This year has been a nightmare on main street, but it has been rainbows and unicorns on Wall Street. â€œUnicornsâ€ by investorsâ€™ definition are private companies whose value surpasses $1 billion. We recently had two of them go public: Airbnb (NASDAQ:ABNB) and DoorDash (NYSE:DASH). Airbnb stock is doing better than DASH so far, but letâ€™s focus on its long-term future. Even this morning it was up in pre-market action as the indices are down 2%.
This unicorn concept took its lumps last year. The three giants that came to market in 2019 had major debacles. Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) stayed private way too long, so they could not live up to the expectations. But they persevered and rose from the ashes. WeWork on the other crashed and burned and failed to even come out of the gate.
So far, Airbnb stock is not showing imminent signs of disaster. From an investment perspective the decision is easy: It will do well in the future, so itâ€™s worth owning now. It might struggle short term, but time is on its side. It is futile to try to pinpoint the perfect entry into it. Valuation is an argument that can go both ways at this stage. The current market capitalization being close to $100 billion is raising eyebrows among investors.
Airbnb Stock Is Not All Froth
The companyâ€™s revenue line is growing rapidly. It almost doubled from 2017 through 2019. This year is an anomaly because of the novel coronavirus pandemic. Businesses that rely on travel, leisure and entertainment are suffering tremendous losses. When the world is sheltering in place, people are not booking vacations. I respect the fact that they survived this tough test and came with a successful IPO. There is hope for long-term prosperity for the company.
Millions of companies are failing and this one faced the turmoil head on. The vaccines are likely to reach Americans quicker than forecast. This will give people courage to move around. It may be too late for this round of holidays, but it will help with the next ones to come. Meanwhile, management has a pass from scrutiny for the next six months. We are less likely to be critical under Covid-19 conditions. Relief is coming as the results of Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) vaccine are more than 90% effective against it. This morningâ€™s headlines of a potential Covid-19 mutation is worth monitoring though.
A few months ago we expected that there will be a new normal for protocols after 2020. I bet it will to be a lot closer to the old normal with only a bit more awareness. For example, hotels will be cleaner, but they should have been to begin with. We will definitely have a generation of borderline germaphobes, and they will help keep the balance among us. Covid-19 will not change the course of humanity forever. A lot of people died, but I am confident that the world will not let this crisis go to waste. Businesses are learning and improving their processes, especially those like Airbnb.
The Bulls Are in Charge in the Short Term
Technically the Airbnb stock price is coming up against its toughest test yet. It came out of the box strong, but immediately fell 25%. Coming into Christmas, the buyers are in charge. The stock is systemically setting higher-lows attacking the neckline near $160 per share. If the bulls can overcome last weekâ€™s highs, then they have a chance at setting records. Much like Uber, success in trading the stock requires patience. Judging it hastily is wrong. This is a successful business that just needs time to mature on Wall Street.
Those who believe in it should just buy and watch the thesis play out over time. Periodically check against the progress of the business plan without sweating every dip. At some point if it drops low enough, investors can then manage the risk by adjusting the position size. It is also important to not average down too soon. I usually require time and/or a big price difference before doing so.
There is no doubt that the addressable market for Airbnb is huge. The only question is if they can appease Wall Street by improving their profit-and-loss statement over time. Usually IPOs get the benefit of the doubt during a honeymoon period. However, the bigger the unicorn the tougher the judgment. Case in point, the love that Uber had as a unicorn turned to hate. Investors revolted against their spending habits as they grew impatient. A simple apology from management refocused investorsâ€™ attention on the future and now the stock has made new highs.
The IPO Process Is Important
The IPO process this year is under the microscope. On one extreme you have these unicorns like Airbnb. But on the other extreme there are the Special Acquisition Corporations (SPACs). Call me a skeptic, but I would take a unicorn any day over a SPAC. Thereâ€™s a reason why the IPO process is difficult. Thatâ€™s because it needs to be. Shortcuts around it are dangerous. Even the smartest investors of all time make mistakes (remember WeWork?). If WeWork was a SPAC, it would have gone public. It would have been a disaster for investors. Airbnb has been in business for 13 years, so there arenâ€™t too many questions about its legitimacy.
Now, itâ€™s simply up to Airbnbâ€™s management to play their cards right on the main stage.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director ofÂ SellSpreads.com.