Why Affirm Would Delay Its IPO Amid A Hot Market

It might seem the recent huge gains by Airbnb and DoorDash on their first trading days following initial public offerings would have BNPL giant Affirm Holdings Inc. speeding up its own planned IPO. But the company is reportedly actually doing the opposite.

The Wall Street Journal cited unnamed sources over the weekend as saying that Affirm decided to push its IPO off until at least January, apparently to let markets calm down and avoid the massive first-day “pops” Airbnb and DoorDash recently saw.

Airbnb’s stock soared almost 113 percent on its first trading day, closing at $144.71 after underwriters priced the IPO at $68 a share. DoorDash did almost as well, rising 86 percent to $189.51 after underwriters priced the shares at $102.

Affirm is the second hot IPO candidate to reportedly put off going public following Airbnb and DoorDash’s huge first-day gains. The Journal recently quoted unnamed sources as saying that videogame maker Roblox Corp. made a similar decision in recent days.

The paper cited Roblox CEO David Baszucki as writing in a company memo that “based on everything we have learned to date, we feel there is an opportunity to improve our specific process for employees, shareholders and future investors both big and small.”

Why would such first-day gains prompt companies planning IPOs to slow down their offerings rather than speed them up to strike while the market is hot?

Simple — big “pops” are great for investors who participated in the IPO or bought shares as soon as the new stock began trading and sold out quickly, but they actually do nothing for the underlying company. That’s because firms going public only get the IPO price set by underwriters — not any of the “pop” that occurs the day the stock opens for trading.

Instead, the extra money goes to investors who own or quickly buy the stock, not to the underlying businesses themselves. The billions of dollars in extra market capitalization that Airbnb and DoorDash saw on their first trading days didn’t go to those firms at all. Arguably, all the big pops meant was that underwriters underestimated the companies’ values and priced the shares too low.

Why are well-known stocks like Airbnb and DoorDash shooting up in value despite a global pandemic, a U.S. recession, massive economic uncertainty and high unemployment?

Some market watchers attribute the gains to what’s called the “Robinhood Effect.”

Millennial-friendly investing platform Robinhood has grown by leaps and bounds during the pandemic, making it easy for consumers with little or no investing experience to jump into the market. Some experts believe these unsophisticated investors are snapping up stocks of companies they’re familiar with, driving the share prices higher.

The theory goes that this becomes a self-fulfilling prophecy. Rubes overpay for Airbnb, and in doing so, they drive Airbnb’s price to the stratosphere — thereby making novice investors lots of money and prompting them to invest even more.

Experienced investors see the big gains and also pile into popular names like Airbnb, adding even more fuel to the fire. Everyone makes money … until reality eventually sets in and hot stocks cool way down.

There’s some empirical evidence to back this theory up.

Consider research from Chartered Financial analyst Nicholas Abe, chief operating officer of Boosted.ai, an artificial-intelligence firm that helps institutional investors add machine learning to stockpicking. Abe found that Robinhood investors’ “minimum dollar holdings” have jumped 396 percent since the market hit a “COVID low” earlier this year.

“[That] makes it seem pretty obvious that Robinhood investors are having a major impact on the market,” he wrote in a recent column for MarketWatch. “I would personally expect these trends of Robinhood investors outperforming the market and the number of Robinhood investors increasing to continue until the market goes ‘risk-off.’ Until then, it might not make sense to bet against Robinhood.”

But not everyone agrees. Barclays analyst Ryan Preclaw recently crunched the numbers and found that Robinhood investors are buying plenty of underperforming stocks as well as overperforming one, as per CNBC.

For example, he found that the number of Robinhood accounts holding shares of cosmetics firm Coty – the S&P 500’s worst-performing name since mid-March — has risen by sixfold. Preclaw wrote in a note to investors that that’s a much bigger gain than seen for hot stock pick Amazon.

“Just because two things happen at the same time doesn’t mean one causes the other,” Preclaw wrote. “And while it’s true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase.”

Either way, Affirm is reportedly not only holding up on its IPO to avoid a big first-day run-up, but contemplating changes to its offering to deflate any big pop before it occurs.

The Journal cited unnamed sources as saying that could include selling a larger portion of shares to the public than originally planned, as well as changing the mix of shares that the company, employees and existing shareholders would offer.

Making a bigger supply of stock available should reduce a pop due to the law of supply and demand — and it should also give Affirm a greater share of any cash that changes hands as part of the company’s IPO.