Cordell Eminent Scholar at the University of Florida, Jay Ritter, joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss how the IPO market is faring and what to expect in the coming months.

Video Transcript

ALEXIS CHRISTOFOROUS: Look, June is proving to be a pretty exciting time for IPOs. We had big names like Warner Music and Vroom go public. They had pretty stellar Wall Street debuts.

Joining us now to get a temperature check on how the IPO market is faring and what we can expect for the rest of this year is Professor Jay Ritter, the Cordell Eminent Scholar at the University of Florida. Professor, good to see you again.

Look, summer is usually the month of the doldrums for the IPO market, right? Do you think that this pandemic has turned that timeline on its head and that summer might actually be a very hot time for new stock offerings?

JAY RITTER: Certainly there have been some IPOs from the spring that were postponed, but actually June and July, normally you have a lot of activity. August is where there's a slowdown.

BRIAN SOZZI: You know, Jay, do you think there's an early day of reckoning for some of these companies going public right now? They're still not making money. Sure, they're growing their sales by strong rates, but in this environment, they have to make money, and I imagine that would be tough given what we're seeing in the economy.

JAY RITTER: Well, different industries have been affected differently. The health-care sector, we're seeing a lot of IPOs. In fact, this is the eighth year in a row where about 40% of all IPOs are biotech companies. And some of them will be very successful. Many of them will fail to come up with a good drug. But the market is definitely willing to finance the health-care sector.

And the technology sector is doing extremely well. NASDAQ just set a record earlier this week. But on the other hand, other industries are struggling-- obviously transportation, restaurants, et cetera. But delivery services, in particular food delivery, is certainly a hot area right now, and there are likely to be a couple of IPOs in that sector later this year.

ALEXIS CHRISTOFOROUS: Yeah, and we're seeing consolidation in that sector too with Grubhub and Just Eats over in Europe.

I want to get back to something you said in your notes. These recent IPOs did have strong starts, but you say they left a lot of money on the table because the underwriters didn't do a very good job of raising money for the companies. Explain that to us.

JAY RITTER: Yeah. Last week and this week with Warner Music, ZoomInfo Technologies, Shift4 Payments, and Vroom, all of them were underpriced severely. The number of shares sold times the first-day change in price from the offer to the close for those four companies left $1.5 billion on the table.

Now, those are profits to the first-day investors. But on the other hand, that's money that the company didn't raise even though the market was willing to pay a much higher price for the stock than the underwriters set for the offer price.

BRIAN SOZZI: Jay, how can investors spot a good IPO company to invest it in a market that, before today, has gone up in a straight line in the past two months?

JAY RITTER: Well, obviously it depends upon the company and the industry. Not all IPOs jump in price, but what is fairly predictable is if there's strong demand in the week before the company goes public from institutional investors, usually the underwriter then raises the offer price above what the filing price range had been, and typically they don't raise it as much as they could. So it's actually a rather unusual situation where a higher offer price is a really good predictor the price is going to jump on the first day of trading.

ALEXIS CHRISTOFOROUS: Are you surprised, Professor, that we're seeing the interest we are in new stock offerings given all the uncertainty in our economy right now? Because I know the IPO market tends to be a herd mentality, and now that we're seeing some of these issues come to market and do well, might that cause other companies that might have been on the fence to take the plunge?

JAY RITTER: I think that a lot of companies that were on the fence will indeed go public. But once again, it depends upon the industry. The market is very receptive now to certain industries but not to others. In other words, people and investors are looking at each company individual and not just saying this is an IPO. I'm going to buy it or I'm not going to buy it. But is this a company that's got a business model that, even if they're not making money right now, has the potential to be very profitable in the future?

BRIAN SOZZI: Jay, as you look into the back half of the year, what IPO really catches your attention-- you know, that company that can really change the game?

JAY RITTER: Well, a company that doesn't have a lot of public visibility is a company called Snowflake which does big-data software. It's not aimed at consumers, so it doesn't have that consumer recognition. But people are talking about that company, which was only founded five years ago, having a $20 billion valuation. You know, this is an example of the tech sector where a company that's got a really good product is getting a very high valuation.

It's possible that Airbnb might go public later this year. The plan had been for them to be going public until their business fell apart along with other gig-economy companies like Lyft and Uber due to the COVID virus. But it's also changed the situation for Airbnb where they had been pretty much break even on a cash-flow basis, and the recent collapse in bookings has put them into the red temporarily.

ALEXIS CHRISTOFOROUS: All right, Professor Jay Ritter of the University of Florida, thanks for the look inside the IPO market. Be well.

JAY RITTER: You too.