The IPO market is back in the public equity limelight this week, with two listings expected to net over $6 billion from newly debuted shares. Analysts are estimating that DoorDash and Airbnb will be valued at $36B and $42B, respectively. This puts each on track for being some of 2020’s greatest IPOs. Another set of red-inked IPOs with an enormous amount of interest.
The IPO market remains scalding hot as this unprecedented year comes to an end, and investors are thirsty for high-risk, high-return equities. The Renaissance IPO ETF (IPO) has more than tripled since its pandemic bottom, and the recent vaccine announcements add to the market’s already abundant optimism.
Renaissance IPO ETF Price and Consensus
Renaissance IPO ETF price-consensus-chart | Renaissance IPO ETF Quote
It feels like the whole world is more bullish than ever this holiday season, and Christmas is coming early for two well-timed IPO’s from digitally driven market leaders Airbnb and DoorDash. Each company has progressively raised its ambitions for its listings as interest for their shares begins to materialize in their ‘virtual’ investor roadshows these past weeks.
DoorDash (DASH) will be the first out of the gates Wednesday (Dec. 9th) with a target share price between $90 and $95, and analysts are looking at the upper end of this range. The appetite for fresh tech shares is extensive, and investors are more willing than ever to climb up the risk ladder in this ultra-low-interest-rate environment.
DoorDash has been provided with a massive technology-driven tailwind in 2020, and I suspect it will continue to drive growth throughout the Roaring 20s. This smartphone-incepted food delivery application’s ease and convenience will not lose its demand in the post-COVID world.
DoorDash’s management team is looking to raise just over $3B in a deal that would value the enterprise as high as $36B. This would represent a 14x price to a very conservative 2020 sales estimate.
2020 pushed DoorDash to levels it wouldn’t have seen for years if not for the pandemic, and now is the perfect time for this enterprise to release its shares to the broader public.
The business has had a year for the history books, with its year-to-date gross booking nearly tripling from 2019 and its EBITDA flipping to strong positive territory as the company takes over the food delivery space.
DoorDash went from the #3 US food delivery enterprise with a 17% market share at the beginning of 2018 to the segment’s largest player today with a 50% market share (represented in the graphic below from the company’s S-1 filing).
I have no doubt that this enterprise’s parabolic growth combined with its positive EBITDA (something we don’t see in many IPOs these days) will have investors swarming the stock on new issue day.
I believe that the future of this business is bright as the online-driven foodservice space explodes. The question that analysts and investors need to ponder is whether DoorDash can maintain its #1 positioning in this highly saturated category? Uber’s recently announced acquisition of Postmates will give its food delivery business a firm #1 positioning in some key US markets and provide it with the scale it needs to compete with DoorDash.
Airbnb is expecting to release its shares, Thursday (Dec. 10th), to the public one day following DoorDash’s listing.
The enterprise stumbled through the COVID-crisis, but it is preparing to soar in the rapidly digitalizing new normal.
The company is being privately valued at $42B, a valuation that has been raised multiple times since late November from $30B.
If I am able to purchase ABNB (its anticipated ticker) at the original $30 billion target valuation or less, I will pull the trigger on opening day. This would represent 6.2x price-to-2019 sales, a bargain for a business with extensive amounts of growth ahead of it.
I think I will be hard-pressed to secure shares at that valuation as I suspect that growth thirsty investors/traders will swarm into this market disruptor out of the gates. I would wait till the dust settles on this one before chasing a rally.
Despite not yet turning an annual profit, this is an opportunity to get in on the business’s ground floor before its value goes parabolic when it hits profitability. This phenomenon is exemplified by Tesla (TSLA), which has illustrated 650% returns in what is going to be its first profitable year.
The pandemic began as a cash-hemorrhaging crisis for the online vacation rental pioneer. The business ramped up marketing and administrative expenses in 2019 in anticipation of a record 2020, but the COVID-induced economic coma threw a wrench in that forecast, leaving Airbnb stretched thin.
The red-hot start-up has only lost about $2 billion since it was incepted in 2008. Still, its costs were accelerating with CEO Brian Chesky slightly over-extending operations. The enterprise was forced to lay-off a quarter of its workforce and raise $1 billion in debt at 9%, which is an interest rate that reflects a business in distress.
The second half of 2020 is picking up steam as the business saw a big uptick and local stays. When combined with Chesky’s cost-cutting measures, Airbnb was somehow able to pull off a profitable 3rd quarter for the business, maintaining its three-year profitability trend in this season.
The Potential Opportunity
This global pandemic has acclimatized society to rely on the ease & convenience of digital technology and avoid strangers at all costs. Airbnb provides travelers and lodgers with these unique qualities.
The economy is becoming more digitally incline every day as Millennials and Gen Z’s take over as the dominating consuming generations. According to Grand View Research, as of 2019, over 71% of vacation rentals are booked offline, a massive opportunity for Airbnb, with Millennials and younger expected to make up 75% of all consumption by 2025.
Airbnb’s total addressable market is enormous. The world spent $4.7B on travel in 2019, and I suspect that we will return to similar levels in 2021. The global lockdowns have people itching to get out and take a vacation.
Hotels may not be as attractive to travels for upcoming vacations as they will be forced to pass strangers in the halls or get in elevators with them, something I believe people will continue to be less comfortable with in the new normal. Airbnb’s online platform and typically stranger free experience should see a significant tailwind in the years to come.
The appetite for risky IPOs is soaring with the rest of the tech market. The innovation-driven Nasdaq-100 propelled over 42% returns in 2020 and looking higher for 2021, in the wake of one of the most digitalizing years in history.
I’m taking a ‘look but don’t touch’ approach to both of these enterprises debuts this week. I will wait for the dust to settle before I jump into either of these red-inked enterprises.
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