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How C3.ai beat DoorDash and Airbnb on IPO first-day return

Quantitative Hedge fund strategy to gain Alpha based on the IPO pricing anomalies.

Written by Leonardo Hadi
· 4 min read >
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Disclaimer

C3.ai went public last week along with Airbnb and DoorDash. The IPOs showed a staggering 100+% first-day return amid the pandemic. C3.ai managed to lead the first-day IPO return with a 120% surge despite low popularity.

C3.ai is an enterprise AI software company founded by Tom Siebel in 2009 in Redwood City, California. Tom Siebel is a graduate of the University of Illinois at Urbana-Champaign. He is the founder of Siebel Systems, the pioneer of Customer Relation Management (CRM). The system later became the $200 billion company’s core business Salesforce. He sold his first company to Oracle for $6 billion in 2006.

This article will discuss the quantitative hedge fund strategy to forecast the IPO returns in the short and long terms. It also analyzes an investment strategy based on the IPO pricing anomalies and answers the following questions:

What is C3.ai?

How can C3.ai beat the popular technology companies like Airbnb and DoorDash on the first-day IPO return?

How to use the quantitative hedge fund method to forecast the IPO winners in the short-term and long-term?

What is the optimum quantitative hedge fund strategy to gain Alpha based on the IPO pricing anomalies?

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What is C3.ai?

C3.ai, Inc. (NYSE: AI) is a technology company that specializes in artificial intelligence (AI) applications for enterprises. The AI applications collect big data, provide predictive analytics, trigger alerts, and apply solutions to meet the customer’s goals.

The company initially developed AI technology for the oil and gas industry to improve reliability and increase production output. However, the business quickly pivoted to other sectors because the energy industry struggling due to low oil prices. Today, C3.ai’s enterprise AI technology has expanded into aerospace, defense, manufacturing, healthcare, utilities, banking, transportation, and retails [1].

C3.ai brings enterprise AI technology to the market using Microsoft Azure’s cloud computing platform. The customers can customize the interface without writing codes and tailor the application like improving preventive maintenance programs.

Microsoft bought $50 million worth of C3.ai’s shares before the IPO, according to the prospectus [2]. The stock is worth more than doubled after a massive success on the IPO day. The technology giant began investing in companies just before going public in 2018 with a concurrent private placement strategy. Salesforce popularizes the approach and gains significant returns by investing in companies like Zoom, Dropbox, and Snowflake.


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C3.ai’s AI software can run in other cloud platforms despite a strategic partnership with Microsoft. The company reported a $41.3 million revenue and a net loss of $14.9 million for the last three quarters. Most of its revenue comes from the oil and gas industry.

Quantitative strategy to forecast IPO return

Da, Engelberg, and Gao (2011) research paper showed that the abnormal Search Volume Index (SVI) from Google Trends provides data to create a quantitative hedge fund model to forecast the IPO returns.

Google Trend Search Volume Index (SVI) results for Airbnb, DoorDash, and C3.ai since 12 months before the IPO day.

The journal outlines that high Search Volume Index (SVI) pre-IPO and high stock return on the IPO day will result in price reversal within the year. Airbnb and DoorDash had a significantly high Search Volume Index (SVI) 12 months before the IPO. The Search Volume Index (SVI) jumped on the IPO day and continued to climb for both Airbnb and DoorDash shown in the dash lines. But, there was barely any Search Volume Index (SVI) and only a small increase on the IPO day for C3.ai.

Airbnb and DashDoor captured many retail investors’ attention long before the IPO day. This situation created attention-induced price pressure Barber and Odean’s (2008) for the IPO target price. Airbnb initially set the valuation target of $35 billion a couple of weeks before the IPO, then revised the target to $68 billion and hit $85 billion market capitalization on the IPO day.

Read more: Airbnb goes public on December 10 seeking a valuation of $35 billion

Airbnb and DashDoor’s shares increased towards the IPO day as more retail investors paid more attention and created higher expectations for the IPO price. The over-enthusiasm for Airbnb and DoorDash stocks drove the stocks’ demand and resulted in higher valuation on the IPO day.

On the other hand, C3.ai did not receive much attention from the retail investors. Therefore, attention-induced price pressure did not influence the valuation of C3.ai’s stock. This condition allowed a favorable stock valuation and gave a minimal price premium on the IPO day. The shares of C3.ai surged during the IPO day and continued to climb for the next couple of days. The stock was well priced, the market saw an undervaluation opportunity compared to other IPOs, and responded positively.

However, the stock of Airbnb and DoorDash continued to decline the following days after the IPO as the demand from the attention-induced price pressure dissipated. Airbnb and DoorDash’s stock prices were overvalued and had a significant price premium driven by the high Search Volume Index (SVI) before the IPO. The stock prices now reversed to their fundamental stock valuations.

Long-term forecast of the stock prices

The graph from the “In Search of Attention” research paper below shows the comparison of IPO stock returns performance in the short-term and long-term based on the level of Search Volume Index (SVI) before the IPO day.

Panel A shows that the high pre-IPO Search Volume Index (SVI) yields a high return on the first day of IPO. However, high pre-IPO Search Volume Index (SVI) and high first-day IPO return, shown in Panel B, result in price reversal and stock underperformance in the long-term.

What does this mean for the C3.ai, Airbnb, and DoorDash stock’s performance in the long-term?
The graph of the short-term and long-term return of IPO from “In Search of Attention” from the Journal of Finance published by Da, Engelberg, and Gao (2011).

The quantitative research based on the Search Volume Index (SVI) data provides a model on how the stock behaves on the IPO day and a predictive model of the stock performance in the long-term. Based on the model, Airbnb and DoorDash had a high pre-IPO Search Volume Index (SVI) and high first-day IPO return. This condition created a short-term over-enthusiasm that drove the stock price high, exceeding its fundamental valuation, and created a significant price premium on the IPO day.

Read more: DoorDash is up 85% on the IPO day

The investors will enjoy the short-term gain on their Airbnb and DoorDash stock holdings, but the stock price will eventually reverse back to its fundamental valuation in the long-term. Therefore, investors need to analyze the company’s financial performance before making any investment. So, the investors can make prudent decisions based on data, not based on the news media’s over-enthusiasm.

On the other hand, a high first-day IPO return and low pre-IPO Search Volume Index (SVI) will likely yield a positive return in the long run. This condition applied to C3.ai’s stock as there was no premium pricing caused by the short-term over-enthusiasm on the IPO day. The stock was reasonably priced and created a buying opportunity. The stock price will continue to outperform as long as the company continues to deliver exceptional fundamental performance.

Alpha based on IPO pricing anomalies

The most optimum quantitative hedge fund strategy to gain Alpha or benefit from the IPO pricing anomalies is to put a Long position on C3.ai and a Short position on Airbnb and DoorDash until the stock prices reach the fundamental valuation.

Airbnb is currently trading at $139.25 per share with an initial valuation of $68 per share. DoorDash’s pre-IPO valuation was $102 per share and currently trading at $175 per share. C3.ai’s was initially valued at $92 and currently trading at $120 per share. Price reversal will occur when the companies report issues with their financial performance.

Note: The strategy is for investment research purposes. Please read the disclaimer before making any investment decision.

Photo by Pietro Mattia from Unsplash.

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Written by Leonardo Hadi
MBA from the University of Illinois at Urbana-Champaign. Quantitative Fund Investor. Professional Engineer. Operations Professional. Profile

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