Gregory Bergman
Editor-in-chief, CapitalWatch
“It was the best of times, it was the worst of times.”
The famous opening line from Dickens’ classic A Tale of Two Cities would seem an equally apropos descriptor of the 2020 U.S. equity markets as it did the socio-economic life of 19th Century London and Paris.
More broadly, of course, when the history of 2020 is written (maybe in Mandarin?), there won’t be much good to say about this nightmarish calendar year. It’s been bad for just about everyone— even the perennially lucky President saw his luck run out (unfairly or fairly depending on one’s degree of dementia).
But insofar as the investor is concerned, it has been a volatile but overall successful year, with indexes trading higher than they were pre-pandemic. (Of course, if you just stopped playing the market in March—actively or passively—then you got screwed). The year 2020 has produced winners and losers on an epic scale— “the best of times, the worst of times indeed.”
But when it comes to tech stocks and tech IPOs, that Dickensian phrase is unbefitting. A more apt one would be: “It was the best of times, it was the best of times.”
Because, really, in what universe could both DoorDash and Airbnb have such insanely successful IPOs if both sets of investors use the same Gregorian calendar? How could the imminent availability of a vaccine help raise (or not lower) the stock price of a company that benefitted from the pandemic, while also help lift a company nearly brought to its knees from the same virus?
Let’s start with Airbnb (Nasdaq: ABNB).
First, Airbnb is maybe the greatest entrepreneur stories of the 21st century. CEO Brian Chesky, whose jaw dropped as low as Airbnb’s March bookings when a Bloomberg reporter informed him of the $145 share price pre-opening price—more than double the initial $68 per share price— is a smart, but relatable guy.
Hailing from the Rhode Island School of Design, Chesky did not come off the standard Stanford University tech billionaire assembly line. He is a just a bright guy who had a brilliant idea—which makes his billionaire status both more annoying and more inspiring. Chesky, along with a couple friends, launched a little site after having trouble themselves finding an affordable hotel room in San Francisco. The site, and Chesky, would alter the hospitality sector worldwide forever. What is even impressive, however, is how (with help from a brilliant board) Chesky has navigated this most difficult year as CEO.
But we know all that. And we also know that not only did the stock open at twice the initial price ( representing a $106 billion market cap) but that the company was valued at $18 billion by private investors just last Spring.
So, the question is: What happened from Spring to Winter to warrant and $88 billion increase in market cap?
Well, not much from a busines standpoint—other than massive losses due to lockdowns and travel restrictions as cases rise. The future—not the present—is what investors are betting on long-term.
Still, $145 per share? Is that a reasonable valuation? Yes? No?
It doesn’t matter—just ask Elon Musk, the Tesla CEO and Roganesque broheim cultural icon, decried this week what he called the “MBA-ization of America” to The Wall Street Journal, claiming American companies were too focused on financials.
Then he raised another $5 billion selling stock in yet another show of his financial adeptness.
Back to Airbnb.
So, if Airbnb’s valuation is based on the future, buoyed by the promise of a vaccine and a subsequent return to travel, then DoorDash’s valuation must also be based on the future, right? Investors must just be thinking six to 12 months ahead of the economic reality.
No, that simply cannot be the case.
For DoorDash (NYSE: DASH), investors must have flocked to the stock at these prices based on this year’s success. Pandemic lockdowns turned the food-delivery provider DoorDash into a household name.
While investors must, I suppose, see a future as bright as its present, that just doesn’t make much sense. DoorDash, whose stock rose over 80% on its IPO day, is being valued based on its extraordinary year, a year that cannot be replicated. Even if, as some have said, the year 2020 will go down as the first year of the 21st Century— the year when the evolution of a truly digitized economy began. Still. The initial pricing DoorDash well above the roughly $15 billion private valuation it achieved earlier in 2020, which was already a major increase from the $1.4 billion it was worth in 2018. To me that signals the newest valuation is based on a pandemic-driven boost in growth that cannot be replicated.
Nothing speaks to the irrationality like two IPOs in the same week—one given a valuation based on the present and the recent past, while the other given a valuation based on the future with a total disregard for the present.
As we enter the end of the year, investors still want to play, and sentiment is high. That is the good news. The bad news is that, until there is clarity on stimulus and when exactly we will all get the vaccine, investors will double down on every new shiny publicly traded object, without regard for company fundamentals.
I do believe that the bullish trend for stocks that promise to change –and/or capitalize on such a change—in the way we eat, work, and travel, is a trend that will continue long after we get those 100 million vaccine doses back from Pfizer the Trump Administration so stupidly neglected to secure (even at no cost!) as was reported this week. But, while I would buy and hold an ETF of equities focused on food delivery, ridesharing, remote-working, and electric cars and solar panels, enthusiasm for a specific company must be grounded in the promise of that individual company, rather than the space more broadly. I believe that there is a good DoorDash (and maybe Airbab) investors will eventually learn that the hard way.
The bottom line?
I do not believe DoorDash will not live up to its valuation long term. Airbnb, on the other hand, has a real shot. Even then, the company is many, many bookings away from justifying its valuation. These stocks may go up and down next year, but I would bet that both are trading lower this time next year.
Tesla?
Don’t even ask—I just don’t have a clue. And if I had an MBA, I’d likely be even more lost.
Gregory Bergman
Editor-in-chief, CapitalWatch
(The opinions expressed in this article do not reflect the position of CapitalWatch or its journalists. The analyst has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice)
