It was already a great year for IPOs, but this past week took things to an entirely new level.
DoorDash
(ticker: DASH) and
Airbnb
(ABNB) started the week as private companies last valued at a combined $34 billion. They ended the week as public companies together worth nearly $170 billion. The initial public offerings capture how Covid-19 has fundamentally shifted the economy—and the financial markets.
Here’s what we learned from the historic week.
Growth Is the New Value: Investors are desperate for growth, and they don’t care what it costs.
Snowflake
(SNOW) is growing 100% a year, a level it can’t possibly sustain. The data warehousing stock has tripled since its own IPO in September, and it’s trading at 100 times next year’s projected revenue, a figure that’s tough to justify.
I recently asked Snowflake CEO Frank Slootman about the inflated valuation. “A stock is worth exactly what somebody wants to pay for it,” he said. “Everything else is just entertainment and conjecture.”
It’s All Guesswork: Wall Street still has no great ability—or desire—to price new issues, which means that IPOs remain a wealth transfer from issuers to institutions. For DoorDash, the original price talk was pegged at $75 to $85 a share. The IPO priced at $102 and opened at $182. That gave DoorDash a value of $70 billion, generating $30 billion for IPO investors—not bad for an overnight gain.
For Airbnb, the original range was $44 to $50 a share. The stock priced at $68 and opened at $142. Airbnb finished its first trading day at $144.71, valuing the company at $100 billion—this time generating more than $50 billion in insta-profits for the IPO buyers.
Smaller, but no less remarkable was the IPO for
C3.ai
(AI), an artificial-intelligence software company built by Tom Siebel, famous for Siebel Systems, which
Oracle
acquired in 2006 for $5.6 billion. C3.ai initially expected to price its IPO around $30 to $34. Instead, the stock priced at $42, opened at $100, and closed the week around $120, giving the AI firm a market value of $13 billion. That’s like selling your house for $1 million, and discovering that the buyer flipped it one day later for $3 million.
DoorDash and Airbnb used a new modified auction process intended to eliminate big first-day stock pops. It failed. Jay Ritter, a University of Florida professor who studies the IPO market, says that DoorDash and Airbnb rank among the top five IPOs in terms of dollars left on the table. Also in the top five: the recent IPO for Snowflake.
A Good Week for SoftBank… The SoftBank Vision Fund invested $2 billion in DoorDash, a stake now worth $12 billion; parent
SoftBank Group
(SFTBY) is trading at a 20-year high. Just over a year ago, SoftBank was reeling from its role as the lead investor in WeWork, which pulled its IPO after a disastrous set of public disclosures. The WeWork moment all but shut down the IPO market in 2019. What a difference a year makes.
…and for Sequoia: Sequoia Capital is the largest investor in Airbnb—with a stake now worth $11.7 billion—and the second-largest investor in DoorDash, with a $9.6 billion stake. Sequoia partner Alfred Lin sits on the boards of both companies. In an interview with Barron’s, Lin said that Sequoia actually passed on a seed investment in DoorDash in 2013. “But we stayed in touch” with CEO Tony Xu, he adds. Sequoia invested in the DoorDash Series A round, and every round after. For now, Sequoia is holding on to all that stock.
The Bulls Don’t Care About Valuation: “I don’t think about valuation on any given day,” Lin told me. “I don’t think the founders of these companies think about valuation…We think about, where are the vectors of growth. How do we continue to win, how do we continue to build increasing advantages for our customers…”
The Case for DoorDash: “Yes, DoorDash is a dominant leader, with 50% market share in food delivery,” Lin says, “but they have only a small fraction of what is spent on restaurant services….And then if they achieve their vision, which is to empower local economies and local merchants, that’s an amazing potential [addressable market].”
The Case for Airbnb: “The travel industry is huge,” Lin says. “There’s travel, and experiences, or you can look at it as unlocking real estate, which is another huge total addressable market. The notion that we can now work from anywhere, study from anywhere. I complain about the small office in my house, and I’m tired of being in front of the same screen, [so] maybe I want to move to a different location….And as I get comfortable with the model, maybe I’ll let someone else rent my house when I’m gone.”
And the Case for C3.ai: “The investment community recognizes there is a huge market in commercial and industrial AI applications,” CEO Tom Siebel told me about his stock’s debut: “We’re looking at a $250 billion addressable software market—that’s bigger than a breadbox.”
There’s More to Come: Even after this year’s IPO wave, there are still more than 500 unicorns—venture-backed companies worth at least $1 billion—in the private market, according to CB Insights. That list includes potential blockbusters like payment platform Stripe, grocery delivery service Instacart, Korean e-commerce giant Coupang, and stock trading platform Robinhood, which has reportedly hired Goldman Sachs to lead its IPO. “We’re in the golden age of venture-capital exits,” says Sandy Miller, general partner at Institutional Venture Partners. “We have a very healthy IPO market and a massive M&A market…there is big supply, and big demand, because the deals have been working.”
But even a big week for IPO’s can’t change one reality: DoorDash and Airbnb were pricey before their IPOs. Now, price isn’t even part of the equation. As we wrote last week: buyers beware.
Write to Eric J. Savitz at eric.savitz@barrons.com