In Focus: IPO Hope and Disappointment
Updated: Jul 4, 2021
It looks like the markets are finally getting it, the Airbnb IPO. After years of sitting, waiting, and hoping, it's almost here, supposedly. The company filed it's paperwork to go public back in August, and recent chatter suggests that the company will go public in November or December of this year.
The last several years have been an interesting time for Airbnb. Since 2017 it's constantly appeared on lists of the top companies coming public during the year, but it never quite makes it to the public markets. In 2019 it appeared all set to go public, but the disappointing initial public offerings by Lyft and then Uber made going public a tough go in the first half of 2019. The back half of 2019 was shaped by the infamous WeWork debacle. Eventually 2019 became the year of the overhyped unicorn, and Airbnb looked to 2020.
Early 2020 would be no better in terms of going public. The global coronavirus pandemic stopped unnecessary travel in its tracks and caused a real strain on Airbnb and many entrepreneurs who rent spaces through Airbnb. At one point, the talk of Wall Street wasn't about Airbnb's IPO, it was about whether Airbnb could survive as a company through the pandemic.
The middle of a pandemic was not an ideal time to go public. The expectation was that investors would hoard their cash and ride out the pandemic, which would make securing capital difficult for Airbnb and others, but luckily for Airbnb and others, the U.S. Federal Reserve decided to prop up the markets / economy, making investment dollars a little bit easier to get a hold of during the pandemic, and Airbnb was saved.
Prior to the COVID-19 pandemic, going back to May 2019, Airbnb was valued at over $35 billion, which was more than Hilton, $25 billion at the time, and Expedia, $18 billion at the time. But in the early stages of the pandemic Airbnb's valuation took a major hit, dropping to $18 billion in April 2020.
What the Bulls Say
While the current economy isn't booming and the conditions don't appear to be their rosiest, there are still professionals making a bull case for Airbnb.
Nilay Patel, Editor-in Chief at Verge, stated to CNBC that the pandemic may have helped Airbnb reinvent their business for the better. Patel pointed to the exodus from urban areas to more rural areas in the U.S. for work and leisure. Santosh Rao of Manhattan Venture Partners noted in his interview to CNBC that travel is picking up, and travelers are looking for locations they can drive to to get away.
What the Bears Say
Not everyone is as in love with Airbnb as they once were. Some people have pointed to the company being forced to go public in a climate that is less than ideal due to expiring employee stock options, a move that would help insiders but hurt investors who have to purchase shares in the open market. Then there is the current economic environment, which isn't great. Also, the coronavirus is still with us, and its spread is expected to pick up as the U.S. and other parts of the world get colder.
Now is the Time
Now is the time for Airbnb to go public. The company has been EBITDA positive in the past and has the market share and mindshare for its target sector. Can you name an Airbnb competitor off hand that is not a hotel? Also, there is the shift to domestic travel and getaways that people can drive to. This plays even in a pandemic, as it's not so much about the differences in regulations between places like Maine and NYC, but it's about the availability of space that is so limited in urban communities. To be able to drive to a suburban location with a backyard or near a large field where you can social distance but not feel as confined as you would in a typical suburban city is a play for Airbnb.
This may not be an ideal time for Airbnb to go public, but it is a great time for investors to see the company go public. Investors are going to see a cheaper stock price for Airbnb than they would have back in 2019 or early 2020.
There is value here. The coronavirus may be with us for several years, but it wont be with us forever. If Airbnb does decide to go public smart investors will take advantage of the situation, buying Airbnb cheap and holding it for the long term.
When companies like Airbnb meet situations like a global pandemic the natural impulse is to avoid, and wait until things get better. The thing is, when things start getting better, when those data points start turning positive, by the time they trickle out to the average investor Wall Street will have already bid the stock up.
I'm not a big fan of buying IPOs or newly public companies, but I'd make an exception in the case of Airbnb.
Palantir is another one of those companies that constantly made the top companies to go public lists over the past few years, but never quite found its way to the public markets Now it's finally a public company and currently sitting at $9.20 per share with a $20 billion valuation.
The stock went public on September 30, 2020 and hit the market at $10.00 per share, once available to the public the stock hit a high of $11.41 per share, and then slowly faded from there.
The shroud of darkness that hangs over Palantir is thick. Links to Donald Trump, the FBI, local authorities, and ICE (Immigration and Customs Enforcement) have turned many investors off. On the other side of that it's been rumored to have helped with locating Bin Laden, but the company has never confirmed or denied the rumor.
The company has been in business for 17 years and has relied mainly on government contracts for its revenue but that is changing. Currently, 53% of the company's revenue comes from commercial customers.
Both Airbus and BP have taken advantage of Palantir's services, Airbus used Palantir to help it respond to manufacturing problems and is said to have helped accelerate the production of the Airbus A350. BP used Palantir to analyze drilling data, which led to increased production in the North Sea.
Wall Street and Main Street's Confusion
Another reason of the many reasons that investors haven't fully embraced Palantir's stock is because investors don't have a comparable company to link it to. Wall Street still isn't sure if the company is a low margin consulting company or a fast growing SaaS company.
Roger Monteforte, one of Palantir's early investors even stated upon his initial investment that he saw the company as a consulting firm.
Without a solid comp Wall Street doesn't know what box to place Palantir in, and so it stays away and watches from the sidelines. Even though Monteforte has now updated his outlook and believes that Palantir is a uniquely positioned SaaS.
I've Seen This Before
When Facebook went public in 2012, there were many that didn't know what to compare the social media company too. At that time on the brink of going public, Facebook was the furthest any social media company had travelled. Friendster never made it to the public markets and MySpace was private when it was purchased by News Corp for $580 million.
Many people, myself included, were confused by the Facebook business model, and Wall Street and Main Street's confusion caused Facebook to trade down to around $14 per share after it's IPO. Now trading at over $250 per share, Facebook has gained 1700% off of its post IPO low.
Similar to Facebook, what Palantir specializes in is data. Its software wrangles lots of data and makes it actionable for governments and companies. Palantir is unlike the software companies that Wall Street has become accustomed to valuing like Slack, Zoom, or Salesforce.
Palantir is niche, it's targeting companies with $500 million in revenue, which is about 6,000 companies according to a CNBC report. It's software has been described as heavy by people familiar with the company's offerings. Palantir's software is not built to attract small start-ups, that's not where the company's focus rests at the current moment.
Despite a niche focus the company has been able to grow revenue, but has been unable to turn a profit even after 17 years in business. This is another reason Wall Street has watched from the sidelines and has not fully engaged yet.
However, Wall Street has bid Snowflake (SNOW) up to a $63 billion valuation and Crowdstrike (CRWD) up to a $30 billion valuation, and both companies reported less revenue than Palantir did in 2019, and both companies have yet to turn a profit, but Wall Street knows what box to put those companies in.
Don't be Confused
Palantir is a data play. Data, data, data, we've heard the words over and over and over again since 2014 when Wall Street realized what made Facebook and Google so valuable, But now it appears Wall Street has forgotten or is still confused.
My advice is don't be Wall Street, get in early, get in cheap, let Palantir show you how profitable the gathering of actionable data for governments and large companies can be. Palantir sees a $56 billion estimated market for its Foundry product geared towards commercial businesses and a $63 billion estimated market for it's Gotham offering geared towards governments, those are pretty sizable markets. If Palantir can continue taking bites out of those combined markets Wall Street will have to notice and invest no matter what box the company eventually ends up in.