Strong risk appetite for DoorDash and Airbnb IPOs
Head of Equity Strategy
Summary: Both DoorDash and Airbnb are tapping into a red hot equity market and both companies have lifted their IPO price range as investor appetite is huge for technology platforms and the growth profile they are offering. While DoorDash has experienced explosive 200% growth this year due to Covid-19 and could have hangovers post the vaccines, Airbnb experienced a dramatic drop as travelling declined due to travel restrictions but has since rebounded strongly. We go through the key business characteristics of the two IPOs.
This week will host two major US technology IPOs, or that is how Wall Street wants to spin the IPOs of DoorDash and Airbnb. Both companies are essentially platforms connecting buyers and sellers of food and rental homes, respectively. From a technology point of view both businesses are simple, but they make two physical markets more efficient and in the case of Airbnb the technology overlay to rental homes provides networking effects that enhances the value of the platform. Both companies have increased their IPO price range ahead of the pricing date indicating strong investor appetite for companies that are riding the digitalization of the economy. The two IPOs mark a busy year with US public listings up 84% compared to last year.
DoorDash has seen explosive growth during Covid-19
The company raised its IPO price range to $90-95 from $75-85 per share on Friday as a result of strong risk appetite and generally impressive Q3 results from China’s largest on-demand food delivery company Meituan. On a fully diluted basis this values the company at as much as $35bn. DoorDash will set the IPO price tomorrow and begin trading on Wednesday with the Saxo ticker code DASH:xnys.
DoorDash is an on-demand food delivery company that started in 2013 and today has 18mn consumers, 390,000 merchants and 1mn dashers (carriers). The company is essentially an on-demand logistics platform facilitating delivery of local goods but with food delivery being the biggest part of the business in 2020. On Friday, we wrote about how technology is enabling logistics companies to become long-term winners in the global equity market. What is impressive about DoorDash is that it has expanded its estimated market share from 17% to 50% in less than three years (see chart) indicating that company has strong platform offering that appeals more to merchants and consumers. The number of orders has exploded 200% in the first nine months of 2020 compared to the same period last year exposing many more consumers and merchants to the platform and thus increased market penetration by many years. The volume has also reached levels where the company is getting close to becoming profitable, even after including the shareholder loss of stock options. For more on the DoorDash IPO we recommend investors to read the IPO prospectus.
The key risks for the company are US laws and regulation on its dashers and whether they must be recognized as employees or not. Growth decay after a strong 2020 is also a concern as revenue growth could stall as soon as the Covid-19 vaccines are rolled out and people are maybe returning to dining out and ordering less take-away. The network effects are not strong on the platform and thus competition is high including from well-capitalised companies such as GrubHub and Uber. The company’s revenue is derived entirely from the US market and thus the company has not proved that it can scale and delivery service internationally. With Delivery Hero in Europe and Meituan in China an international expansion might not be easy without costly acquisitions and integrations.
Airbnb is a pure play on travel rebound the next two years
This IPO was on track to happen over a year ago, but less frothy markets and suddenly a global pandemic postponed one of the most anticipated IPOs on Wall Street for many years. Airbnb raised overnight its IPO price range to $56-60 from $44-50 per share lifting the fully diluted valuation to $42bn. The company will likely price its shares on Wednesday and start trading on Thursday under the Saxo ticker code ABNB:xnas.
Airbnb is a platform that enables home sharing on globally connecting renters and rentees but differentiates itself from the traditional travel industry that offers highly commoditized offerings through resorts and hotels. Home sharing plays on experiences and in the age of individualism and ‘Instagram moments’. Airbnb has essentially through technology and clever branding expanded a formerly dusted category (home sharing has always existed) and created explosive growth until Covid-19 which has negatively impacted the business.
Annual nights and experiences booked reached 326.9mn in 2019 growing at 31% but due to Covid-19 the number plunged to only 28mn in Q2 a whopping 66.6% decline from Q2 2019. However, the business has rebounded in Q3 reaching almost the levels from Q3 2018. Even more impressively the company had been free cash flow positive for four years before Covid-19 and while the business has been hemorrhaging cash in the two first quarters, the third quarter delivered a positive free cash flow of $328mn partly driven by a strong rebound using less marketing spending letting the brand and the natural rebound do the work.
What the numbers also show is that the domestic bookings have fully recovered while international bookings are still down substantially (see charts). As the Covid-19 vaccines are rolled out it is our expectations that travelling will rebound to levels seen before Covid-19. We also believe it will happen faster than what the market is currently believing. While we are positive on leisure travelling we believe Covid-19 has permanently impacted business travelling in a negative way. We recommend investors to read the IPO prospectus from Airbnb for more information.
The key risk factors for Airbnb are the long-term impact on travelling from the Covid-19 pandemic and whether it has changed people’s habits. The company is also a target for regulation by major cities that are protecting their hotel industry against people lending out their private homes at lower prices than hotels. Bad public relation stories related to guests misbehaving at rented homes could also lower the brand value and erode trust in the entire platform. Depending on how long it takes for vaccines to be rolled out globally the cash burn could continue and thus increasing the time to break-even or maybe even cause a capital raise. Competition is also high, and fraud can happen on the platform exposing the company to litigation risks and pricing pressure on being a middleman in the home rental industry. The platform could also be used for money laundering which is also both a risk to the brand but also potentially higher operating costs in the future.