This Time, the Shoeshine Boy is a Player
The comments below are an edited and abridged synopsis of an article by Rick Ackerman
A recent headline from Forbes stated: Airbnb’s Higher Valuation Is Reasonable. You can count on the media to give reasons why a stock is not overvalued no matter the price. The story appeared before ABNB went public on December 10. The IPO had been pegged at $56-$60 per share, for a valuation of around $35 billion. However, the stock opened at $146 and rose in minutes to $165 for a valuation of more than $100 billion; not bad for a business that has been drowning in red ink since last spring, and before then was challenged to bring any revenues down to the bottom line. “The new valuation,” said Forbes, “changes nothing about the firm’s business but increases the execution risk of management achieving the expectations baked into the stock.”
Execution risk: That’s a term used to downplay the possibility that a company might not be able to live up to shareholders’ expectations. In ABNB’s case, investors are looking many years ahead, to a time when the pandemic is recalled with nostalgia, and when neighbourhoods have become so busy that restaurants will have to turn away business.
The recent IPO of Door Dash, the profitless meal-delivery service, looks even worse than ABNB’s. The seven-year-old startup lost $667 million in 2019 and another $149 million through October 2020. Yet when DASH’s shares began trading recently, they achieved an 85% mark-up above their IPO price instantly, equating to a market cap of $72 billion. Again, not bad for a company that doesn’t have a prayer of turning a profit in the foreseeable future. The service attracts employees for the same reason as Uber and Lyft: none of them can do the math associated with depreciation on and maintenance of their vehicles.
Math is also too challenging for the RobinHoodies who are fueling IPO mania. IPO craziness has never before been turbocharged by (mostly) young men who cut their teeth on game consoles. Their unfamiliarity with bear markets has made them fearless. This time, the shoeshine boy is not merely circulating hot tips from well-shod customers, he is in the thick of it, compounding profits at a rate that even the most seasoned hedge-fund managers must envy.
