(Money Morning) – IPOs have struggled through most of 2020, due to the global pandemic. April and May saw a 67% decrease in IPO proceeds. Many business owners were hesitant to trust the public markets for a while.
Fall 2020 has seen a nice rally in the tech IPO market, however. We had a Palantir IPO and the biggest software IPO of all time in Snowflake Inc. (NASDAQ: SNOW). Snowflake raised more than $3 billion in its IPO.
Tech IPOs are getting even more attention today as Airbnb gets ready for its public offering.
Airbnb filed for IPO with the U.S. Securities and Exchange Commission on Aug. 19. IPO analysts were unsure what to say, having just undergone a difficult year featuring the biggest market crash since 2008.
It’s been leaked that the company also expects to raise $3 billion, with its IPO at a $30 valuation.
This sounds like good news to investors. Airbnb was struck by COVID-19 with a loss of valuation from $42 billion in November 2019, down to as low as $17 billion in early 2020.
Believe it or not, Money Morning’s Shah Gilani says the valuation dip could make Airbnb more of a buy after the IPO. That might sound counterintuitive. But there’s a specific way to go about this…
First, here are some things to watch out for with Airbnb.
Be Careful with Airbnb Stock
Airbnb lost $330 billion revenue since March, when the S&P 500 lost more than 30% of its value. COVID-19 really hurt this company.
Travel restrictions would have limited Airbnb’s rentals for a time. In response, Airbnb has done everything in its power to remain “lean and nimble” as CEO Brian Chesky points out.
The company cut $1 billion from its marketing budget and 25% of its staff.
The worst fear for investors, however, is that COVID-19 alone isn’t dragging the company down.
Airbnb has grappled with city government regulation around the world for a few years. New York City blames Airbnb for a spike in housing costs. Barcelona limits the number of rentals for tourists in the city.
And those are just a couple major examples for a company with 4 million rental listings in 191 countries. Think about all that red tape.
Airbnb was also charged $2.25 billion over illegal rentals in 2018. It was reported that one host was renting out of a government-owned flat. That host was charged a $110,925 fine, but the prospect of other fraudulent rentals looms with Airbnb.
With COVID-19 lockdowns on top of that, Airbnb stock could raise some questions.
Still, Chesky says the company has even “more hosts today than before COVID-19 started.” If true, that would be a positive sign looking ahead.
So why does Shah say Airbnb is on his “buy list”?
When to Buy Airbnb Stock
Though Airbnb’s valuation is still a fraction of what it was years ago, it’s climbing back up.
Shah was excited when the company announced its IPO at a valuation of $18, because it didn’t follow the pattern of other high-profile IPOs that have been flops.
Lyft Inc. (NASDAQ: LYFT), for example, lost 70% of its stock price after the IPO. Beforehand, the company had its valuation ramp up thanks to a surge in capital investment.
The problem is that this is a typical way of artificially pumping the stock price ahead of an IPO. Lyft didn’t get more profitable. It had a rush of buying, which is a strategy for building hype around a newly public company.
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With Airbnb, you have the opposite situation. When it filed for IPO in August, the company had a large chunk of its value cut, indicating it wasn’t playing the same game as Lyft. The stock price was likely closer to a real, sustainable level.
It was one of the reasons Shah liked the company.
Now, we’ve heard rumors of Airbnb’s valuation going up to $30 billion recently. This only changes things slightly. It affects exactly when you should buy Airbnb stock.
Before, we had a valuation range of $17 billion to $42 billion, and it was expected to be at the lower end. If that happened, it would have been a case for buying earlier.
Shah said that if we found the valuation anywhere on the high end of that range leading up to the IPO, you would want to wait for that to dip.
Now, here’s where we want to be careful. Airbnb’s IPO is rumored to come in December.
Headed into fall with both a controversial presidential election and a second wave of COVID-19 looming, the market could be in for significant volatility.
The more volatile the market, the more it could affect demand for shares, and consequently Airbnb’s decision to go public. If the water’s too murky, we could see Airbnb stall its IPO again.
In the event that the company goes through with the IPO, Shah says it’s not an immediate “slam dunk” like Zoom Video Communications Inc. (NASDAQ: ZM) in the wake of a massive remote work trend. It requires a little more finesse.
You want to wait until you have enough information about Airbnb stock before investing. Sure, you will have more information on the company’s financials 15 days ahead of the IPO. But you also want to see how the stock moves shortly after the IPO, how volatile it is and where it starts to level off.
All of this, too, could depend on how tense the election is in November.
After that, you’re also likely to see a drop to normal valuation levels after the stock has been selling a couple weeks. Fair market value was measured at about $21 billion, according to an independent appraisal.
If, by the time the IPO comes, we find that the valuation is in fact at the low end of that spectrum, we could still expect a 10% or 20% drop.
Why Airbnb Stock Is a Buy
Ultimately, you will want to buy a company with 4 million rental listings around the world. It’s grown substantially over the years, from merely a city and suburb service to rural areas across 220 countries. There are 7 million apartments, condos, and houses on the service.
Another thing that makes it a buy could be that billionaire Bill Ackman also had his eyes on the company. Airbnb was expected to merge with his special purpose acquisition company (SPAC) Pershing Square Holdings Ltd. (OTCMKTS: PSHZF).
It looks like Airbnb prefers to go the traditional IPO route instead. But the interest from a man who turned $27 million into $2.6 billion earlier in the year helps the case for buying Airbnb stock.
The Airbnb app has over 80 million users per month. It’s not profitable, but it could make a great long-term investment if you can get in at the right time.
The fact that Airbnb has more hosts now also speaks to potential success, even under continued COVID-19 circumstances. Barring any complete lockdown, people living in cities might still seek to get away and stay in more remote areas temporarily.
In this way, vacations aren’t dead, and home-sharing is not dead either. That’s why buying Airbnb stock remains a positive long play, whichever direction the market is headed.
When observing the election, don’t look for who wins or loses. Try to feel for how bumpy the election is. The greater the tension, the longer you may have to wait to buy Airbnb stock.