the opportunity to become public and raise capital when stock prices rise on the first trading day in Gat Megiddo, Psagot: "The market's appetite is very large.
Subjective Dream Pricing "
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Wall Street
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Monday, 14 December 2020, 15:23
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Recently the ritual has been repeating itself: a company goes public for an initial public offering (IPO) on Wall Street, issues at a price higher than the price range it was aiming for, and then its stock jumps sharply (at a double-digit and even triple-digit rate) on its first trading day.
The IPO market is open and hot, despite the corona plague and economic crisis, and companies like Airbnb, which provides a short-term apartment rental platform, DoorDash, which provides food delivery services in the U.S., and others, are among those joining the U.S. public stock market.
airbnb, which was issued last week at a value of about $ 47 billion (significantly above initial expectations), soared on its first trading day on Wall Street and more than doubled its value;
In doing so, it surpassed the value of the three old hotel chains Marriott, Hilton and Hyatt combined.
But Airbnb is just one example.
Very many companies in the fields of innovation and technology take the opportunity to become public and raise capital, because the market not only allows for an IPO, but also welcomes most companies with open arms.
Israeli companies have also done so in recent months - some of them also "unicorn" companies (those that reached a value of over $ 1 billion in the private market, before the IPO).
Among the Israeli companies that have recently conducted IPOs on Wall Street are the digital insurance company Lemonade, which has jumped 216% since the IPO and is traded at a market value of $ 4.3 billion;
Technology company JFrog, which is currently worth $ 6.2 billion after a 55% jump in the offering;
As well as smaller companies, including Nanox and Payne Reform in the healthcare sector and NeoGames in the technology sector.
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Very strong value.
AIRBNB
"Even in SPAC issues the market is boiling"
How can one explain the power of the market, and the high values?
According to Gat Megiddo, Psagot's chief investment officer, "there are two notable trends in the Wall Street IPO market. The first is large technology companies, such as Snowflake, which are falling into the category of disruptive innovation in the wake of the crisis, Dollars and rose very strongly.
"The second is the issuances of SPAC (non-active blank check companies, which raise money to buy companies; NIS), where the market is also boiling, although the values are lower, and where we see a lot of activity around electric vehicles and autonomous vehicles. "For example, QuantumScape, which developed a battery for fast car charging, merged with SPAC."
Megiddo adds that "it is difficult for me to justify a value of $ 83 billion for Airbnb, with Hilton trading at $ 30 billion, but those who do justify the value, say that such companies mean when they say disruptive innovation. Maybe against the background of the plague people will not want to go to a hotel. More demand for an Airbnb model.
"If we try to force ourselves into the DCF model and stick to the financial statement, in life we will not be able to understand the value.
It's a type of company whose pricing is based on their infinite potential to the extent that their business model succeeds, it's a dream. "
Isn't that reminiscent of the pricing of dream companies before the dot-com bubble burst in 2000?
Megiddo:" It's important to remember that these companies are marginal. They are not in the big indices, and most of them do not have large institutional investors.
And anyway, if you look at Alibaba for example, it traded at a three-digit multiplier a few years ago and looked at it like the stocks we are talking about now.
Since then it has achieved very high profitability and return, and today it trades at a reasonable double-digit multiplier.
"So yes, on the one hand there may be companies whose pricing is definitely excessive, but on the other hand their model can catch on. And it is also important to remember that there is an event of generational transition: young investors enter the market, and give a valuation that suits their generation."
How do you explain a stock that jumps tens of percent or more on its first trading day? The company entered the market with incorrect pricing?
"Some of the pricing at the IPO stage was incorrect. Issues on Wall Street are made through non-uniform bids, not a public tender - by the way, as has happened in Israel in recent months. Usually, those who participate in the IPO are large institutions, not everyone can bid and win shares. It should not produce 100% price gaps, but yes, institutions that inject capital into a company are expected to make a profit when it goes out.
"The appetite of the market right now, the openness of investors to this type of companies, is very large. When pricing a dream it is a subjective thing, not like pricing according to a profit multiplier, but each with its own assumptions. It could also end in disappointment in a few quarters, if the company does not live up to expectations. "
What do you expect to see in the IPOs market on Wall Street in 2021?
" If the market is good, then the IPO market will also remain open and the celebration is expected to continue. If the forecasts are correct - that in 2021 they will start to open up the economy and there will be a start of recovery, with a certain routine in the middle of the year - it will most likely support the markets and the IPO market will continue to swell. And if otherwise, it will be closed.
"Basically there can also be point cases, like a very bad big IPO, that will spill cold water on the IPO market, but by and large it depends on the market," Megiddo says.
"Another thing that is important to look at in 2021-2022 is that some of our pre-crisis habits will return. A lot of the models are built on changing habits; but when restaurants open, will people order less and sit back in a restaurant? "A hotel and not just an apartment. When we can understand which of our previous habits are returning to normal, it will make it clear to us about some companies. The office market is also related to this.
" But in any case, when it comes to companies that develop disruptive technologies, ".
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