Thursday, Dec 17th 2020

Passing on Airbnb and DoorDash (for now)

Investor Update

Despite IPO markets being on fire, we have passed on Airbnb and DoorDash (for now).

Why? Because these IPOs have had unique trading dynamics that we believe do not warrant your capital being invested (yet). Below are our top takeaways.

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1. Day one "pops" rarely mean anything for the typical investor.

The financial media often wrongly makes high-profile IPOs seem like an easy way to make a quick buck. For example, DoorDash and Airbnb are both widely quoted to have risen +86% and +113% respectively on their first day of trading.

But these day-one returns are for the offering price and only apply to people who had exclusive access to pre-IPO shares (e.g., insiders, hedge funds).

Because the first public trades of IPOs are often meaningfully above these offering prices, true day-one returns for everyone else are often much more muted than what headlines suggest.

On this metric, DoorDash and Airbnb actually returned a typical +4% and -1% on their first trading day - not a terrible outcome, but far from a free lunch.


2. Unique supply/demand imbalances around IPOs often drive share prices to deviate materially from fundamentals.

Part of what causes the first trades of an IPO to get booked materially above the official offering price is: supply of shares < investors' demand for them.

As investment banks drum up excitement around their IPO clients like Airbnb, they also carefully price shares to build in a little undersupply that should boost the stock prices during the first day of trading.

For those who get exclusive access, this often results in a quick one-day win, as prices promptly surge at the onset of trading.

But as the first trading day's hype fades, prices tend to drift back towards more normalized levels. For example, DoorDash and Airbnb are both now down -16% and -14% respectively since their fiery debuts last week.

3. Lockup periods prop up share prices temporarily, but result in downward price pressure in the future.

Most IPOs tend to come with lock-up provisions. These clauses prohibit insiders like employees and private investors from selling shares for 3-6 months following the IPO.

This is intended to prevent a flood of people trying to sell from negatively impacting the initial trading dynamics of the company - but ultimately, that piper needs to be paid.

Inevitably, new public stocks begin facing downward price pressure as the lockup period expires and employees start to sell stock.

This dynamic is one that actually may benefit main street investors, as the technical impact of a wave of new share supply can cause stocks to trade below where their fundamentals dictate. That means a buying opportunity.

TLDR: We're staying patient and picky with Airbnb and DoorDash vs. getting caught up in the IPO hype. 

We continue to monitor the IPO and post-IPO market on your behalf, and will follow up should any attractive new opportunities come across our radar.

As always, if you have any questions, don't hesitate to reach out.

Best, Titan Investment Team

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