Yesterday I made another of my regular appearances on FOX Business Network's "Varney & Co." when the host, Stuart Varney, asked me point-blank: "Are you worried?"
Me? Worried?
Stuart pointed to the current state of the IPO market and the fact that Snowflake Inc. (NYSE: SNOW) has rocketed nearly 258% since its mid-September debut. He pointed out - correctly, of course - that Snowflake is now worth more than 109-year-old International Business Machines Corp. (NYSE: IBM), and he wondered if we were heading down the same road we did with the dot-coms in 1999.
I'll tell you what I told Stuart - and a national television audience.
I'm as bullish a guy as anyone you're likely to meet. In fact, I think we're going to see 10% or 15% gains on the benchmarks in 2021.
But, that said...
There is a lot of froth in the IPO market - just as there was during the dot-com bubble. We've seen 401 companies go public in 2020, raising some $146 billion in the process. That easily beats 1999's pre-crash IPO haul of $108 billion.
But it's not all froth: I happen to think Snowflake is valued more or less correctly, and some of its fellow "Class of 2020" members hold promise, too, like Palantir Technologies Inc. (NYSE: PLTR), which went as high as 362% over its IPO price, and Warner Music Group Corp. (NASDAQ: WMG), which is up more than 29%.
DoorDash Inc. (NYSE: DASH), on the other hand, which debuted yesterday to the tune of around 80% more than initially priced, is a different story. Six months ago, DoorDash's value was pegged at $12.6 billion. Call me old fashioned, but I don't see why it would be worth $60 billion as of yesterday.
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DoorDash doesn't make money, at least not routinely. It lost $600 million last year, and it took a global pandemic and resultant explosion in home delivery to drive its $2 billion take this year. What happens to DoorDash when the pandemic ends?
It literally doesn't add up, and when that happens, investors - particularly investors who chase red-hot IPOs - tend to get burned.
Yesterday's frenzy of trading was stupid, like 1999 in the worst way, and it really drives home the point that an egregious over- or mis-valuation doesn't matter when investors are that giddy.
And that brings us to this morning, and the Airbnb IPO on the Nasdaq...
Here's the Deal with Airbnb's Valuation
Airbnb was valued at $31 billion right before the pandemic hit. Then, it needed an injection of $1 billion, some of which took the form of a loan at 10% interest, and some in the form of cash-for-warrants that valued Airbnb at $18 billion.
That's a big come-down, but not really a big deal, because it's just the "cost" of those warrants. Chalk that "down round" up as a win for inside investors, like Silver Lake, and Sixth Street Partners, which were there first when the company needed money.
Still, Airbnb has raised its expected IPO range from $44-$50 to $56-$60, which, if the IPO gets priced at $60, would raise $3.1 billion and create a valuation of $42 billion.
I like Airbnb, but $42 billion is a whopping 35% higher than the made-up-from-thin-air $31 billion pre-pandemic valuation. You know, the pandemic? The ongoing global catastrophe that's virtually put Airbnb's entire business model of connecting travelers with rented digs in a deep freeze?
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There's not much earnings visibility going forward into the uncertain, though somewhat hopeful future. I'm not sure a $42 billion valuation makes sense here, but we'll see.
I'd like to see what happens in a quarter or two, what kind of numbers Airbnb can put on the board as we exit the recession and, as seems likely, coronavirus vaccines start to put travelers back on the road in numbers.
How (and When) to Buy ABNB
So the smart move here might not be the popular one, as yesterday's clamor for those questionable DASH shares suggests. (If you really want to own DASH, just hang in there, and you'll be able to pick it up much cheaper down the road. Me? I'm not touching it with a 10-foot pole; I wouldn't touch it with a borrowed 10-foot pole.)
If you have to own Airbnb - and you manage to get your hands on it today - then apply part of your commitment to it if it opens up reasonably priced. Add to your position if it goes lower in the months ahead, especially since there'll be a lot of stock for sale when the lock-up period ends and insiders and employees cash in.
I want to own it, too, though I don't want to pay 60 bucks a share, so I'm going to wait and see if I can get it lower - maybe a lot lower - recognizing all the while that it might get away from me.
But, as bad as DASH is, it's not even the worst stock out there today - if you go here, I name several stocks I think every investor should dump right now, and, even better, which stocks I think belong on everyone's "2021 Buy List." You can get the list, free, right here.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.