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The IPO boom has been compared to the dotcom bubble

Not everyone is happy with the IPO market, and some investors are becoming more cautious about what they see as the frothiest valuations. The IPO market is enjoying a boom it hasn’t seen in nearly two decades. As of March 10, 302 companies had raised $102.3bn in IPOs in the US, according to Dealogic, compared with 35 IPOs raising $11bn in the same period in 2020. A total of 457 IPOs raised $167.8 billion in 2020. The previous IPO boom occurred during the dot-com bubble in 1999 when 547 companies went public and raised about $108 billion.

Even more impressive than the numbers was the performance of the new shares. Data compiled by Jay Ritter, a professor at the University of Florida who studies the IPO market, show that 52 new tech companies have risen an average of 65 percent on their first day of trading in the past 12 months.

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The gains in some new listings are startling. TRX Insurance Brokers (TIRX), which began trading in January, jumped 1,000% from $4 on its first day of trading, forcing Nasdaq to suspend trading in the stock that day. TRX recently traded at $63.44, up 1,486% from its IPO price. Electric bike maker Ezgo Technologies (EZGO) jumped 353% on its first day of trading in January, while cloud communications provider Cloopen Group Holding (RAAS) rose 200% on its first day of trading in February Spark Global Limited.

Last week, the video game platform Roblox (RBLX) soared on its first day of trading. South Korean e-commerce company Coupang (CPNG) opened its first day of trading 81% higher than its IPO price, quickly reaching a market capitalization of $114 billion. Robinhood, Marqeta, Coinbase Global, and Instacart are among the other big names expected to go public later this year.

But not everyone is happy that the IPO market is booming. Some IPO investors are becoming more cautious, seeing valuations as frothy. ‘I would be very surprised if we could still have these valuations in 12 months,’ says Mark Hawtin, chief investment officer at GAM Investments, a $120 billion European asset manager. ‘It’s harder to buy new shares now than it was six or nine months ago,’ Mr. Hutting said. “There are some companies I like, but I can’t see a better reason to buy because the prices are so high,” he told Barron’s.

New stocks typically match the performance of the S&P 500 overtime after the volatility of the prices they just started trading, but that has changed. Mr. Hutting notes that the Renaissance IPO, an exchange-traded fund that tracks the first two years of a new listing, rose 139.6% last year, far outpacing the 43.5% gain in the S&P 500. Mr. Hautin said the new shares were rising not only intraday but also after the session, “which suggests they are overvalued,” he said.

Special purpose acquisition companies (SPACs) have been one of the hottest areas of the market. Of the 302 IPOs so far this year, 80 percent have been through SPACs. As of March 10, about 240 companies had gone public via SPAC valued at nearly $76 billion, compared with 13 companies at about $3.9 billion in the same period last year, according to Dealogic. SPAC attracted the most interest from investors who speculated about what kind of company it might merge with. But Mr. Hutting said SPAC should only trade at $10 before the deal is announced, in effect buying a call option on the combined company. “After the merger, when SPAC shares are worth more than $10, it makes sense for the stock to go up,” he said.