Peter Schiff: Fed Fuels IPO Folly

There were two big IPOs last week – DoorDash and Airbnb. Both companies raised over $3.5 billion in their public offerings. In his podcast, Peter Schiff talked about the IPO frenzy. He argues that it has very little to do with funding great business ventures. It’s more about making a quick buck in a market juiced by easy money from the Federal Reserve.

DoorDash started in 2012, and Airbnb was founded in 2008, but neither company has turned a profit in any year they have operated. This big IPO is clearly not about wildly successful companies looking for capital so they can expand. Even before the IPO, both companies raised billions of dollars from venture capitalists.

It’s not like they went public because they needed the money. They have billions and billions of dollars that they’ve already raised. Airbnb is a household name – pretty much all over the world. What do they need money for?”

Originally, IPOs were generally for small companies that were profitable and a business model proven to work on a small scale. IPOs allowed companies to access capital to expand a concept already proven to work.

But as Peter pointed out, we have no clue if Airbnb or DoorDash will ever work.

All that we know is that they’re losing a ton of money.”

In the first nine months of 2020, DoorDash lost somewhere in the neighborhood of $149 million. In fact, DoorDash’s competitors – Uber Eats and GrubHub – haven’t made any money either.

Nobody has proven you can make money with this business model. Yet they’re already going public. And if you think about the fact that DoorDash and Airbnb, they’ve already raised billions of dollars from VCs, and yet they haven’t been able to use that money to turn a profit. So, why is it going to be any different with this new money?”

These companies going public have nothing to do with the traditional old-fashioned IPOs. Peter said the only reason we have IPOs today is so the private investors can cash out.

It is not so the companies can raise new money to expand. They’ve already raised all the money they can. They’ve expanded the businesses as much as they can. And now they want a payday.”

But there’s one thing they haven’t expanded — their earnings. Because they don’t have any.

In effect, you have companies that are simply expanding market share and revenue with their losses subsidized by venture capitalists that know they’ll get a payday when the company goes public. The investors who buy into the IPO don’t really care about profits either. They want to get in on a hot company figuring they’ll be able to sell quickly to somebody else at an even higher price. Nobody is focusing on the lousy fundamental of the businesses.

Initially, when you have the IPO, a lot of funds want it, a lot of investors want it because they know that the price is going to go up. It’s doesn’t matter about the losses or the prospects for future profits. None of that matters in the frenzy of the IPO. Everybody wants to buy it because they know it’s going to go up. The question is who is going to get caught with the stock when the music stops? Because it’s a game of musical chairs. As long as people are bidding up the price and you can have it in your statement at a higher price, well, you look like the hero. But at some point somebody is going to be left holding the bag because the bottom is going to drop out of these companies eventually because they are not viable.”

Some people will call this a failure of capitalism. But Peter emphasized that this has nothing to do with capitalism. This is all about the Fed.

This is the artificially low interest rates that have turned Wall Street into a gigantic casino. And that is where all this money is coming from. That is what is fueling these money-losing companies. That’s why there’s all this cash to fund these businesses because interest rates are so low and money is so cheap that these types of companies can attract all of this money. If they had to pay a market rate for interest, if you didn’t have all this cheap money coming from the Fed, then none of these companies would be able to sustain the type of losses they’ve been sustaining because they wouldn’t be able to get the venture capitalists to finance it.”