Geopolitics

On IPOs this week, DoorDash and Airbnb are worth billions of dollars despite not making a profit

The COVID-19 pandemic has been a boon for tech company stocks as lockdown measures meet record demand for digital services for millions of people. And two big names are capitalizing on this trend by selling their shares to the public for billions of dollars this week despite not making an annual profit.

DoorDash food delivery service went public on Wednesday, selling 33 million shares at a price of $ 102 each. The company estimates that at $ 39 billion.

DoorDash has quickly grown to become the largest food supplier in the world, serving 543 million meals so far this year. That’s equivalent to more than $ 16 billion in revenue for 18 million customer doors – more than double what the company delivered last year.

The San Francisco-based company reduced all of these take-out orders to nearly $ 2 billion. Despite booming sales, the company continues to lose money, posting a loss of $ 149 million that year. Last year was even worse for DoorDash, losing $ 667 million on $ 885 million in sales.

The average DoorDash order this year was $ 32.90. The restaurant gets about $ 20 of that, the driver about $ 8, and DoorDash’s cut is 15-20 percent. (Scott Galley / CBC)

That insignificant detail doesn’t stop investors from devouring shares in the company. At one point on Wednesday, its value nearly doubled to more than $ 200 per share on the NYSE.

The vacation rental and travel website Airbnb is ready to do so on Thursday. With an IPO, the company will be valued at more than $ 42 billion. It’s similar too: booming demand for its services in 2020 resulted in sales of more than $ 2.5 billion, but the company also posted a loss of more than $ 696 million in the first nine months of the year U.S. dollar.

Both companies benefit from the feverish investor demand for technology. Attorney Kristine Di Bacco of Fenwick & West, a Silicon Valley law firm that works with tech startups and venture capitalists who want to fund them, says she isn’t surprised at investors’ appetite to eat both.

Despite their lack of profitability for the time being, “they were strong companies that got caught in the pandemic and have only accelerated since then,” she said in an interview on Wednesday.

Both companies were affected by the pandemic, but in different ways.

DoorDash saw booming demand from people ordering groceries into their homes. Airbnb saw its usual business of far-flung leisure travel craters in March and April when lockdowns were in place, but the company turned to meet the growing interest in longer stays for people who want to settle within driving distance of their usual homes .

Sky-high valuations have sparked some speculation that tech stocks may be in the middle of a 1999-style bubble, but Di Bacco dismisses that thought.

“Unlike the era of petets.com, the companies going public these days are more mature companies from a business perspective,” she said, pointing out that Airbnb has been around for 12 years and DoorDash for seven years.

“There were also a number of successful IPOs that year, so all of the money is available for reinvestment.”

Booming market

So far this year the US has raised more than $ 163 billion for IPOs, surpassing the previous record of 1999. This zeal for everything that has to do with technology encourages almost every company in this area, almost regardless of what they do.

“Valuations in the software and services market have more than fully recovered from the initial COVID shock. The industry’s tailwind has propelled the sector to all-time highs,” said CIBC equity analyst Stephanie Price in a recent statement to clients. “During reviews [have fallen] After the highs in early September, the decline seems to have stopped just in time for the IPO market to warm up. “

The so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – have been in danger since the pandemic began, thanks to the booming demand for their digital services from millions of customers who are mostly at home for months at a time.

DoorDash has grown rapidly and controls roughly half of the US grocery delivery market (Evan Mitsui / CBC).

It’s not just a US phenomenon, either, as Ottawa’s Shopify became the Most Valuable Company in Canada this year, nearly tripling its values ​​since March. The company is now valued at nearly $ 170 billion. (In perspective, that’s more than oil company Suncor, CIBC, telecommunications giant BCE, and grocery chain Loblaws combined.)

Shares in Canadian payment processing company Lightspeed rose from $ 10 in March to more than $ 70 today, while its Montreal start-up colleague Nuvei silently conducted the largest technology IPO in the history of the TSX earlier this year, at $ 26 each The stock went public in September. The company’s value has more than doubled to USD 65 per share in just under two months.

Bloomberg Intelligence analyst Mandeep Singh says investor appetite for tech stocks, including this week’s two big IPOs, makes sense as they are growing fast and ready to continue even after the pandemic ends.

He notes that more than two-thirds of Airbnb bookings come from repeat customers, which is a good sign of long-term sustainability.

“While Airbnb is not yet consistently profitable, it is better positioned to expand margins due to lower fixed costs due to the recent downsizing and increased marketing efficiency,” he said.

But not everyone buys this argument, especially when it comes to DoorDash.

Investment firm Grizzle analyst Scott Willis said the company was overpriced on its IPO price of $ 102 per share, all the more since it changes hands at $ 180 per share starting Wednesday afternoon.

“The media may be hyped, but this offering is more like … pump and dump than a valuable IPO,” he said.

Airbnb shifted its focus away from vacation travel during the pandemic and towards the demand for places to settle during the lockdowns. (Yuya Shino / Reuters)

Prior to the pandemic, DoorDash grew from one-sixth of the U.S. grocery delivery market to more than half, mainly by lowering fees and spending lots of money on ads to undercut the competition. But the company spent less than a third of what it normally does on marketing during the global health crisis because it was easy to get new business.

“As soon as the coronavirus is gone and consumers can choose between delivery, collection or going out again, the promotions will have to start again,” said Willis.

Barry Schwartz, chief investment officer of Toronto-based money manager Baskin Financial, says he’s not currently interested in buying shares of either company at any cost, but that doesn’t mean he doesn’t think they are worthwhile companies.

“Is the evaluation absurd? Only time will tell,” he said in an interview. “If they’re not profitable in five years, or they don’t look what they will be, then they are completely overrated and people have made big mistakes.”

The fear of missing out on future profits is part of what drives investors to buy while they can, at any cost, but despite the high valuations, both are basically “really high quality companies,” Schwartz said.

“This is not your parents’ dot.com bubble.”

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