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IPO Duo Confirms the Market’s Insane Valuation Right Now

Last Updated September 23, 2020 2:24 PM
Andrew Packer
Last Updated September 23, 2020 2:24 PM
  • Airbnb delayed its IPO amid the market turmoil but has refiled for a launch this year.
  • Palantir is also looking to go public.
  • Both these companies may be looking to cash out thanks to high stock valuations right now.

One of the few victims of the stock market–besides Warren Buffett for his failure to capitalize on the downturn–appears to be in the IPO field.

Short for initial public offerings, an IPO is when a company goes from being privately held  by founders to held by a legion of day traders who want a piece of the action, sold to them via investment banks for a hefty fee.

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The biggest expected IPO this year was Airbnb, which put plans on hold back in March. The short-term rental app company made a confidential filing this month , the first step to going public. Now that it’s refiled, shares could be in your portfolio by the end of 2020.

Of course, things aren’t as good as they seem. When the company first announced, it had a valuation of $31 billion.

Hotels by market cap
Even with a reduced valuation, Airbnb is still poised to be the second-largest hospitality chain should it go public. | Source: Luxuryabode.com 

Today, the company’s value is closer to $18 billion .

Also joining the list is Peter Theil’s Palantir , which may also file and trade by the end of this year. Palantir isn’t as well known, as it’s been somewhat private about its business practices.

It also doesn’t help that the company is a government contractor, and uses big data to try and do things like predict crime .

Palantir products
The company is somewhat secretive, but from what we do know, Palantir is far ahead of other big-data companies on the data it collects. | Source: Quora 

Palantir has an estimated valuation near $20 billion, on par with Airbnb’s reduced value. That would make for a massive IPO.

Why Go Public Now?

The real question investors should ask themselves in any IPO is qui bono, or who benefits?

A company’s largest owners by the time they go public are the founders, employees who took a risk on a startup in exchange for stock, and often angel and early investors such as private equity and hedge funds.

Once a company has its IPO, all those groups have an exit plan to cash out the increased value of their shares.

Even better, publicly-traded companies tend to trade at a premium to privately-held companies. Private equity deals to buy non-public companies typically don’t pay more than ten times EBITDA .

That’s far less than the 29 times earnings  that the average S&P 500 stock trades at right now.

S&P 500 PE ratio
Currently, the S&P 500 is trading at about twice its historical average on an earnings basis, although the PE ratio does tend to surge during recessions. | Source: Multpl.com 

So, going public allows a company to see a significant surge in valuation that enriches existing shareholders even more.

Put it all together, and the fact that company insiders are looking to cash out now may be in recognition of today’s high market valuations.

That bodes poorly for investors looking for a quick return. While IPOs often set a trading price low enough to ensure a good day, some IPOs don’t fare well, leading to immediate losses.

Even Facebook (NASDAQ:FB) struggled for months as the company had to start looking for ways to increase revenues and earnings once it was a publicly-traded company.

Of course, if today’s crazy markets have taught company CFOs anything, it’s that a flagging share price can be immediately reversed with the announcement of a reverse split.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.