In analyzing Airbnb (NASDAQ:ABNB) after its recent initial public offering, I keep coming back to words from a pair of esteemed investors. When asked precisely which stocks generally were the most dangerous, both discussed “new issues” like Airbnb stock.
Those investors were Warren Buffett and Charlie Munger of Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B), speaking at their company’s 2012 annual meeting. As Buffett noted, IPOs come to market when sellers want to sell. And as Munger pointed out, brokers generally get higher commissions on those products. Both factors make it unlikely that a given IPO is the most attractive stock in the market at a given time.
To be fair, the post-2009 bull market has tested the wisdom of that approach. Tesla (NASDAQ:TSLA) went public in 2010 at $17. Adjusted for last year’s stock split, it trades over $3,600. Shopify (NYSE:SHOP) priced its IPO at the same level five years later, and now trades over $1,000.
But neither Tesla nor Shopify, at the time they went public, were anything like Airbnb. Few companies are at the time of their IPOs. Trading in the few that were, however, suggests investors have no need to rush into Airbnb stock just yet.
The Biggest IPOs
Over the past decade, there are probably four IPOs that can rival Airbnb in size and scope.
That’s not necessarily true in terms of capital raised. Airbnb generated a relatively paltry $3.7 billion in proceeds from its IPO. That’s only a bit more than DoorDash (NYSE:DASH) raised last month, and actually less than the $3.9 billion Snowflake (NYSE:SNOW) brought in during its September IPO.
But in terms of post-IPO valuation and general investor enthusiasm, Airbnb has only a handful of peers. There was the Facebook (NASDAQ:FB) IPO in 2012, at the time the largest among tech stocks in terms of capital raised. Alibaba (NYSE:BABA) eclipsed Facebook in 2014. Snap (NYSE:SNAP) went public in early 2017. Uber (NYSE:UBER) unquestionably was the biggest IPO of 2019.
All four stocks have an interesting common bond.
Will History Repeat?
That bond is simple: all four stocks struggled after their IPO.
Facebook infamously threatened to breach its IPO price throughout its first session of trading, and finally gave way the following day. Within months, the stock had lost half of its value, and chief executive officer Mark Zuckerberg was being derided as immature for wearing a ‘hoodie’ to pre-IPO meetings.
Alibaba went public at $68, rose 38% its first day, and then generally headed south. 17 months after its IPO, the stock still was below its IPO price.
SNAP started falling almost immediately, and didn’t bottom until late 2018. UBER was below its IPO price until just a few months ago.
In each of these cases, there wasn’t necessarily something wrong with the company. Certainly, there were concerns. For instance, investors fretted about Facebook’s ability to generate ad revenue from its mobile app, where digital ‘real estate’ was less plentiful relative to the desktop version. Snap ran into what looked like a ceiling on user growth.
But it’s not as if these businesses collapsed — or even saw revenue stop growing. Rather, the problem across the board was valuation immediately after the IPO.
With Airbnb valued at $85 billion despite being unprofitable, Airbnb stock certainly has its share of valuation concerns.
The Case for Airbnb Stock
To be fair, there’s a case that this time may be different. 2020 tech IPOs have done well: Snowflake, for instance, has more than tripled. No less an investor than Berkshire bought that IPO — and has profited handsomely.
Near-term trading aside, it’s also worth making the point that long-term investors in all of the big tech IPOs did just fine. FB stock is up more than 600% from its IPO price in less than nine years. BABA has gained 240%. SNAP has nearly tripled, and even UBER has moved into the black (though investors there still have lagged the market).
But none of those stocks had quite the pop ABNB saw: the stock more than doubled on its first day, with its valuation at one point clearing $100 billion. That kind of upfront gains wipes out an awful lot of long-term expected returns.
To be sure, Airbnb will be fine. It’s a truly innovative company. Demand will return after the novel coronavirus pandemic. The potential for a post-pandemic “urban exodus” may even help the company by providing a greater supply of apartments and more reasonable pricing for end users.
Whether that’s enough for an $85 billion valuation is another story. So is whether investors need to buy Airbnb stock right now. At the least, the history of other widely-anticipated tech IPOs suggests patience will be a virtue.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
