What You Need To Know This Week — December 12th, 2020
What You Need To Know This Week
A weekly recap to keep you informed on the most important events this week impacting markets, business, tech and the global economy.
INVESTORS PARTY LIKE IT’S 1999 AS AIRBNB SHARES MORE THAN DOUBLE IN THEIR STOCK MARKET DEBUT
Airbnb shares surged 113% in their long-awaited stock market debut this week. The San Francisco-based home sharing company initially priced its IPO at $68.00, which was increased from its initial indicative pricing range, only to see its stock close at $144.71 on its first day of trading. The shocking share price increase catapulted the profitless firm to a nearly $100 billion valuation, which is more than threefold its value from the spring when it conducted a rescue financing due to a pandemic-led drop in business. For the first nine months of 2020, Airbnb had a net loss of US$697 million on revenue of US$2.5 billion, pegging its valuation around 20x next year’s revenue. Airbnb’s eye-popping valuation is indicative of a market that is desperate for growth irrespective of profits, a continuation of a trend that has dominated for years.
DOORDASH STOCK SKYROCKETS IN ITS IPO AS THE MARKET CRAVES TECH OFFERINGS
After pricing its initial public offering at $102.00, DoorDash saw its shares skyrocket 80% to $182.00 as investors clamoured for shares once they opened for trading. The 7-year-old meal delivery company represents the market’s eagerness to ascribe tremendous valuations to money-losing businesses, given DoorDash’s $72 billion market capitalization and its losses of $667 million and $149 million in 2019 and 2020, respectively. Given the enormous valuation of DoorDash and its competitors, Uber Eats and GrubHub, investors must believe that the intensely competitive business models will turn profitable at some point. Nonetheless, market participants are rewarding growth in the face of never-ending red ink with no real prospect of near-term profits in the current environment.
ELECTRIC VEHICLE DEALS PROLIFERATE AS FOUR SPACS ANNOUNCE EV MERGERS
With the bull market comes speculative excess. In addition to tech IPOs, what area of speculation in the current environment is the SPAC market. Specifically, investors are starving for electric vehicle companies and the special purpose acquisition company is the perfect mechanism to meet this voracious demand. This week there were four electric vehicle and EV-related SPAC business combinations, all of which skyrocketed on the announcement. Cannabis blank check company Collective Growth announced a merger with LiDAR sensor firm Innoviz Technologies, sending its shares up more than 31%. GigCapital3 struck a deal with Lightning eMotors and saw its stock rally 28.5% over the past couple of weeks. SPAC Forum Merger III announced a business combination with EV manufacturer Electric Last Mile, on which its shares rallied 27.4% this month. TPG Pace Beneficial Finance signed a deal with EV charging company EVBox and its stock more than doubled overnight. The Accelerate Arbitrage Fund (TSX: ARB) is long a number of these SPACs, having acquired them before the deal announcements.
Notable Insights, Articles, Podcasts, and Tweets
Listen to Chamath Palihapitiya, CEO of Social Capital, chat about how he plans to build the next Berkshire Hathaway on the Capital Allocators podcast.
Another prominent institutional investor has made a 9-figure allocation to Bitcoin. This week, Massachusetts Mutual Life Insurance announced a $100 million investment into the digital currency. What happens to the price once it is a default allocation of most institutional investors?
Software company MicroStrategy issued $400 million of convertible bonds to buy Bitcoin.
Canadian biotech AbCellera went public and its stock almost tripled in its IPO. The Vancouver antibody developer is now worth nearly $16 billion. The company’s valuation is up 40-fold since a private financing round last spring, establishing AbCellera as Canada’s largest biotech firm.
Want a 9-minute primer on how merger arbitrage works? Check out Julian’s investor education video with AIMA on merger arbitrage.
Anatomy of a Hedge Fund SPAC Trade: “Free lunches don’t last long in finance but hedge funds have identified a temporary exception to that rule: the special purpose acquisition company, or SPAC.”
The SPAC Pop Is Now A Thing: “For now, with public markets riding high, SPAC momentum continues. And the SPAC pop, it appears, will continue to be a thing.”
SPAC arbitrage “is a very low-risk trade if done correctly… As long as you buy the SPAC at or below the cash value, we are virtually guaranteed a return in any scenario.”
There is $4 trillion invested in model portfolios, which are nearly 100% invested in just two asset classes, stocks and bonds. These should contain an alternatives allocation of 20%, which represents an approximate $1 trillion opportunity.
“Investors are buying apartment buildings at valuations never seen before.” Monetary and fiscal stimulus continues to drive the price of risk assets.
When allocating to external managers, smaller is better. Firms with small assets under management have a competitive advantage as smaller funds earn higher returns on average.
Investing must always be approached from a long-term perspective: “Over any 10-year window, you should expect an active manager to underperform [in] three or more years.”
Alternative investments are “critical to delivering performance in a low-yield world,” yet most investors are markedly underweight alternatives.
Merry Christmas and Happy Holidays from the Accelerate Team. This column will be the last What You Need to Know This Week of 2020, and we will be back with our weekly insights in 2021.
