Stock markets in the United States, a country with the highest number of coronavirus infections and record hospitalisations, are seeing one of the biggest investor appetites ever for new entrants. Several companies have lined up to go public, especially during the second half of the year, setting up December to be the busiest for the IPO market.
In fact, data compiled by Bloomberg shows that companies have raised more than $160 billion in IPOs on U.S. exchanges in 2020 — a record high. Amid this frenzied demand for debutants, investors have kept a close watch on IPOs of food delivery startup DoorDash (DASH) and home-rental firm Airbnb (ABNB). Both the companies went public this week, mopping up a combined nearly $7-billion from the market, and listing much above the IPO price range.
Shares of DoorDash Inc soared over 80 percent on their debut on December 9, 2020. They opened at $182 on the New York Stock Exchange, far higher than its IPO price of $102, and closed at $189.51. Meanwhile, Airbnb — the biggest U.S. IPO in 2020 — has priced its shares at $68 apiece. The company had earlier priced the expected range of its IPO at $44 to $50 and then raised it again to $56 to $60. Shares of the company had a stellar debut, opening at $146 on the Nasdaq against an issue price of $68 apiece. It rose as much as to $165 before closing at $144.71.
For the uninitiated, DoorDash delivers food from restaurants to their customers by charging a few dollars of a fee to customers and a commission from restaurants. The company was founded a little over seven years ago by a few classmates at Stanford.
Airbnb lets homeowners rent a room, a mattress or their entire property to customers for short and long-term stays. It receives a commission from the property hosts and charges service fees to the guests. Headquartered in San Francisco, California, the Airbnb story started in 2008 and its founders are Brian Chesky, Joe Gebbia, and Nathan Blecharczyk.
What Clicked For the Companies?
Both the firms underline the hunger among investors in the US IPO market, especially among technology companies as the COVID-19 pandemic boosted their significance due to stay-at-home restrictions enforced by the authorities.
DoorDash cashed in on the trend of more people ordering in their meals due to the curbs. This is reflected by the surge in its market share as well. The company said in its filing documents that it had 50 percent of the U.S. market share, as of October, zooming past rivals such as UberEats (UBER), GrubHub (GRUB), and Postmates. Its market share was just 17 percent in January 2018 and DoorDash foresees an opportunity for this number to expand as less than 6% of U.S. residents currently use its services.
The company’s revenues during the first nine months of the year have more than tripled and net loss has narrowed compared with a year earlier. Its transaction volumes grew to 543 million orders for the first nine months of 2020 against 263 million orders in all of 2019. With the raging pandemic in the United States, analysts expect the stay-at-home and ordering in trends to continue for more time before they begin to recede.
Airbnb, meanwhile, has been rewarded for its resilience during an extremely challenging business environment for those in the travel business. The company suffered a body blow at the start of the pandemic as people canceled their travel plans, forcing it to offer full refunds to guests and monetary support to property owners listed on its platform to offset their losses.
However, it switched lanes and redesigned its app and offerings, focused on the core business of rentals and with a twist of experiences and offering locations near the user, shelved diversification plans such as venturing into movie production, laid off 25 percent of its staff, and raised about $2 billion in loans to stay afloat.
In the months after the initial shock, Airbnb benefited from travellers booking safer private homes and away from crowded places. All these efforts paid off, helping Airbnb fight the pandemic’s impact on its business and it posted a surprise profit in the previous quarter. It posted a net income of $219 million on revenue of $1.34 billion in the last quarter. But this was nearly 19 percent lower than $1.65 billion in revenue last year. In fact, for the full year in 2019, its net loss stood at $674 million and this has already widened to $697 million so far in 2020. While a larger part of the impact has been due to the COVID-19 pandemic, investors have shrugged off these financials for its outperformance against its peers in the travel industry.
Going forward, with the upbeat news about vaccines and pent-up demand for travel likely, analysts expect a phase of better growth for the company in 2021.
What Should You Watch Out For?
While the prospects for both the companies seem upbeat, there are tailwinds for them for investors to take a note of. For DoorDash, increasing competition, a possible peaking of takeaway demand into 2021 and cheaper alternatives for restaurant partners pose a threat to its business.
While the company has more than 390,000 merchants on its app, eateries have criticized it for the hefty commissions it charges for the orders. Restaurants are also looking at not just rivals such as UberEats or GrubHub, but technologies such as ChowNow and Slice are in the play as well. Chownow has a software that allows restaurants to take orders, create a mobile app and use the data for marketing. Slice, on the other hand, offers a technology that specializes in pizzerias.
Moreover, according to this report, there are red flags to be noted in its financials too. It states that the S-1 filing showed DoorDash and its auditors “identified a material weakness in our internal control over financial reporting.” The filing says DoorDash found “inadequate processes and controls to ensure an appropriate level of precision related to our revenue to cash reconciliation process.” Among other risks in its filing, the company also identified the competition and consumers opting for the cheapest delivery service providers.
In the case of Airbnb, property owners have complained and criticized higher commissions, while guests have known to be unhappy about the service charges too. Adding to these are regulatory and issues raised by citizens in areas where Airbnb listings are located. City governments and authorities have called out the company for encouraging homeowners to take their apartments or villas off the housing market and creating an unbalanced scenario. Meanwhile, neighbours of the listed properties have consistently highlighted worries about unverified guests and hotbeds for disturbances in the vicinity. Additionally, major travel players such as Booking.com have also ventured into this space, heating up the competition and opening up the market for customers.
Airbnb has also come under criticism because of its ‘party house’ problem. The company has faced lawsuits that have blamed it for shootings, crimes and the spread of the novel coronavirus. Moreover, host-guest relationships haven’t been completely smooth too. Several media reports stated racist behaviour targeting the guests following which Airbnb was forced to institute a non-discrimination statement for guests and hosts to sign. The company put a worldwide ban on house parties and expanded its hotline for neighbours to report listings that violated that rule.
Booking.com has a greater inventory when the hotel listings are included
In a Nutshell
Both DoorDash and Airbnb are currently investors’ favourites in this frenzied buying environment, but higher valuations of the stocks relative to their performance have also been highlighted by experts. Historically, too, listing gains are known to have tapered off. For instance, an analysis cited in this report shows that more than 60% of over 70,000 IPOs from 1975 posted negative returns after their first day of trading. With that in mind, who wouldn’t want a slice of the biggest stock debut’s of 2020!