Programming note: Money Stuff will be off tomorrow, back Monday.
IPOs, more or less
Two big companies went public yesterday. One is Roblox Corp., which opened for trading yesterday morning through a direct listing. Instead of a traditional initial public offering, in which Roblox would sell stock to big institutional investors on Tuesday evening and then have it open for trading on Wednesday, Roblox skipped that first part. It didnt sell any stock. The stock just opened for trading on Wednesday; people who already owned itearly venture capital investors, employees, etc.could sell in ordinary transactions on the stock exchange. It
went pretty well I guess:
Roblox is one of the few companies that have gone public through a direct listing, an alternative to an initial public offering in which the shares begin trading without the company issuing new stock.
The companys shares, which opened trading at $64.50 apiece, rose to $71.40 at 3:06 p.m. in New York, giving Roblox a market value of more than $39 billion. The companys fully diluted valuation, including restricted stock units and employee options, is about $46 billion, making it one of the most valuable companies to go public during the pandemic.
It closed at $69.50; it opened at $74.93 today. Thats a modest gain over its opening trade, but of course that doesnt matter. Roblox didnt sell stock in the opening trade, so that numberthe $64.50 opening priceisnt particularly important to Roblox. If the stock shot up to $100 yesterday, Roblox would not have left money on the table. There is no IPO pop, for Roblox, because it didnt do an IPO.
lot about IPO pops. The complaint is that the investment banks that lead hot IPOs (1) allocate all the shares in the IPO to their favorite institutional investor clients, big Wall Street investment firms that reward the banks with lots of trading business, and (2) systematically underprice IPOs, so that those institutional investor clients get instant windfall profits when the stocks open for trading and inevitably trade up. Meanwhile the company doing the hot IPO leaves money on the table; it sells stock for below its market value. Wall Street banks systematically transfer value from startups and their venture-capital investors to Wall Street investors.
To fix this, venture capitalists often argue for direct listings, which avoid this transfer of value, at the cost of not raising any money for the company going public. But Roblox did raise money. Not yesterday; in January. And Martin Peers at the Information
makes a good point:
Roblox stock soared on its first day as a public company, closing a touch below $70 and valuing the gaming firm at about $38 billion. Assuming the stock stays that high, it means a very quick profit for venture capitalists who bought stock in Robloxs last private fundraising at $45 a share in January. And that points to a flaw in the main argument advanced to promote direct listings, the route Roblox used to go public.
According to that argument, a direct listingwhere a company lists its existing shares, without selling new stockavoids the mispricing inherent in IPOs. Proponents point to the first-day pops we often see when a stock starts trading, soaring 50%-100% above the IPO price, guaranteeing a very fast profit for institutional investors who bought shares in the offering just the night before. IPOs are seen as leaving money on the table for the company.
How is Robloxs situation that different?
I mean, Ill tell you the answer: Roblox sold stock to venture capitalists at $45, and then it traded up in public markets to $70. In a traditional initial public offering, a company sells stock to mutual funds at $45, and then it trades up in public markets to $70. Venture capitalists are not happy when mutual funds get underpriced stock: It dilutes existing shareholders and leaves money on the table. Venture capitalists are of course perfectly happy when venture capitalists get underpriced stock; thats the business they are in.
This is not just a matter of, like, East Coast vs. West Coast. When Roblox did its offering in January, it got to pick its investors. If it had instead done an IPO, the banks would have picked the investors. That is not strictly true, of course; even in a traditional IPO, the company gets the final say over who gets an allocation of stock. But traditionally the investment banks opinion carries a lot of weight there, and the company is generally less familiar with the public investors in an IPO than it would be with the VC investors in its private fundraising rounds. So the stereotype that banks allocate shares of hot IPOs to their own favored clients has a lot of truth to it.
But the argument against the traditional IPO is not really that founders and funders of private companies dont like mispricing, or leaving money on the table, or large quick gains for favored early investors. Its just that they want to allocate those gains to their friends, not Wall Streets friends.
The other company that went public yesterday is Coupang Inc., which did a traditional IPO that priced last night. As of 11:30 a.m. today it had not opened for trading, so I dont know if it will have an IPO pop, but so far
all signs are that it went well:
South Korean e-commerce giant Coupang Inc. and a group of existing shareholders have raised $4.6 billion in an enlarged offering, making it one of the biggest listings by an Asian company on a U.S. exchange.
Coupang priced 130 million shares at $35 each on Wednesday, above a marketed range of $32 to $34 apiece, the company said in a statement.
The retailers IPO is the biggest on a U.S. exchange since Uber Technologies Inc. raised $8.1 billion in 2019, according to data compiled by Bloomberg. Coupangs offering is also the biggest by any Asia-based company in New York since Alibaba Group Holding Ltd.s $25 billion listing in 2014, the biggest ever in the U.S.
Coupang and its existing shareholders had planned to sell 120 million shares. The previous range had been boosted from $27 to $30 earlier, signaling strong demand from investors.
Thats a hot IPO: There was enough demand that the company was able to upsize it and raise the price. And by 11:30 a.m. it was indicated to open at $61 to $63, so it does seem like there will be a big pop.
All normal enough. But heres the unusual thing about Coupang. Apparently, of the hundreds of investors who put in orders to buy shares in the IPOmany of whom did roadshow meetings and put in work to understand the company and come up with a pricefewer than 100 were allocated any shares, with most of those shares going to about 25 accounts handpicked by Coupang. Coupang apparently kept tight control over the allocation, choosing its investors itself rather than deferring to its underwriters (led by Goldman Sachs Group Inc.). Now those favored investorsinvestors favored by Coupang, not investors favored by Goldmanwill benefit from the IPO pop. Everyone else, who put in the work and decided they wanted to own Coupang, will have to buy in the aftermarket, from those initial investors, and pay up to do so.
Obviously Coupang has left money on the table, but who cares? Coupang underpriced its IPO, but the beneficiaries of the underpricing are the existing investors that it wanted to benefit.
There are two points here. One is that pricing an IPO efficiently so as to wring every last dollar out of the capital markets is not a particularly real or important goal for most companies that are going public. The people who buy your stock the moment before it becomes publicly tradedin an IPO, in a pre-direct-listing funding roundare taking a risk, and they expect to be rewarded for the risk, and companies are generally happy to reward them. They just want to reward the right people.
The other point is that companies can do this! This is just a thing you can do! If you dont want to allocate an IPO to big Wall Street investors, you can allocate it to whomever you want. (Assuming that theres enough demand to do that, which requires (1) being a hot company and (2) underpricing the IPO to get sufficient demand without big institutional accounts.) We talked in January about
hybrid IPOs, which are just regular IPOs except the company looks really hard at the order book and decides to price the IPO based on how much demand it has. This is like a hybrid IPO, except instead of maximizing price the company instead maximizes allocations to its own favored investors.
I dont know
what were doing here:
GameStop Corp. ended the session higher after a roller-coaster session that echoed the wild swings in January when the company first rattled markets.
Shares closed up 7.3% to $265 in New York, extending gains for a sixth day, its longest winning streak since September. But it was not a smooth ride for the video-game retailer. At one point, shares whiplashed violently, with the stock bouncing between $348 and $172 in about 22 minutes, triggering multiple volatility halts. Volume also exploded, with over 70 million shares changing hands, almost double whats been seen in the past week.
JJ Kinahan, chief market strategist at TD Ameritrade, compared the recent action on GameStop and investors willingness to pile into the the shares to firefighters running into danger.
I think youre running into a burning building — thats truly the easiest way to say it, he said. You can be a hero but you can also be the guy who theyre holding a funeral for, he added.
One thing that I want to say about that article is that it was not at the top of Bloombergs home page. GameStop is not on the front page of todays
Wall Street Journal, though it is on the front page of the
Business & Finance section (below the fold). Its not on the home page of, I dont know,
Good Morning America (5 questions left unanswered after Prince Harry and Meghans interview with Oprah). When GameStop got as high as $483 in intraday trading in the last week of January, it was the biggest story in U.S. financial news, maybe the biggest story in all of U.S. news. It was covered everywhere; there was an absolute national craze for GameStop. The Reddit forum at the center of the craze, r/WallStreetBets, was adding
a million users per day, as new people were discovering the story;
600,000 people downloaded Robinhood, the preferred stock trading app for buying GameStop, in one day, Jan. 29.
Now GameStop has receded back into a niche Reddit pastime. The growth of
WallStreetBets has slowed; it has added only a million or so users in the last five weeks. The most obvious source of new demand for GameStop stockregular people who learned about it when it was the lead story on every TV news broadcast, decided to check out WallStreetBets, got hooked and bought stockseems to have dried out, or at least slowed down. And yet the stock briefly hit $348 yesterday, a $24 billion market capitalization, up from $40.69 three weeks ago.
What is going on? One story that you could tell is that maybe there arent as many buyers now as there were in January, but there also arent as many sellers. Back in January, there were a lot of fundamental active equity managers who owned GameStop stock, some of whom had owned it for a long time. Then the stock shot from $20 to $400 in a few weeks, and every sensible professional money manager presumably
dumped all their stock for a huge gain. When the stock then fell back to $40, there was no particular reason for them to get back in: The stock was still pretty rich compared to where it was trading in 2020, and anyway the whole situation was so weird and volatile and Reddit-driven that it seemed sort of unprofessional to get involved. The investors who are left are (1) index funds, who cant really sell, (2) insiders, who also cant really sell (because theyre in an
earnings blackout), and (3) retail investors who came to the stock from Reddit and pride themselves on their diamond hands, their unwillingness to sell as the price goes down (or up).
Meanwhile there were a ton of short sellers in January, and not so many now:
Volatility returned despite short interest being at the lowest level in more than a year. Roughly one-fifth of shares available for trading are currently sold short, according to data compiled by S3 Partners. That compares to a peak of more than 140% in January.
Theres nobody left to sell: Long fundamental institutional investors are gone, and no short seller is going to touch this thing after
what happened to the shorts in January. So the price can shoot up even without the same wall-to-wall attention from buyers that GameStop got in January.
That Bloombeg article is full of interest. There is some stuff about fundamentals (about board member Ryan Cohen leading a new board committee focused on its digital transformation), and some analysts gently doubting that the fundamentals have improved 550% in three weeks. But there’s also stuff like this:
Keith Gill, the trader known as Roaring Kitty, weighed in on Twitter with a post from the British comedy series Fleabag. The tweet served as a rally cry for some Twitter and Reddit users who saw it as a signal to buy the dip.
that tweet. See, Keith Gill is a guy on Reddit who made a lot of money buying GameStop, and now he is famous, and when he tweets a reaction GIF, people interpret it as an esoteric signal that they should buy GameStop stock. Try to imagine a GIF that Keith Gill could tweet that people would interpret as a signal to sell GameStop stock. The
dancing pallbearers? Keith Gill has tweeted that the shorts are going to get carried out, time to buy!
I dont know. The story of GameStop might be that, over the course of late January and early February, it migrated from being a regular stock, with institutional investors and short sellers and the whole normal ecosystem of the stock market, to being a pure Reddit plaything, with an investor base made up of (1) diamond-hands-y Redditors and (2) locked-up insider and index-fund holders, and with any sensible short seller too terrified to get involved. It has just become unmoored from the usual rules of financial markets, in which stock prices are at least loosely tied to ideas about future cash flows and fundamental value. Redditors want to trade it, and no one else does, so it has become its own special thing.
Also this is very funny:
Earlier on Wednesday, short-seller Muddy Waters
tweeted out a clarification that earlier comments made by Carson Block about the video-game retailer on CNBC were sarcastic. Block had said GameStop is a better company now than it was in December, which the tweet said was purely sarcastic.
Sarcasm, the absolute bane of securities disclosure. Its a little surprising that Elon Musk hasnt yet gotten in trouble with the Securities and Exchange Commission for a tweet and defended himself by saying it was sarcasm. (Though that almost happened in his
defamation trial.) If I were a professional short seller, or a long/short investor, I would make constant use of sarcasm. I think this company is great and its stock is going to double, Id say, and youd have no idea what I meant.
We have talked a
times about this silly trade idea: Some hedge fund that is hated by WallStreetBets could take a long position in a stock and then disclose a short report about that stock; outraged Redditors would buy the stock to squeeze the shorts, but the hedge fund would actually be long and make a profit. You could do that with sarcasm. I hate GameStop and think it is going to zero, youd tweet, but youd actually own the stock; Reddit would get mad at you and buy up the stock, making you a nice profit. If anyone complained that you misled them, you could say what, I was being sarcastic, wasnt that obvious?
A non-fungible token sold at auction for $69 million, nice. The thing about art is that it is a matter of subjective aesthetic judgments. Beeple seems cool but, to me, buying a unique blockchain-based pointer to a
bunch of digital images that are freely available on
his Twitter is not that aesthetically appealing. Id rather buy
But some people obviously think the whole NFT thing is attractivenot necessarily, or not only, that Beeples actual images look nice, but that the notion of owning digital art on the blockchain is itself aesthetically appealing. You cant hang it on your wall to impress visitors to your house, but you can tell people at cocktail parties (or on Clubhouse panels) oh yeah Ive been buying a lot of NFTs, and perhaps that will impress them more, or at least it will impress the correct people in the correct ways. Maybe if you have a Caravaggio on your wall youll get invited to join the right art museum boards, but if you have a Beeple on your blockchain youll be invited to join the right Series A rounds. Or the right art museum boards, what do I know.
And because we are talking about art, those subjective notions of aesthetic and social appeal carry a lot of weight. Like, theres nothing else; you cant eat the Beeple, or the Caravaggio, and neither of them generates any cash flow. Its just (1) does it make you feel good to own it, (2) do you think it will make other rich people feel good to own it, so it will retain its resale value, and (3) will you get social recognition (as an art collector or blockchain visionary or patron of culture or patron of technology or ostentatious rich person or whatever) for owning it? There is no real underlying value to anything in the art market; all the market value comes from how it makes you look and feel, and how you think it will make other potential buyers feel. If people feel good about the aesthetics of NFTs, thats not really any crazier than feeling good about the aesthetics of oil paintings.
So, yeah, NFTs, $69 million, why not. Seems fine. I still dont get GameStop though.
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 I am being unfair here; surely the main answer is January was a long time ago, the stock could have gone down or the IPO could have failed, and making a 40% return for taking two months of risk on a private company is not that crazy for a venture capital investor.
 Incidentally, you could
tell a similar story about SPACs. What is a special purpose acquisition company if not a way to reallocate the IPO pop from (1) traditional institutional investors chosen by Wall Street banks to (2) venture capitalists who sponsor SPACs? Its not as clean as that; most SPAC deals involve big institutional investors buying at the SPAC price, etc., but still kind of feels like that. The IPO pop, in a SPAC, happens *before* the SPACs target goes public; the people who benefit from the pop are not traditional IPO investors.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.