Airbnb, Doordash, Snowflake Stocks: Tech Bubble 2.0 Or A Great Buying Opportunity?

Hey guys, Eddie here and welcome to another video. I know it's been a while, but today we're going to be talking IPOs and the remarkably robust IPO market we've seen this year despite the coronavirus pandemic. So we've seen some blockbuster IPOs last week with Airbnb, DoorDash, and more recently we've seen Snowflake as well. So these have been initial public offerings where these companies private companies are listing on the stock market for the first time, getting access to new equity capital, and their share prices have really increased dramatically on their first days and weeks of trading. So in this video, we're going to be discussing valuations, these new IPO names. Should you be investing in them, or is this just the dot-com bubble all over again? So let's start with Airbnb and DoorDash. They both raised $3 billion each last week, and Airbnb rose 113% from its $68 a share IPO price, which was already increased— the IPO range was already increased into that. DoorDash also surged 86% on its first day of trading. And these are just some of the latest examples of IPOs this year. North America has seen 428 IPOs this year, and this has raised a total of $143 billion according, according to Bloomberg data. So not only has 2020 been the year of coronavirus, it's It's also seemingly been the year of IPOs as well, and all of these names have done extremely well. We've seen investors with an insatiable appetite for particularly tech names, but also biotech as well. So names like Snowflake have done massively well as investors seek to get a little bit of exposure to these kind of software names. Investors have been making a ton of money on these, and actually that's a positive thing for IPO names in the IPO market, as investors are more likely then to try and get involved in some of the other newer IPOs if they've made money on the previous ones. Interest rates are extremely low, and this is obviously favorable for growth companies, and this looks to continue. 2020 has also been a huge year for software as a service biotech. Think, think Moderna, which is up 700%, working on the vaccine. Everyone's at home, lockdowns have been, uh, you know, imposed in most major economies, so people have not been able to go out. And of course, we've seen the FAANG names dominate. We've seen Zoom up 500% year to date, uh, as that work from home trend has continued. Slack be acquired by Salesforce. All these kind of tech names have done extremely well as we kind of prepare for this digital economy, the sharing economy, and investors, you know, can't seem to get enough. And this is really a frenzy. We've even seen the emergence of what we call SPACs, okay? So these are special purpose acquisition companies, uh, using alternative ways of a company basically listing on a stock market. And this is kind of a merger, um, with a blank check company and the private company bringing it public. And we've seen huge volumes big names and big investors like Bill Ackman. Could call him Bill Spac-Man, uh, with the amount of things he's been involved in, uh, and a huge volume, uh, which we've never seen before in the SPAC market. We've also seen, uh, you know, very high proceeds, as I just previously mentioned, uh, with IPOs ex-SPACs. But really, that's been superseded by 2014. But if you add the SPAC volume, uh, in terms of the proceeds raised into that we are really at a record year. The Renaissance IPO ETF as well has seen record, almost parabolic, um, flows into their ETF, and this is, you can see, verging on $700 million, okay? And this is the total funds where you can see that institutions, retail can't get enough of these new hot IPO names, okay? Valuations are extremely frothy if you look at most valuation metrics, not to say that investors really care about those at the moment in the short term. But really, there is somewhat of a mean reversion over the longer term in terms of valuations. And I was talking about this in some of my other videos in kind of Q1 of 2020 and even in Q4 of 2019 about the, you know, the extreme valuations we were at. This kind of optimism is looking a bit frothy, as you can see. From the chart to the 2000s were really that dot-com bubble. But there's been a lot of high valuations at the moment. This is really making investors somewhat nervous, but they still remain overweight equities even though we have seen those 2000 kind of valuation levels. And some have termed it there is no alternative. You know, we're in a super low yield environment with huge amounts of monetary policy yield compression through quantitative easing. This is seeking This is leading to investors to move out the risk curve to things like private equity and those growth names, even value names, those value names with high dividends. And obviously we've seen the kind of presidential election risks subside. And now capital allocators are indeed allocating more capital to these equities and they're getting a pretty good return on some of those dividend names as well. And of course, this is pushing the indices up. It's kind of a feedback loop where if there's a positive equity environment, then obviously more companies are going to IPO. And it's kind of leading to this yield-starved environment where people are moving up the risk curve and pushing up these extremely overvalued by traditional kind of valuation metrics, up, up and up even more, even though they're not generating any earnings and cash flow in some scenarios. So Really, the appetite is there. Of course, monetary policy is keeping yields suppressed, and we've also seen huge amounts of fiscal policy. But really, it's a liquidity story. Lots of liquidity sloshing about, and that money, if it's not being allocated to low-yield kind of Treasuries, for example, it's going to try— it has to go somewhere, right, to earn, earn a return and outperform those passive benchmarks if you are an active manager. So it's seeking— it's kind of leading to that risk-taking. And like I mentioned, equity valuation in the short run can go kind of parabolic, but in the long run there is somewhat of a mean reversion, at least what we've seen historically. And as you can see, another valuation metric, median price to sales. And this is an off— a common metric because a lot of these tech names don't generate any earnings, so you can't look at them at a price to earnings or a price to cash flow basis. You tend to look at them as a kind of price-to-sales ratio. And actually, investors this year have valued new public tech companies at 24 times— so 23.9 times— their LTM revenues. Okay, and this is the highest of the past two decades. Okay, so this is leading to a lot of investors also having to use a lot of imagination to get to these valuations. But a lot of professors, financial market analysts Uh, commentators are really having a tough time to get to these valuations to see if it makes sense. Of course, we've seen the parabolic rises of things like Tesla, um, this year, and this is really leading to valuations being extremely stretched. And this is basically investors betting on these companies over time— of course, the market is forward-looking— generating these profits, um, and Basically betting on these companies that have experienced rapid growth continuing to have this rapid growth and obviously a favorable equity environment as well. But this is also driven— being driven by huge call buying volume both from retail and institutions. I did a video on SoftBank quite recently. You know, retail surge— retail trading has surged in popularity especially when everyone's at home trading. And again, this is another reason, plus with all the other reasons I've mentioned, that's pushing up these valuations. So these biggest IPOs of this year, you can see the names: DoorDash, Pershing Square, which was a SPAC, Snowflake, Warner Music Group. Airbnb on the first day of trading was worth $86 billion. And this is actually on par with Goldman Sachs, who was the advisor actually helping them list on the stock market. Um, so huge valuations, almost unfathomable, um, for many people who haven't heard of Airbnb or even Snowflake. They're exceeding some of the names that have been in the industry, uh, for a long, long time. Um, so this is something to keep an eye on, uh, and this is what is driving people's thoughts about the froth in the market. Investors have been scrambling for these names like DoorDash, like Airbnb, on the first day of trading. Um, and of course, this is an insatiable appetite, uh, this can't seem to be, uh, fulfilled at the moment. DoorDash, more, more kind of if we drill down, has a market value of $60 billion now, uh, and this was a dramatic rise, uh, for the US meal delivery company. And of course, um, this has flourished as restaurants have been closed, people have been ordering a lot from home using Uber Eats and, uh, the like. And of course, this was a perfect time for them to go an IPO, huge appetite specifically now. And they actually closed at $189 on Wednesday last week, 86% above their IPO kind of pricing range. And again, this frenzy, you know, investors can't get enough. And when you see all these names kind of increasing in value, it's very, very tempting. They raised $3.4 billion. And Mr. Zhu said DoorDash had received significantly more demand for its shares than the amount it was able to issue. They actually did record surprise profit, not really, uh, surprisingly, uh, in this kind of environment, uh, of $23 million, even though a lot of these names obviously don't make money. Uh, in its last full year of operations, they made $660 million, uh, loss, um, of— on revenues of $885 million. Okay, Airbnb, again, super popular name as a private company This is one of the biggest tech IPOs more recently. This is obviously a holiday rental company. And this is again a play on the reopening trade that a lot of people have been kind of moving into as we've got the vaccine news, which is obviously extremely positive. We've seen oil above $50 a barrel and all those kind of value names starting to outperform again as that rotation from kind of growth to value takes place. All betting on the fact that we have a vaccine and then obviously people are able to travel, they're able to fly, they're able to use Airbnb and stay in kind of Airbnb hotels or rooms all over the world. But again, you can't ignore the huge valuations. The shares closed at $144, massively from $68. And this actually was an $86 billion valuation, as I mentioned, more than or the same as Goldman Sachs. And this is actually twice more than the market cap of the largest hotel group, the Marriott. So again, huge, um, valuations with this kind of tech spin versus the kind of more traditional names. Um, Snowflake, again, an IPO, has reached $120 billion. This has exceeded now IBM, Advanced Micro Devices, some of those kind of legacy names. Um, they've now, uh, increased in share price 40% since the 2nd of December. So massive gains. Just after their earnings report. That was the first one as a public company. This improved— sorry, impressed Wall Street analysts with triple-digit revenue growth. Again, revenue growth, not so much focus on the earnings. But to put it into perspective, IBM, for example, is to generate around $74 billion in revenue this year, has a market cap of $112 billion that obviously Snowflake has just exceeded. Okay. Snowflake is on basically on pace and estimated to generate $578 million. Okay, so you can see the differences, um, or the weighting that investors are putting on these kind of growth names like Snowflake to generate value in the future or generate earnings and cash flow in the future if they're willing to basically overlook these relatively low revenue figures compared to comps. Why is everyone so bullish? Like I mentioned, we've had the slosh of liquidity, monetary and fiscal. Okay, we've got the vaccines now, a series of different vaccines. Um, we've got breadth in the kind of rally of the stock markets as we've seen that value rotation. Morgan Stanley are forecasting, uh, $2.8 trillion of liquidity in 2021. And this is— we've got the Federal Reserve on Wednesday, but this is the mantra that every bank has taken, every government has taken. Basically, we'll spend now worry about it later, or don't seem not, not to worry. Um, so of course, people like the Fed, central banks like the Fed, are, you know, probably going to increase their quantitative easing packages or move out the duration curve and buy longer duration assets. This is all to keep financing costs low so those businesses that need to borrow to fund their liquidity and kind of solvency needs is satisfied. But again, this slosh of liquidity has to go somewhere, and this usually distorts the valuations of assets. And really, this was triggered by, let's say, the Fed and all global central banks on— in March this year stepping in and saying, we'll backstop the credit markets, for example, we'll buy any investment-grade high-yield credit. When they started buying Apple and Amazon bonds, that made no sense. This really was a green light to investors that the Fed has everyone's back. Another European central bank, the BOJ, they're all flooding the market with liquidity. And this market, this liquidity's got to go somewhere. Okay. And this is another reason that is pushing valuations and asset prices upwards. There are risks, okay, to these valuations. And, you know, the faster they rise, often they fall just as fast. And there are risks on the horizon. Like the virus mutating, you know, some side effects to people taking the virus, herd immunity not being achieved, delays in the distribution of the vaccine, for example. Of course, this is great news, but there's a huge amount of risks, um, you know, to, to this reopening trade, uh, taking place, um, and central banks and government saying, you know, maybe we'll pull back from the liquidity we're providing and interest rates not to stay at the zero lower bound, which is very, very unlikely. But again, all of these would, you know, really pop a hole in the, in the bubble that is this kind of tech stock valuation, you know, software as a service kind of mantra we've got at the moment, you know. And others argue maybe we're not in a, in a bubble and this bull market is just getting started. So Lots of different commentators on either side. Should you be buying these IPOs and these tech stocks? There's been some eye-watering gains, so maybe if you've got the risk appetite, you should be getting involved. But definitely over the short term, this can stay irrational, but over the long term, as I mentioned, there can be some mean reversion. So use proper risk management techniques, and of course, uh, be careful out there. You know, you only see the big, big gains being posted online, but there are some equally big losses. Remember, someone's always on the opposite side of that trade. But huge market for IPOs this year and lots of commentators, for example, at Goldman Sachs, are saying this is just the start and there's plenty of other tech names willing and able to IPO in the near-term future. And there's a big backlog of names that want to IPO and capture this really positive sentiment and equity. Environment. But anyway, I hope you enjoyed my kind of first video back. Please leave some comments in the description, anything you want me to cover. I'm thinking of doing some more kind of focus on M&A and equity capital markets like IPOs, perhaps SPACs, if you're interested, to complement, uh, Anthony Cheung's and the team's content. If you enjoyed this kind of different look, subscribe to the channel. And yeah, I hope you enjoyed the video. Take care.