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Christmas Is Coming Early In The IPO Market: DASH & ABNB

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The IPO market is scalding hot as this unprecedented year comes to an end, and investors are thirsty for high-risk, high-return equities. The Renaissance IPO ETF (IPO - Free Report) has more than tripled since its pandemic bottom, and the recent vaccine announcements adds to the market's already abundant optimism.

It feels like the whole world is more bullish than ever this holiday season, and Christmas is coming early for two well-timed IPO's from digitally driven market leaders Airbnb and DoorDash. Both tech giants began their 'virtual' investor roadshows earlier this week and anticipate debuting their shares to the broader public before the year is up.

Airbnb IPO

The enterprise stumbled through the COVID-crisis, but it is preparing to soar in the rapidly digitalizing new normal

The company is being privately valued at $35B, a valuation that has been raised since late November from $30B.

If I am able to purchase ABNB (its anticipated ticker) at the original $30 billion target valuation or less, I will pull the trigger on opening day. This would represent 6.2 times price-to-2019 sales, a bargain for a business with extensive amounts of growth ahead of it. 

I think I will be hard-pressed to secure shares at that valuation as I suspect that growth thirsty investors/traders will swarm into this market disruptor out of the gates. I would wait till the dust settles on this one before chasing a rally.

Despite not yet turning an annual profit, this is an opportunity to get in on the business's ground floor before its value goes parabolic when it hits profitability. This phenomenon is exemplified by Tesla (TSLA - Free Report) , who has illustrated almost 560% returns in what is going to be its first profitable year.

Recent Struggles

The pandemic began as a cash-hemorrhaging crisis for the online vacation rental pioneer. The business ramped up marketing and administrative expenses in 2019 in anticipation of a record 2020, but the COVID-induced economic coma threw a wrench in that forecast, leaving Airbnb stretched thin.

The red-hot start-up has only lost about $2 billion since it was incepted in 2008. Still, its costs were accelerating with CEO Brian Chesky slightly over-extending operations. The enterprise was forced to lay-off a quarter of its workforce and raise $1 billion in debt at 9%, which is an interest rate that reflects a business in distress.

The second half of 2020 is picking up steam as the business saw a big uptick and local stays. When combined with Chesky's cost-cutting measures, Airbnb was somehow able to pull off a profitable 3rd quarter for the business, maintaining its three-year profitability trend in this season.

The Potential Opportunity

This global pandemic has acclimatized society to rely on the ease & convenience of digital technology and avoid strangers at all costs. Airbnb provides travelers and lodgers with these unique qualities.

The economy is becoming more digitally incline every day as Millennials and Gen Z's take over as the dominating consuming generations. According to Grand View Research, as of 2019, over 71% of vacation rentals are booked offline, a massive opportunity for Airbnb, with Millennials and younger expected to make up 75% of all consumption by 2025.

Airbnb's total addressable market is enormous. The world spent $4.7B on travel in 2019, and I suspect that we will return to similar levels in 2021. The global lockdowns have people itching to get out and take a vacation.

Hotels may not be as attractive to travels for upcoming vacations as they will be forced to pass strangers in the halls or get in elevators with them, something I believe people will continue to be less comfortable with in the new normal. Airbnb's online platform and typically stranger free experience should see a significant tailwind in the years to come.

DoorDash IPO

DoorDash has been provided with a massive technology-driven tailwind in 2020, and like Airbnb, I suspect it will continue to drive growth throughout the Roaring 20s. This smartphone-incepted food delivery application's ease and convenience will not lose its demand in the post-COVID world.

DoorDash's management team is looking to raise just over $2.5B in a deal that would value the enterprise as high as $32B (on a fully diluted basis). This would represent a 12.5x price to a very conservative 2020 sales estimate.

2020 pushed DoorDash to levels it wouldn't have seen for years if not for the pandemic, and now is the perfect time for this enterprise to release its shares to the broader public.

The business has had a year for the history books, with its year-to-date gross booking nearly tripling from 2019 and its bottom-line flipping to strong profitability as the company takes over the food delivery space.

DoorDash went from the #3 US food delivery enterprise with a 17% market share at the beginning of 2018 to the segment's largest player today with a 50% market share (represented in the graphic below from the company’s S-1 filing).

I have no doubt that this enterprise's parabolic growth combined with its positive bottom-line (something we see less in IPOs these days) will have investors swarming the IPO. The shares, which will be listed under the ticker DASH, are expected to debut at a price between $75 and $85 per share. The current IPO date for DASH is set for December 8th on the NYSE. 

I believe that the future of this business is bright as the online-driven foodservice space explodes. Now the question that analysts and investors need to ponder is whether DoorDash can maintain its #1 positioning in this highly saturated category? Uber's (UBER - Free Report) recently announced acquisition of Postmates will give its food delivery business a firm #1 positioning in some key US markets and provide it with the scale it needs to compete with DoorDash.

Final Thoughts

The IPO market is hot right now, with overzealous traders/investors looking for the next parabolic stock. I would be cautious in purchasing these two equities the day of their listing (which is yet to be announced) as many that missed out on this year's crazy gains are seeking a fresh opportunity.

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