From my perspective, early trading in Airbnb (NASDAQ:ABNB) seems a bit nutty. And that’s saying a lot.
After all, I’m happy to pay big valuations for growth stories — if they’re the right stories. I even offer an entire service, Early Stage Investor, that focuses on those kinds of opportunities. Focusing just on near-term valuation, and ignoring long-term growth, is an easy way to miss out on huge gains. The market has proven that over time. Particularly in the last few years.
Nor do I believe that coming years will be much different. I’ve called this decade the “Roaring 2020s.” We’re in the midst of megatrends that will drive enormous growth and make investors substantial profits.
Yet I still think Airbnb stock has run too far.
A Clean Double
We’re used to the IPO pop: the first-day rise in stocks immediately following their initial public offering. Whether that kind of trading makes much sense or not is up for debate. Some market participants believe that ‘pops’ compensate traders willing to take on the risk of owning an unproven stock. Others see it as a handout to Wall Street and institutional investors.
Whatever the rationale, many IPO stocks see gains of 20% or 30% on their first day, as some investors who receive allocations at the IPO price then flip their shares on the open market. But ABNB has been a different animal.
On its first day of trading, ABNB closed at $144.71. Its IPO price was $68. In one day, Airbnb stock rose 113%.
That’s not just a pop, but an explosion. And what makes the trading even crazier is that the $68 IPO price itself was raised. The initial preliminary pricing range was between $44 and $50. The first-day close of $144 was more than triple the midpoint of that range.
It’s too simplistic to argue that if Airbnb was willing to sell shares of $68, that the stock shouldn’t be worth much more than that. Similarly, it’s not the end of the world that investment bankers early in the IPO process thought it would go off under $50. Trading ranges are based as much as what the market will bear as what Wall Street thinks the company is worth. Wall Street gets its wrong sometimes, too.
Still, those factors at least need to be considered. Airbnb added about $47 billion in market value in a single day. We don’t have any evidence that the company, nor its advisers, believe that kind of gain was warranted.
The Pandemic and Airbnb
Some skeptics might question the huge first-day pop in the context of the still-ongoing novel coronavirus pandemic. Travel demand has been crushed. Airbnb’s own revenue declined 32% year-over-year in the first nine months of the year, according to its prospectus.
It’s a fair concern, but perhaps not a significant one. After all, investors need to take the long view, as I’ve argued throughout this year. Normalcy will return, and so will travel demand.
That said, the pandemic will have longer-term effects that perhaps are more material. We’ve seen stocks in sectors like video conferencing or online gambling rise sharply not because 2020 numbers will be better, but because existing tailwinds are being augmented by society’s response to the pandemic. Might ABNB face a similar dynamic — in reverse?
After all, Airbnb has done particularly well in urban areas. It has done so well, in fact, that it’s become a bit of a villain. One professor told Bloomberg in April that “short-term rentals have had a disastrous impact on cities’ rental markets.” With limited supply in major cities being diverted to Airbnb, prices for residents skyrocket.
We’re already seeing that trend reverse, as rents plummet in markets like San Francisco. That doesn’t necessarily bode well for Airbnb, which has benefited greatly from the “scarcity value” of available apartments in prime areas.
If the post-pandemic urban exodus takes place as expected, Airbnb could take a hit in its most profitable markets. That’s a bigger issue than temporary weakness in 2020 results.
Take Your Time
None of this is to say that ABNB is a short, or a stock headed for collapse. Obviously, there’s an enormously intriguing growth story here. Airbnb has reshaped the travel industry, and it will be a fixture in that industry for decades to come.
But there are risks here longer-term. Short-term, it’s hard not to believe that a better price won’t be on offer potentially soon. The investors who were dying to own Airbnb at almost any price were the ones in the market on Thursday. The rest of us don’t need to rush.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
