U.S. IPO Market is Red Hot, But Should You Buy?
Two giant companies had extremely successful initial public offerings this week. DoorDash, the food delivery service business, ended their first day of trading with an 85% increase, and Airbnb, the online vacation rental company, skyrocketed 112%.
A unicorn is a common business term used to describe privately held startup companies valued at more than $1 billion. To be on this list is quite the accomplishment, but it does not do justice to the market capitalization of DoorDash, which closed its first day of trading with a fully diluted market cap of $72B and Airbnb with a fully diluted market cap of over $100B[i]
For those who may not be familiar with the IPO market, it may seem like a tremendous, missed opportunity not purchasing these stocks on the first day of trading. However, the headline news of how these two stocks performed on the first day does not capture the reality most public investors experienced.
Take DoorDash for example, the stock was priced at $102 per share, but when it officially opened to the public, it started trading at $182 and closed the day at $189.51, with a 4% increase. Airbnb had an initial price of $68 but opened for trading at $146 and closed at $144.71; down slightly on the day and traded as high as $165, which means if someone bought at that price, they lost 12% in one day.
So, who got these big returns that the media is quoting? Mostly institutions and the company founders.
We analyzed both companies, and while each of their business models and strategy make sense in the new economy, that is not enough to decide to buy the stock. Price matters. Think about buying a home that is in the perfect part of town, would you pay twice the price for it? Even though it might have been your dream home, paying an outrageous price for it would not make good financial sense.
Let us compare Uber and Airbnb; both companies that fall under the Sharing Economy. Uber, who focuses on ride sharing, trades at 7.4x revenue, while Airbnb is now trading at 24.2x revenue. That means that for every dollar of revenue, Uber investors are paying $7.40, while Airbnb investors are willing to pay $24.20 for that same dollar.
Again, we think both DoorDash and Airbnb have potential, but not at current prices. Sometimes it pays to be patient and wait. Think back to Lyft, which is currently priced at $48, they had an IPO March of 2019 at $72 and has traded below that price ever since.
The IPO market is not what it used to be; companies now remain private much longer than in the past, which means their strong growth years are experienced while private. Tread lightly if you want to buy IPOs on their first trading day. Although we believe these are good companies, we would rather be patient and wait for the price to hit a more reasonable risk-reward level.