The stock market made it official this week: price doesn’t matter anymore, value isn’t relevant, only fools look at the results.
Two fast growing but losing money companies DoorDash Inc. and Airbnb Inc. soared in their early days in the market as investors collectively decided to sidestep reality and head straight for Happy Town. .
DoorDash shares soared to 92% after its IPO on Wednesday, while shares of Airbnb more than doubled after their IPO on Thursday.
The buying frenzy around the two companies echoes the tech stocks mania of the late 1990s. Once again, investors are willing to pay any price to own a portion of the top growth companies. .
This time around, however, the buying frenzy seems to involve an even higher level of wishful thinking than 20 years ago.
In the 1990s, the untapped potential of e-commerce won over investors. Their voluntary suspension of disbelief was stupid in retrospect, but at least understandable enough. People had no way of evaluating the new opportunities that opened up.
In contrast, recent exuberance has focused on companies established in the low-profile businesses of delivering chicken wings and renting spare rooms. Investors don’t have to extrapolate new weird vectors to value them. They just have to assume that things will turn out more or less as they have been.
This is where the willingness to ignore the past became vital. To date, DoorDash and Airbnb have primarily stood out for their ability to generate rapid growth while incinerating trucks of cash.
Airbnb, for example, is a 12-year-old company that managed to report an operating loss of $ 502 million in 2019 on revenue of $ 4.8 billion.
In 2020, its difficulties intensified, with lockdown restrictions reducing people’s ability to travel. In April, he had to raise $ 1 billion in new funding from private equity firms in a deal that valued the entire company at $ 26 billion. In May, it laid off a quarter of its workforce.
So, seven months later, how much does the stock market think about Airbnb? About 79 billion US dollars, more than triple its value in the spring.
“This speaks to a market that has clearly lost all sense of perspective,” wrote Michael Hewson, chief market analyst at CMC Markets UK.
Indeed. By comparison, Marriott International Inc. has generated steady profits in recent years and enjoys revenue four times that of Airbnb. However, the stock market values the hotelier at just $ 43 billion, just over half of what it estimates to be Airbnb’s value.
Optimists will cite Airbnb’s history of rapid growth and its strong rebound from its pandemic lows this spring as arguments in favor of share ownership. But the numbers don’t hold up.
Aswath Damodaran, professor at New York University and specialist in stock valuation, performed pre-IPO analysis which optimistically assumed that the company will enjoy strong revenue growth for years to come. . He also predicted that Airbnb would become profitable before the end of the decade.
Even with this bullish data, his estimate of fair value to the company is around US $ 36.5 billion – less than half of what investors have now propelled.
The evaluation of DoorDash can be even more dizzying. The eight-year-old food delivery giant lost US $ 616 million in 2019 on an operational basis, and is set to lose a few hundred million again this year despite a delivery boom of food fueled by a pandemic.
According to the calculations of Mr Damodaran – who, once again, compliments the company for assuming vigorous growth for years to come – DoorDash shares are worth around US $ 18.3 billion for a reasonable investor. The real number? Around US $ 59 billion, which means the stock could drop to a third of its current price and still be fully valued.
Certainly, these exercises in calculating numbers based on reality are unlikely to convince the faithful. True believers tend to linger on the Total Addressable Market, or TAM, to justify high stock prices.
The idea here is that a dominant company in a huge market will continue to grow to a point that will ultimately support the price that investors impose on it. At some point – not now, but soon, just wait – the business will start to benefit from the enormous scale it enjoys.
Part of the buzz around Airbnb stems from this way of thinking. The company promotes a holistic vision of what it could become – not just a go-between for owners, but a delivery vehicle for interesting “experiences”, from walking tours to cooking schools to just about anything.
Likewise, DoorDash wants you to ditch that silly idea, it’s just a bunch of people dropping burgers and pizza at your front door. In his prospectus, he expresses his ambition to sell monthly subscriptions that would allow unlimited deliveries for all types of goods.
“We envision this membership becoming a wallet for the physical world, where a consumer can access not only restaurants, but all local businesses in their community, and receive benefits while shopping in-store, at home or elsewhere ”said.
Um sure. Ambition is to be lauded, but investors should be wary when companies begin to sketch grand but gloomy futures – especially when they have yet to prove that they are capable of making a profit on their existing businesses.
In Airbnb’s case, there’s the growing challenge of pushing back cities that dislike the company’s propensity to turn residential neighborhoods into de facto hotel neighborhoods.
For its part, DoorDash faces competition from Uber Inc., as well as the threat of future legislation on construction workers. More fundamentally, it faces the challenges of what has always been a low-margin business.
In his flyer, he shows how a typical meal order of US $ 22.40 will end up costing the customer US $ 32.90 after taxes, tips and fees. Of this amount, the independent “dasher” who delivers the meal receives US $ 7.90 while DoorDash pockets US $ 4.90.
Is this a good deal? Dashers seem unlikely to get rich, while restaurants may be reluctant to pay double-digit commission rates when the pandemic ends. At the very least, finely balanced math seems like a shaky foundation for a multi-billion dollar business.
This may explain why the company had to forfeit its profits by investing money in promotions and discounts to keep the deal going. But don’t try to tell that to the enthusiastic folks who have stocked up on his actions this week.
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