Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
In the dark days of the pandemic’s first lockdown in May, Airbnb was scrabbling around for $2bn of emergency funding and laying off a quarter of its staff as bookings collapsed. Last week, the holiday rental company’s shares more than doubled on their first day on the stock market from an IPO price that was already way above the range proposed just a few days earlier. After one day as a public company, Airbnb was worth twice the world’s biggest hotel group, Marriott.
Of all the extraordinary reversals that investors have witnessed this year, this is perhaps the most remarkable. But Airbnb is in good company. The stock market debut of food delivery company DoorDash, just the day before, had set the bar high with an 86% first day spike. Zoom and Snowflake, a data analytics company worth more than IBM, have been two other remarkable plague year IPOs. The gap between Wall Street and the rest of America, still in the grip of the Covid pandemic, has never looked so wide.
The comparisons with the dot.com bubble are unsurprising. Twenty years ago, lastminute.com, another business that promised an online travel revolution, came to the London market at a price of 380p. Demand for the shares was so high that individual investors were allocated just 35 each. The price hit 511p on the first day of trading. Investors who were largely shut out of the float were soon relieved that they had been. Two weeks after the listing, the shares had fallen to 270p. A month after coming to the market, they were trading at just 30% of their flotation price. Lastminute had become the indelible image of the dot.com bust.
History does not repeat itself exactly and there is no reason to think that we are at the same point in the stock market cycle today. Valuations are nowhere near as stretched as they were in 2000 and the fireworks are restricted to the IPO market and a handful of unique outliers such as Tesla. For large parts of the stock market, this feels nothing like a bubble. But that does not mean the remarkable Airbnb flotation is without some important lessons. Here are four.
The first is that investors are looking for reasons to buy. Despite the surging infection rate in the US, a double dip recession in Europe and the slow-motion car crash of Brexit, markets are pricing in a materially better 2021. Specifically, they are looking forward to a re-opening of the global economy and a rapid return to business as usual. The travel business, along with retail and hospitality, was hardest hit during the pandemic. Investors are now assuming that, duly vaccinated, we will start behaving as if Covid never happened.
In such a recovery, Airbnb is a no-brainer. It combines a short-term travel sector recovery with the unstoppable long-term shift to managing our lives online that the Covid outbreak simply brought forward. You might think Airbnb distorts local housing markets. You might worry that it has moved a long way from its roots in the ‘sharing economy’ to become just another big tech predator. But ask yourself whether it has also changed your life. It works. It is truly disruptive.
So, the second lesson is that the stock market is good at spotting when things change permanently and rewarding the beneficiaries of those shifts. I have written recently about how a high sustainability rating on our in-house ESG rating system has correlated closely with stock market performance. A related point is that there is also a direct link between this measure of sustainability and company valuation. The best-run companies, with an enduring business model that reflects a changing world, attract the highest ratings and the lowest cost of capital. It’s the market’s way of saying we need more of this.
The third lesson is that even a completely logical argument like this can, and with predictable regularity does, go too far. Something else investors are very good at is justifying their folly with spurious rationalisations. Twenty years ago, a lot of nonsense was talked about ‘eyeballs’ and ‘new paradigms’. When a share price looked ridiculous measured against sometimes non-existent earnings, investors simply started comparing it to sales instead. We have a remarkable capacity for self-delusion when it comes to extrapolating recent trends into the future.
After 11 years in which investors have been rewarded for chasing growth over value, it is unsurprising that the case is being made that this relationship is the natural order of things. It is not. Value outperformed growth from the second world war until 2006. We should be looking for mispriced growth not growth at any price.
The final lesson from Airbnb’s dramatic debut is that strange things happen when there is too much money sloshing around. The growth in so-called M2 - a measure of cash and near cash deposits like money market securities - is growing at nearly 25% annually. Go back 60 years and this measure has never grown faster than 15%. During the long grudging bull market since the financial crisis, investors have struggled to really believe it was for real. An ocean of liquidity is, as a consequence, sitting on the side-lines in money market funds and bonds. Investors are waiting for the right time to be tempted back into the equity market. There is nothing quite like an explosive IPO to persuade the marginal investor that that time has arrived. It’s going to be an interesting year.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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