Investors who follow developments in international capital markets are aware of the two large initial public offerings (IPOs) that took place last week by food delivery company DoorDash and the home rental company Airbnb.

On its trading debut last Wednesday, DoorDash hit a market capitalisation of over $60 billion after the share price rallied by 85 per cent. The following day, Airbnb opened 115 per cent above its IPO price, resulting in a market capitalisation of more than $87 billion.

These two firms are part of what has been called as the ‘gig’ or ‘sharing’ economy, which has been one of the most important online phenomena in recent years. Other firms in this category that also conducted an IPO recently are Uber and Lyft.

The high demand for shares of DoorDash and Airbnb, as well as other recent listings by tech companies, is driving comparisons with the dot.com bubble of 1999 and 2000.

In fact, many commentators highlighted that despite the increase in popularity for ordering food from home during the COVID-19 pandemic, DoorDash lost $149 million in the first nine months of 2020, yet surg­ed to a market value of over $60 billion last week. Moreover, DoorDash was valued at $16 billion earlier this year and this sudden surge during the IPO is more evidence of the hype surrounding new market listings.

Likewise, Airbnb incurred cumulative losses of $2.1 billion since it started business in 2008, including a $697 million loss in the first nine months of 2020. Including staff stock options, Airbnb’s fully diluted valuation is over $100 billion, compared to a valuation of $26bn when it conducted a private capital raising exercise at the start of the pandemic.

Airbnb financed its growth over the years via funding from venture capital firms. It was reportedly valued at $1 billion in 2011 rising to $10bn in 2014 and over $30bn in 2016. The company had $4.8 billion in revenue in 2019, much of which comes from service fees from bookings charged to guests and hosts using its platform, which amounts to circa 15 per cent of the gross bookings channelled through the platform.

The platform’s size is impressive. Over four million owners in 220 countries now offer and rent their properties through Airbnb. Eighty-six per cent of the company’s hosts are based outside of the US. In 2019, 54 million global active users booked 327 million nights and experiences through Airbnb.

The market frenzy for Airbnb is not only evident from the 115 per cent surge above its IPO price last Thursday, which is the biggest debut rally on record for a large US listing. In fact, the IPO price of $68 per share had already been increased from the original price range of between $44 and $50 per share established by the company during the previous week, as well as the revised range of bet­ween $56 and $60 per share a few days before the IPO.

A renowned valuation expert had published an article earlier this month providing a detailed valuation of Airbnb and concluded that its fair value was  $36 billion, equivalent to $48 per share. In fact, he argued that if the final prices established for the IPO were to attribute a value of over $44 billion, it should be considered overvalued. As things develop­ed, the valuation jumped to $100 billion last week, showing the extent of the market frenzy.

The market value attributed to Airbnb last Thursday is a multiple of 19 to 20 times its estimated revenue for 2021, a very high valuation multiple.

Airbnb has been valued more than leading online travel website Booking.com. This is quite a feat considering Booking.com had three times more revenue than Airbnb and made a profit of almost $5 billion last year while Airbnb incurred a loss.

Always keep in mind that ‘price is what you pay, value is what you get’

Another comparison that shows the extent of the market frenzy for last week’s IPO is that between Airbnb and the large, long-established hotel operators. The market cap of Airbnb is over twice that of the world’s largest hotel group, Marriott International of over $40 billion. Moreover, the combined market values of the Marriott, Hilton Worldwide Holdings and Hyatt is of $80 billion.

Similar to the hotel operators, Airbnb was also naturally hugely impacted by COVID-19, and in the prospectus published ahead of the IPO, it was revealed that the company’s revenue dropped by 32 per cent in the first nine months of 2020 to $2.5 billion, and losses more than doubled to $697 million. In the period from January to September 2019, Airbnb gene­r­a­ted revenue of $3.7 billion and incurred a loss of $323 million.

As the pandemic ground global travel to a halt and room bookings and experiences at Airbnb plunged by 72 per cent in April, the company laid off about 1,900 workers, or 25 per cent of its workforce. However, in the year’s third quarter the company made a profit of $219 million as the significant cost-cutting that took place earlier this year, including the sharp decrease in the number of staff, offset the 19 per cent decline in revenue to $1.34 billion. The performance of Airbnb in the year’s third quarter showed that the recovery was stronger than many had anticipated.

As is typical with many US technology companies, the company’s voting power is largely being retained by the co-founders. Airbnb has four classes of shares but only two classes (the ‘A’ and ‘B’ shares) having voting rights. The other two classes of shares have no voting rights. The holders of the ‘B’ shares (held by the founders and other insiders) have 20 votes each compared to one vote each for the ‘A’ shares sold in the IPO. As a result of this, the three co-founders who retained less than 50 per cent of the shares will still have a large proportion of the overall voting rights.

Frothy valuations across the technology sector are one of the main highlights that characterised this extraordinary year across stock markets worldwide.

The classic example is of the electric vehicle manufacturer Tesla, whose valuation touched $600 billion this week, which equates to six times the combined size of General Motors and Ford Motor. Tesla’s share price rallied by 630 per cent in 2020.

Another example is of Zoom Video Communications, which became hugely popular as a result of the sizeable demand from people working from home across all corners of the world. It conducted an IPO last year and recently hit a valuation of $160 billion.

The data analytics Snowflake also made headlines some months ago following an equally impressive IPO. The company’s market value rose above $120 billion this week surpassing IBM.

Notwithstanding these unbelievable valuations and the strong upward movements in share prices of these companies, investors should always keep in mind that share prices should reflect the financial fundamentals of a company, its performance from one accounting period to the next, and the prospects going forward. Over time, share prices generally converge towards fundamentals.

On the other hand, however, it is also true that interest rates are at historically low levels and should continue to remain at very low levels in the foreseeable future. This is one of the key drivers supporting such high multiples for companies growing at above-average levels.

Despite the media hype created around the two sizeable IPOs last week and other high-flying technology companies, one must always keep in mind that “price is what you pay, value is what you get”. Investing wisely should be very much dictated by this philosophy.

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