The transfer of wealth from Wall Street to Main Street, once a nebulous concept, received another shot in the arm this month. Coinbase, one of the hottest IPO prospects for 2021, chose the direct listing route. They are not the first, and they won’t be the last this year.
Despite posting a profit of $320 million in 2020, Coinbase made volatility and the possibility of future losses points of emphasis in their S-1 documentation. They also alluded to the threat of a public reveal by the mysterious Satoshi Nakamoto, developer of Bitcoin.
Does that scare you off? Not me. I would have been hesitant to buy on this one if Coinbase filed for a traditional IPO. That’s a path for institutional investors to reap the rewards. With a direct listing and an early morning buy on Day 1, I might have a shot to cash in on Coinbase.
Democratizing Finance by Leveling the Playing Field
The biggest drawback to IPOs is that share prices are already over-inflated by the time independent investors can get involved. With a direct listing, the price is set by trading volume and everyone can participate. That’s the type of democratization needed for a wealth shift.
Unlike the short squeeze initiated by the Reddit Raiders last month, giving all investors a chance to buy at the same time doesn’t require the vilification of hedge funds and Wall Street banks. It simply levels the playing field. Get up early and you can join in the fun.
With an IPO, share prices will often overinflate by 100% or more in the first few days of trading. That’s followed by a sell-off at some point where the original investors cash in, and then we “common folk” get our turn. By that time, gains are minimized, and losses are more likely.
Direct Listings Can Flatten the Volatility Curve
Direct listing worked for Asana (ASAN). They went public in October last year. The opening price was $25.91. It peaked at $41,42 in February and opened this morning at $30.17. Share prices never over-inflated and investors have yet to take a significant loss.
Palantir Technologies (PLTR) has had a similar journey. They listed at $9.20 in October, peaked at $35.18 on January 29th, and opened this morning at $23.77. The net gain since inception is 149.35%, but volatility has been minimal. Think rolling hills instead of jagged peaks.
Compare that to IPOs from the same time period. Snowflake (SNOW) opened at an over-inflated $328.79 in November, climbed to $387.70 in just under a week, and has been dropping steadily ever since. They’re currently at $219.71 and still in downtrend.
Ncino (NCNO), a strong buy recommendation from Mad Money’s Jim Cramer, hasn’t done much better. They opened at $71, bounced all over the map for three months, and are now in freefall. They’ve gone from $83.93 in February to $62.20 this morning.
Minimizing Risk with More Accurate Pricing
If you do the math on all direct listings from 2020, the delta between direct listing prices and current stock prices averages roughly 30%. IPOs, as exhibited by the numbers above, can vary 100% or more. That’s a fairly significant risk for independent investors.
Simply put, by the time an IPO reaches the general investing public, the price is no longer accurate. It’s already moved due to the influx of institutional dollars. With a direct listing, the pricing is set closer to the actual value because it’s determined by trade demand.
Don’t get me wrong. I’m not saying that you should never buy into an IPO. If the opportunity is there and the numbers look good, go for it. Just be aware that you might be overpaying. It’s often best to wait until share prices have fallen after an initial uptrend.
Direct Listings to Watch for in 2021
The two hottest prospects in the direct listing market are UiPath and Databricks. Both have multi-billion-dollar valuations and have raised significant capital in recent financing rounds. They’re also well-covered on other websites, so I won’t get into the weeds about them.
My recommendation in this space is Roblox. The online gaming technology firm announced in January that they would be going public via direct listing. They currently have 150 million active users and posted earnings of $250 million in 2020, double what they did in 2019.
Roblox has a valuation of $4 billion, but Reuters estimated it would be $8 billion for an IPO, too rich for my blood. If they go direct, as they’re claiming they will, the valuation won’t overinflate the share prices. Those will be more accurately set by the market. I’m buying if that happens.
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