Week in Review - This is actually a bubble now, right?

Saturday, December 12, 2020 • By Lucas Matney

Howdy, this here is Week in Review. Last week, we talked about how Wall Street responded to the Slack deal, this week I’m trying to understand where reality starts and ends in public markets, and truthfully I’m not having much luck.

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The Big Story

This past week offered a couple massive moments for investors in Silicon Valley that have placed bets on tech startups. One was the IPO of DoorDash, which had a private valuation of $16 billion in its last fund raise this summer, and today closed at a market cap of $56 billion. The other was the IPO of Airbnb, which raised at an $18 billion valuation this year when it seemed poised to be one of tech’s biggest losers of the pandemic. Today, Airbnb’s market cap sits near $83 billion.

Now, public tech stocks have had a wild few months breaking through expectations, so the story isn’t just companies getting rich. The story is how much those prices are disconnected from the numbers.

Both of those tech stocks had wildly distorted first-day trading pops that sent the share prices skyrocketing. The bankers staring at financials and talking through the S-1 with investors didn’t seem to have wild enough imaginations, causing these companies to leave billions on the table.

And take this week, when an analyst at JP Morgan upgraded Tesla’s target share price to $90 from previous estimates. Doing so signified that the bank believes that Tesla’s situation has improved and that things are looking up. The thing is that Tesla is trading at $610, up nearly 9X year-over-year. Tesla has always been an outlier of outliers, but their wild year is being replicated across the board.

For plenty in the tech industry, this week was the first time the word “bubble” came out of their lips in a while. Much like when any company with blockchain in their name was surging during 2017’s bitcoin rally, seemingly any tech stock is having a banner year. Even GoPro’s stock has seen major gains; it’s nearly quadrupled in value since it hit an all-time-low in March.

The investors behind the startups, founders behind the startups and bankers behind the startups are all aware that current market caps are pretty well disconnected from current realities and, even if they’re pricing in potential, are doing so in a way that ignores how the value of stocks on public markets are generally calculated. With the past as a guide, at some point money will matter again and investors will discover that these companies are not doubling the sizes of their businesses year-over-year or reaching anywhere near the growth metrics they would have to in order to justify these market caps.

Public markets are unendingly weird and there are often weird cycles but something about this feels historic, and I think the shock investors felt after a couple high-profile IPOs this week codifies that feeling a bit more.

Image Credits: Adrian+Los/EyeEm / Getty Images

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