2020 was supposed to be a blockbuster year for initial public offerings (IPOs)…
Rumors swirled about which companies would choose to go public this year.
Some of the top contenders were Airbnb, the hit vacation rental company… DoorDash, the popular on-demand food delivery service… and Robinhood, the financial services app that was the first to offer no-fee trading. All of these companies had been expected to go public in 2020.
It was time.
After all, Robinhood is now seven years old and valued at $8.6 billion.
Started the same year as Robinhood, DoorDash is valued at $16 billion.
And Airbnb? Founded in 2008, the company is now valued at $31 billion.
Thanks to record levels of venture capital (VC) money flowing into private companies in recent years, all these companies have delayed going public.
In 2018, for example, venture capital firms invested $156.5 billion across 8,661 deals. That’s the most VC investment in a given year ever. That’s enabled companies to stay private… And it’s created a backlog of exciting companies going public.
But this IPO backlog was expected to break up in 2020.
And then COVID-19 happened.
An IPO “Pause Button”
Readers are likely already aware of the many ways the pandemic has upset plans for this year. I’m sure more than a few of us had to reschedule a vacation or other travel plans due to the lockdowns. Well, the IPO market has been one more casualty.
With the volatility in the stock market and the general uncertainty for how lockdowns and supply chain struggles will affect companies’ bottom lines, IPOs ground to a sudden halt. No one wanted to go public under these conditions. It was like someone hit a giant “pause” button.
And the backlog of companies has grown even more as a result…
But now, the clouds are beginning to clear. After falling steeply back in March, the market has experienced a remarkable rally… The Nasdaq Composite is up about 15% year to date. And that means companies are beginning to feel out the potential of an IPO once more.
Just last month, we saw digital marketing company ZoomInfo debut with the largest tech IPO of 2020 thus far.
And get this… Even though the stock was priced at $21 a share, it opened at over $41. It then rose to a high of $53 over the course of the month. This certainly reflects optimism for the economic recovery and Wall Street’s desire for things to return to normal.
This is very bullish for future tech IPOs this year. In fact, companies in the pipeline are going to feel emboldened to move forward on the back of ZoomInfo’s strong IPO.
And I think that bullishness will be even more apparent in one specific sector: biotechnology.
The Biotech IPO Boom
Here’s something that may surprise us…
Of all the traditional IPOs this year, 58% have been biotechnology companies. Collectively, they’ve raised nearly $10 billion for drug development.
The best part?
Unlike many companies these days, many biotechs are still very young when they go public. Very often, they are in their earliest stages of development.
When Amazon went public in 1997, the company had an enterprise valuation of just $438 million. And shares traded for a split-adjusted $1.50.
Compare that to a company like Uber, which held its IPO in 2019 and was valued as high as $75 billion.
Today, biotechnology companies go public at a valuation comparable to Amazon’s, not Uber’s.
That means that most of the potential gains are still in front of us…
Why do biotechnology companies go public so early?
These companies are developing therapies that will take years to develop and test. Perhaps, one day, they will receive approval from the U.S. Food and Drug Administration.
In order to raise the capital to fund this lengthy drug development, biotech companies must go public to ensure they have enough money to reach the finish line.
And this creates a fantastic opportunity for investors to get exposure to bleeding-edge companies at some of the lowest valuations.
And believe it or not, COVID-19 has actually accelerated the biotechnology sector.
An “Acceleration Phase”
Suddenly, the world has woken up to the potential of biotechnology.
Because of COVID-19, every venture capitalist and private equity house has realized how powerful these technologies are and how quickly biotech can move.
We’re going to see an acceleration in biotech investment, early stage companies, and IPOs as a result.
All of the early stage biotech companies that hit the “pause button” on their IPOs are now lining up to get out. And thanks to the increased attention given to biotech, the returns on some of these investments will be larger than anything we’ve seen in recent history.
For this reason, I’ve referred to what we’re witnessing as an “acceleration phase” for biotechnology. More early stage companies are coming to market. The returns are larger. And they are happening faster.
The investment potential here is unlike anything I’ve seen.
That’s why on Wednesday night, during a special investing seminar, I revealed everything that I’ve learned about these biotech stocks. If you’re at all curious how to profit from the current biotech boom, I encourage you to watch the replay right here.
Regards,
Jeff Brown
Editor, Early Stage Trader