Here’s the Only Smart Way to Play the Airbnb IPO

It's been a record-setting summer for IPOs. Vroom Inc. (NASDAQ: VRM), Lemonade Inc. (NASDAQ: LMND), and BigCommerce Holdings Inc. (NASDAQ: BIGC) all soared on their initial-public-offering debuts.

Then came the record-setter, Snowflake Inc. (NYSE: SNOW) - the largest U.S. software IPO and the biggest company ever to double in value on its opening day.

So this profit-rich, success-soaked moment is opportune for Airbnb, the vacation-rental "unicorn" that's a heavy favorite to go public by the end of 2020.

Good thing, too (for Airbnb). The company's had a rough year, to put it mildly. The company slashed headcount by a quarter back in May, and, as The Wall Street Journal reported, saw its valuation plummet from $31 billion to $18 billion - a rare occurrence for such a celebrated private firm.

So investors are feeling bullish about this company once again, including yours truly - I do think this is going to be a good long-term investment.

Still, this may not be a slam-dunk IPO á la Zoom.

It would be a pricey mistake to rush out and grab the first shares that hit the market. Grab them at the wrong time - the wrong price ­­- and you could be looking at a long, long trip back to the "plus" side of the ledger.

This is going to take some strategizing, like so...

This Is What a Classic Unicorn Looks Like

Airbnb confidentially filed registration documents with the U.S. Securities Exchange Commission (SEC) on Aug. 19 and is expected to launch its IPO (initial public offering) before the end of the year. That's a long way from where the company started in 2008, a year after Brian Chesky and Joe Gebbia put an air mattress in their San Francisco apartment's living room.

As originally conceived, Airbnb was a "sharing economy" business, where rooms and other spaces for rent were shared by the owners or renters who also lived there. Most rentals were offered in cities or inner-suburban surroundings.

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Twelve-odd years later, and the business now includes all types of rentals. There are more than 7 million shared or whole properties in apartments, condos, and houses, in cities, suburbs, and even rural settings in 220 countries.

The "twist" is Airbnb doesn't actually own the properties, it connects would-be renters and landlords "hosts," as they're called, on its online platform - a platform that gets more than 80 million visits per month.
That business model has been wildly successful, propelling Airbnb to coveted "unicorn" status, that is, a private firm that gets rounds and rounds of venture capital (VC) and private equity (PE) funding with a valuation north of $1 billion.

"Unicorns," as in the rare fantasy animal from folks' wildest dreams, are becoming increasingly common. Of the 80 companies that went public in 2019, 28 - 35% - were billion-dollar unicorns. That's up from 20 in 2018, and just 13 in 2017.

They are so very, very tempting - when valuations move that much, investors perk up. But many - like the aforementioned Snowflake - aren't profitable.

Sometimes unicorns lose their luster if they wait too long to go public...

We've Got a Two Cautionary Examples Here

Two examples are ride-sharing pioneers Uber Technologies Inc. (NYSE: UBER) and Lyft Inc. (NASDAQ: LYFT). Last May, I predicted both of these would be bad investments, and sure enough, both fell from great heights - far and fast - after their debuts. Savvy investors could sense what was in store for these lead balloons when late rounds of private investment boosted valuations before they went public.

Uber raised $14 billion before its IPO, and $8 billion with its IPO... then the stock was slashed in half over the next 10 months.

Lyft raised $5 billion before its IPO, $2.3 billion with its IPO... before falling 73% over the next year.

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Those higher valuations didn't have anything to do with Uber and Lyft being more profitable; rather, they had everything to do with the previous round of investors getting more per share for their cash injection.

It's all part of the game.

That's the investing gambit whose objective is getting public investors to buy fresh shares of a "hot" IPO shortly before the company goes public. They see valuations jump - sometimes by 50% or 100% - and can't wait to buy.

In reality, they're being suckered in by early- and late-stage investors poised to cash out.

But Airbnb is different. It's not like other unicorns. It's not playing that game. As we noted, the company's valuation fell based on the last round of cash it took in.

And when I look closer at what Airbnb has to offer, that valuation change is one reason Airbnb's stock is on my "Buy" list...

If you buy the "right way," that is.

How to Play It for All It's Worth

In mid-September, company execs said they wanted to bring Airbnb to market "before the end of the year," which is Wall Street-speak for "likely sometime after the presidential election."

Once the election is decided, insiders will probably try to bring Airbnb to market - but only if the markets are receptive to the outcome of the election. We should see the reaction quickly.

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The more controversial the election, the longer the deal team might wait - the better to put a little distance between the value-leaching tumult and the IPO debut.

Right now, Expedia Group Inc. (NASDAQ: EXPE) is worth $13 billion, TripAdvisor Inc. (NASDAQ: TRIP) is at $2.5 billion, and Booking Holdings Inc. (NASDAQ: BKNG) is worth more than $67.5 billion.

Then there's Airbnb - which is not yet public.

As I mentioned a moment ago, back in 2017, a private-investing round valued the company at a hefty $31 billion.

Last November, based on how the firm's shares were trading in a private marketplace, Airbnb was worth about $42 billion. But based on the $2 billion it needed and just got, the company's pre-money valuation was down to $17 billion.

That makes the valuation range maybe $17 billion to $42 billion.

Frankly, that "Valuation Gulf" bothers me - it's just such a broad potential range.

I'd stress waiting to see where the valuation lands on IPO day.

If it's on the high end of that $17 billion to $42 billion, don't touch the shares - the price will almost certainly come down.

If the valuation ends up on the low end of that range, that's a sign the investment bankers know there's not a lot of demand - but that Airbnb wants to go public nevertheless.

In that case, definitely wait a few days before taking the plunge.

Indeed, in case of a low-valuation IPO, wait for the stock to fall 10% to 20%; that's when I'd pick up some shares on the cheap.

If you're not sure what to do, don't fret: As soon as Airbnb's shares come to market, I'll be back to give you the lowdown on what I think of the debut.

And I'll give you more tips on how to trade the stock.

Three Companies I Like Even Better Than Airbnb

I just named three stocks I think are "screaming buys" right now - and no one has to wait for their IPO.

All three are trading at a discount - they're under the radar: companies most people haven't even heard of. But they have massive tailwinds with the potential to make their prices skyrocket.

Here you go - the names, tickers, and price targets of three stocks that belong in EVERY portfolio...

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