Airbnb’s epic IPO went from a hopeful $60 a share to over $150 a share in a few hours. This unprecedented rise is the latest in a slew of oversubscribed IPOs that have dumbfounded analysts this year. It also illustrates a few things. The insane buzz around IPOs, the demand from retail investors for shares in the latest shiny new stock, and the escalating highs of the property sector.
Why so high?
Let’s lay this out. Airbnb is a property rental company that officiates the arrangements between host and guest. Being a travel company, its entire business came crashing to a halt when the coronavirus took hold in March. By April, its value had crashed to $18 billion, from $31 billion in 2017. It reluctantly had to lay off a quarter of its global workforce, making 1,900 staff redundant because the Board expected its forecast revenues to be $2.3 billion (£1.95 billion) for 2020 (half that of 2019).
To now be worth $100 billion puts its value at 4,066 times its 2020 annual earnings. Or 1,983 times its 2019 earnings. To say that’s ridiculous is clearly an understatement. So, the question is, is this sustainable and can the Airbnb share price keep climbing?
Will the Airbnb share price soar higher?
There’s concern that this is smoke and mirrors, with no real substance behind these crazy figures. While a boom in Airbnb rentals has increased demand from investors snapping up properties in desirable areas, this is not the full story.
In reality, many parts of the world are struggling to rent properties. Plus, in popular areas, regulation could come as Airbnb has pushed out the opportunity for locals to get on the property ladder. While the vaccine rollout can help get the global economy back on track and travel restrictions lifted, these other concerns spell tough times ahead for Airbnb.
We’ve already discussed how it’s diversifying and making the most of the opportunities coming its way, but will that be enough to keep its share price rising?
Caught in an IPO storm of sensationalism
In addition, the crazy IPO buzz of recent weeks is making many analysts and small-time investors nervous. It’s not just Airbnb. Tesla’s (NASDAQ:TSLA) value has skyrocketed this year. It plans on making less than half a million cars next year (quite a small number really) yet it’s valued at over $600 billion. DoorDash (NYSE:DASH) IPO’d the day before Airbnb also resulting in an insane uptake. Meanwhile, even small and relatively unknown companies are enjoying a wild ride. Hydroponics company Hydrofarm Holdings (NASDAQ:HYFM) debuted with its IPO the same day as Airbnb, opening 130% higher than expected. Whispers of 1999 dotcom bubble déjà vu are getting louder.
Jim Cramer is as dumbfounded by the Airbnb valuation as anyone. He says it’s reminiscent of the dotcom bust.
You would figure they would have learned from 1999-2000 how to handle the new investors who want deals. They have learned nothing.. same thing as 1999.— Jim Cramer (@jimcramer) December 11, 2020
there are some prices not worth paying.. it is no sin to show prudence…— Jim Cramer (@jimcramer) December 10, 2020
Airbnb CEO Brian Chesky was lost for words in a live interview on Bloomberg when he was asked what he thought of the incoming $139 IPO price. He said that when they applied for the debt refinancing in April, that would have set the share price around $30. To now be over $100 shows a recovery that’s nothing short of sensational.
The unbridled appeal of tech stocks
Investors are looking for exposure to tech stocks, rather than the property sector. Case in point, FAANG stocks are ultra-popular this year, which includes Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX); and Alphabet (NASDAQ:GOOG). Does this mean Airbnb could become the next FAANG stock?
These tech stocks have shown complete resilience in the face of adversity and helped support the flood of interest into the sector. Cloud data newcomer Snowflake Inc (NYSE: SNOW) has enjoyed a warm reception since its September IPO. It raised $3.4 billion at a valuation of $33 billion at IPO, making it the largest software IPO in history. And since then has gone on to rally to a market valuation of more than $120 billion. While Airbnb may fit the travel sector, it’s strictly a tech stock because it carries all its operations out online. It may seem like a massive leap of faith for Airbnb to be the next Amazon or Facebook, but if it continues to diversify and grow, then anything’s possible.
Will Airbnb be admitted to the S&P 500?
As the free float increases and if the market cap stays as is, or increases, then there’s a chance Airbnb could be eligible for admittance to the S&P 500 Index (INDEXSP: .INX). Airbnb is now publicly listed on the NASDAQ stock exchange. With a $100 billion valuation, it could well be eligible for a seat at the S&P 500 table. So, will it get into the S&P 500 like Tesla? That’s probably a stretch at this early stage. It will have to work some magic miracles to bring revenues ahead of 2019’s returns and skyrocket into a profitable future. Stranger things have happened and if it keeps up its incredible momentum, who knows!