DoorDash and Airbnb stock got off to great starts after coming public last week. But can investors find true value in either?
Value-oriented investors look for contrarian stocks with attractive valuations. They tend to dismiss white-hot IPOs like those of DoorDash (DASH) and Airbnb (ABNB). Their back-to-back debuts certainly lack contrarian appeal: both have produced five-alarm enthusiasm, with DoorDash surging 86% on its first trading day, while Airbnb stock’s 113% first-day pop makes DoorDash look tepid in comparison. These gains came on top of IPO prices that were raised substantially from their initial ranges.
Using conventional valuation metrics, these stocks are clearly expensive. With its $71 billion market value, DoorDash trades at about 10x projected 2022 revenues of perhaps $7 billion. Airbnb’s $101 billion market value is nearly 11x its $9 billion of projected 2022 revenues. Currently unprofitable, DoorDash may produce a $300 million profit by 2022 (for a 237x earnings multiple) while Airbnb may never produce a profit. Clearly, these stocks are well outside of traditional value investor territory.
Yet, perhaps value investors can find merit in these stocks. After all, these investors are updating their so-called “old-school/obsolete metrics and tangible asset-based approach” to adapt to the accelerated disruptions in the economy. Could these two companies capture enough growth to actually be undervalued?
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Breaking Down DoorDash and Airbnb Stock
DoorDash is no doubt producing exceptionally fast growth. Third-quarter revenues of $879 million were more than triple those of a year ago. This is a real company that has tapped into a highly relevant niche.
Furthermore, it looks poised to dominate the most attractive delivery segment – suburbs and smaller cities/towns. And, DoorDash is hoping to expand into other goods, essentially becoming the preferred “last mile” choice for the delivery of groceries, household goods, apparel and such. Value investors will like their capital-light and high-variable-cost business model.
Airbnb offers a similarly appealing story, with rapid growth (although not as fast as DoorDash’s) and a global expansion opportunity that captures a secular shift in demand. While Airbnb is a pandemic loser (the opposite of DoorDash’s situation), as travel has been nearly shut down, it is likely to recover and grow smartly again once a vaccine is widely distributed.
Successful investing, particularly value-oriented investing, is all about buying stocks where expectations are too low. Let’s compare investors’ expectations for DoorDash and Airbnb to a wildly successful company, Amazon (AMZN). It may be impossible to replicate that company’s success, so our two IPOs should have much lower expectations.
To be fair, let’s look at Amazon in 2011, when it had a market value of about $90 billion – roughly the midpoint between DoorDash’s and Airbnb’s current market values. In 2011, at that $90 billion valuation, Amazon was producing $48 billion in revenues. Investors already anticipate that DoorDash and Airbnb have the same, vast opportunity set with less direct competition than Amazon had. In reality, these two upstarts are hardly generating a tenth of Amazon’s revenues at a comparable point in their stories, but with a narrower opportunity set and considerably higher competition.
In 2011, investors were just starting to recognize the potential of the cloud storage business. Amazon was a pioneer with its Amazon Web Services, which perhaps provided some lift to its valuation at the time. Neither DoorDash nor Airbnb can remotely hope to match this growth opportunity.
If exceeding investor expectations drives share prices higher, falling short of investor expectations drives share prices lower. These two companies have plenty of opportunities to disappoint.
For DoorDash, disappointment could readily come from the post-pandemic economy, where customers shift to in-restaurant dining. Dashers (the delivery people) make almost nothing outside of voluntary tips and may demand higher wages, opt for a better job when the economy recovers or perhaps receive higher pay if gig-worker regulations change. More aggressive competition from UberEats or Grubhub (GRUB) could quickly shave profits from DoorDash’s already-skinny margins. A vast array of other potential problems are outlined in the 58 pages of risk factors in its regulatory S-1 filing.
Airbnb hasn’t yet produced a profit, and may never. In pre-pandemic 2019, losses accelerated as the company invested heavily in new products, growth initiatives and infrastructure. This year’s losses will be high, and there may not be profits for years to come. Any one of the issues listed among its 73 pages of S-1 risk factors, including regulations in response to un-neighborly behavior by renters, could derail investors’ enthusiasm for Airbnb stock.
The Verdict...
These two companies seem to have great stories. Their services are readily understood (does anyone really understand what fellow recent IPOs Palantir or C3.ai actually do?) and many new shareholders are probably customers. A great story at a respectable price may be a great stock, but a maybe-really-good story with stunningly high expectations probably makes for a disappointing stock.
Value investors can move on to other opportunities.
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