December 14, 2020-Investors Party like it’s 1999 as Airbnb Shares More Than Double in Their Stock Market Debut. Is the Company Really Worth $100 Billion?

DoorDash Stock Skyrockets in its IPO as the Market Craves Tech Offerings. Are we in a Growth Stock Bubble?

Electric Vehicle Deals Proliferate as Four SPACs Announce EV Mergers. What’s Going to Halt the Frenzy in EV SPAC Deals?

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Transcript:

Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate financial technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.Com.

Julian Klymochko: Welcome podcast listeners to episode 105 of The Absolute Return Podcast. I’m Julian Klymochko. 

Michael Kesslering: And I’m Mike Kesslering.

Julian Klymochko: Today is Friday, December 11th, 2020. Wild week, this week. So much that we’re getting to the podcast late and pretty much midway through December, just given all the craziness. We are going to take a bit of a podcast hiatus on the weekly updates, but we are going to be publishing some great podcast guest interviews over the next few weeks. So, look forward to that. We are definitely looking forward to some holiday R&R, but nonetheless, let’s get into the episode today.

    • Off the top. I mean, Airbnb with just IPO madness, investors are partying like it’s 1999. Airbnb shares more than doubling in their stock market debut. Is this company really worth a hundred billion dollars?
    • Another crazy IPO. DoorDash, their stock skyrocketed in their initial public offering, not quite triple digits, but close. And this market just continues to crave tech offerings. Irrespective of the fact that they’re losing hundreds of millions of dollars every year, no chance of profit and who knows how long, but nonetheless we chat about, are we in a growth stock bubble? 
    • And speaking of another bubbly area. Frenzy deals in EV SPAC space, electric vehicle deals are just proliferating. Four SPAC, announced EV and EV related mergers this week, and guess what? They all surge. So that’s kind of another funny area of the market. And we ask, what’s going to halt this frenzy in electric vehicles SPAC deals? 

INVESTORS PARTY LIKE IT’S 1999 AS AIRBNB SHARES MORE THAN DOUBLE IN THEIR STOCK MARKET DEBUT

Julian Klymochko: But let’s get onto Airbnb. Their shares surged 113% in their long-awaited stock market debut this week. Just skyrocketing, the San Francisco based homesharing company. They initially priced their IPO at $68.00, and if we look at how this IPO developed is, they initially set a price range at $44-50 dollars per share, then raising it to $56.00 to $60.00, pricing at $68.00, then seeing their shares close at $144.71 cents on the first day of trading. Gives you some insight into how nonsensical the IPO process is. But nonetheless, I believe the board really tried to price it at fair value, but completely missed the mark as did their bankers. Given that the stock was 113%, the company raised $3.7 billion dollars in its initial public offering. So obviously left lot of money on the table, given the value discrepancy, but this was the biggest US IPO of the year. Just voracious investor demand for it.

But let’s talk about the dynamics of the company because this share price surge is despite the fact that Airbnb has never made a profit on an annual basis yet as a valuation of nearly $100 billion dollars and we had previously chatted about Airbnb back in the spring when they went through a distressed financing with Silverlake and what was the evaluation there? I think it was like $18 billion or around that $18 to $30 billion range. And now it’s up, what? Four or five-fold from there. So, kudos to Silverlake, really capitalizing on that and that bet really paid off. But Airbnb really struggled. They’re basically like teetering on the verge of bankruptcy during the pandemic lows just because their business absolutely fell apart. But after dropping 72% year over year in April, their business is now down only 20% as of September, which is different than some of these other companies, IPO. Trying to capitalize on the timing, seeing a surge due to the pandemic, but not Airbnb. Their business was significantly negatively affected, which is pretty crazy in terms of the valuation. Investors clearly willing to look past that when they aren’t looking to look past a lot of the other travel related stocks. If you look at some of the hotel companies and things of that nature.

But we talk about some of the fundamentals for the first nine months of 2020, Airbnb had revenue $2.5 billion. This is down from $3.7 billion for the same period. Last year they lost in the first nine months, nearly $700 million dollars. And their valuation is still at about 20 times next year’s revenue. So, forget about EBITDA or earnings, none of that. We’re talking about 20 times revenue in a business in which growth is I mean we, saw massive negative growth year over year. But nonetheless, this eye-popping valuation is indicative of a market that is desperate for, I suppose, the appearance of growth, because certainly when things normalize, investors expect Airbnb to get back to growth, but this is one of those brand names stocks. Like everyone uses Airbnb, so it’s got that brand recognition. So perhaps that’s just causing a surge in retail buying that doesn’t really pay attention to fundamentals, but this is really just been a trend that we’ve seen for the past number of years, where there’s this massive disconnect between fundamental business valuation and where stocks are trading in the stock market, especially for story stocks such as Airbnb, which if you are interested in trading, it is listed under the ticker, ABNB, but Mike, what are your thoughts on this? Do you think we’re in a growth stock bubble? And is Airbnb, like there’s a hundred billion fair value of five-fold over the past nine months?

Michael Kesslering: Yeah. I mean, the question of whether we’re in a growth bubble, I mean, I don’t think there’s much doubt about that. And in particular, when we we talked about Airbnb, as well as DoorDash, and then we’ll be talking about electric vehicle financings as well, but like, look at Airbnb, like they raised $4.4 billion dollars in equity financing. So, this is like a very late-stage company that, well, in reality, they did want to be public late 2019 and then into 2020. And they kind of built their strategy around going public at that time. I remember when they were trying to go public in early 2020. I believe we discussed this before, but they had a big issue with their employees, was their stock options were like basically coming due in November of 2020. And so that was kind of an issue why they wanted to get out the IPO prior to that just for employee retention and everything like that. But as well, I mean, when you look at Airbnb, they have a hundred-billion-dollar valuation. When you compare it to, I guess, DoorDash you’ll get their addressable market or core markets and Airbnb, they do have a $3.4 trillion-dollar total addressable market.

Julian Klymochko: Yeah.

Michael Kesslering: And I mean, the market right now really focuses on these total addressable markets. And they compare that to DoorDash where their market valuation is actually substantially higher than their core total addressable market. So, I mean, there’s a little bit of a disconnect there. I mean, total addressable market, you know, plenty of money has been raised off of such as that. However, I mean, at the end of the day, are they able to monetize that? I really don’t know, but in reality, their business model is simple. At least, you know, really what it comes down to is service fees and those amount to about 17% of the gross booking value. When you do rent a room or a suite with Airbnb and that take rate, 17% would be referred to as a take rate. Split between the hosts and guests, where the guest is paying the lion’s share of that. They’re paying 14% approximately, and the host pays about 3%. I thought there was a few interesting trends in their S-1 that were pointed out by Byrne Hobart in his Substack article about a few weeks ago. Where he did point out that domestic travel spending was up 35% year over year. That helps to offset some of the decline in international travel, as well as another interesting trend is the long-term travel spending defined as 28 days or more that’s up 50%. So, you do have some interesting trends that were identified in the granular details of the S-1. But really what I highly respect the management team is how adaptable they’ve been in identifying gaps in the travel industry during the pandemic, and really just moving quicker than incumbents. So most notably hotel chains and as well. I mean, we discussed this at another time but the whole early pivot to breakfast cereals to make their salary payments and whatnot very early and Airbnb was quite interesting, but we’re going to discuss DoorDash as well. And just comparing the two, I thought there was a few interesting comparisons with DoorDash. You know, the expectation that you start out with a frequency of use at about five times per year, ramping up to 20 for Airbnb it’s difficult to imagine people using it more than a few times per year. The company does have to really get 100% of your vacation travel if they’re going to meet their goals. And I would also note that both of these companies are former YCombinator companies. So, it is a very good week for the brand of YCombinator, but in terms of the irrational exuberance in the stock that you’ve seen since its IPO yesterday, really just seems like people wanting to be early on the back scene, rebound trade. That seems to be a kind of a common theme when you’re looking at the analysis of what’s gone on. I think it’s not very appropriately valued given its underlying unit economics, but this is a crazy market right now. I’ll leave it at that.

Julian Klymochko: So, Mike, from a valuation standpoint, are you telling me Airbnb cheap on an EV per TAM basis?

Michael Kesslering: Yeah, that is a metric that everybody likes quoted right now. So, if that’s your preferred metric, which I highly do not recommend, but it would scream favourably on that metric.

Julian Klymochko: Yeah, it’s an interesting dichotomy between Airbnb and DoorDash, because you mentioned Airbnb perhaps a vaccine rebound reopening type play as vacations and travel comes back.

DOORDASH SHOCK SKYROCKETS IN ITS IPO AS THE MARKET CRAVES TECH OFFERINGS

Julian Klymochko: However, DoorDash has really the opposite because they’re seeing a massive surge in business due to the pandemic and many skeptics believe that perhaps that is a bit of a pull forward in their business, but nonetheless, DoorDash surging nearly as much as Airbnb in its IPO this week, they priced their IPO at, $102 per share. Their shares surged 80% to about $182.00, as investors is clamoured for shares, once they did start trading. 

A bit of background on this company, it’s about seven years old founded by some Stanford University classmates and ever since DoorDash has lost money every year since its founding. But I mean, you look at its valuation, $72 billion dollars, despite losses of $667 million in 2019 and $149 million over the first nine months of 2020. It just goes to show you investors attitudes these days, it’s like they don’t even look at P&L or EBITDA or anything like that. They just look at a brand name of the company or DoorDash, I like that. I use to go into my Robinhood account, buy the stock. But what differentiates DoorDash from Airbnb is that I believe Airbnb can be profitable, at some point. They have an underlying business that I think will generate a lot of profits over the long-term. But you look at DoorDash and its competitors, Uber Eats and Grubhub. They’re all famously tremendously competitive and highly commoditized, such that you’ve got a question, “will DoorDash and their competitors ever be profitable on a sustainable basis, or is this business model really just a race to the bottom as they just compete back and forth for market share?”

So that’s kind of the question that investors need to take, not just on DoorDash, but some of its competitors, you know, are you willing to reward this total addressable market potential and revenue growth in the face of never-ending red ink with no real prospect of near-term profits or ever like, how do you value a business that will never be profitable? And the notion of never-ending losses, they’re going to have to continuously tap the market and where this business model runs into trouble is you saw it when the last tech bubble imploded after the year 2000, all the companies that couldn’t be profitable and were reliant on the capital markets. As soon as the capital market window closes, your business is done. You’ve got to file for bankruptcy because you can’t access capital anymore and that window can close very quickly. I had a really funny comment from the CEO of market research from New Construct’s David Trainer, he called DoorDash quote, “The most ridiculous IPO of 2020”. Some of the reasons he cited, lack of profitability, huge competition. And he specifically mentioned pandemic pull forward in demand. So, he’s thinking that they’re showing massive growth metrics year over now just given the pandemic. However, once things normalize, those growth metrics can drop off significantly. But Mike, what are your thoughts? You think DoorDash will ever be profitable or is this just another indication of this tech stock bubble?

Michael Kesslering: Yeah, I just want to go over like a few more business highlights as well. Everybody’s quoting their market share, they do have a 50% market share in US food delivery, that’s their core business. What I find interesting in an interesting case study is they did form quite a bit after some of their main competitors, such as Grubhub. I mean, they launched a full decade after Grubhub, which is quite interesting, but they really focused and gained a lot of market share initially in the suburbs where they actually have 58% market share. And it’s an interesting case study. I mean, when you talk about the capital raises, they raised $2.5 billion dollars. Harden shareholders being Sequoia and SoftBank. So, they do have a very willing participant to keep supplying them with capital in SoftBank but in terms of the unit economics.

So, let’s go over a little bit of the unit economics first for the restaurant. So, DoorDash, they make their money through merchant commissions and then the variable fees from the consumer. So, they gave an example in their S-1 where the restaurant keeps 61%, https://help.doordash.com/dashers/s/article/Lateness-Based-Deactivations-Explained?language=en_US. And it really just makes you think from the restaurant’s perspective is losing 39% of the total food sales sustainable for any restaurant. And there will be arguments that sure that DoorDash is increasing the business revenue that may not have occurred without DoorDash. I don’t want it really want to get into that. I think some of that or argument is a little bit flawed as there is some cannibalization there. But on the unit economics for DoorDash, some of the estimates that I’ve seen for their unit economics are pretty optimistic. And I’ll just give some examples. For example, I’ve seen kind of in the range of $6 dollars to acquire each new customer which I’m thinking it is quite a bit higher than that, but as well, a $30-dollar average order where you have increased frequencies throughout the life of a customer, which really works out to base on some assumed retention rates, things of that nature. Lifetime value of a customer working out to about $60 dollars. Now that seems very favourable on a unit economic rate basis. But the main issue that I have would be the low CAC, customer acquisition costs and limited amount of marketing spent on retention of customers. This is a very competitive industry. So, I think some of the estimates I’ve seen are fairly low. And why that matters? Is because this payoff, because of some really what you’d have to assume for the frequency of use by the consumer. The payoff is very backend loaded. And so, the unit economics are very sensitive to those inputs. But as well, looking at some of that, I do become a little bit self-conscious to see the cohort estimates for frequency when they’re talking about using it less than five orders per year, which I am certainly above that on both DoorDash and SkipTheDishes. 

However, with the unit economics, I am actually pretty impressed by the economics of DashPass. So that’s basically where you as the consumer pay $9.99 cents, so 10 bucks a month and then you get free delivery. Right now, they have about 5 million subscribers, which is pretty strong. And so, this really implies kind of on an annualized basis where they can run rate at about $600 million. So, I find that part fairly interesting, but really when you look at this, I mentioned before that their market cap right now is significantly higher than their core business like the US food industry where food delivery being 6% is a about $23 billion dollars. And so, you compare that to their market cap of like $55 billion dollar ish. That unsustainable, so the bull case really relies upon the operational excellence of Tony Xu. And so, can he take this logistical platform, as he really likes to phrase it, I’ve heard him on a few podcasts. He’s a very interesting founder. Their operational chops of their management team is really strong, but can they transition out of their core market and take that operational excellence into other delivery like groceries and non-perishables and convenience and convenience store items? That’s the main question, that’s the entire bowl thesis, I do think, I mean, you are paying up for that optionality, so it becomes a pretty difficult sell from my perspective. I did just want to mention one other thing just with regards to IPO’s over this past year. I saw a stat on Bloomberg today that the average first day of return for IPO’s was over 35%, over the last year. And it’s just a crazy IPO market.

Julian Klymochko: Well, on the IPO, ETF is up over a hundred percent this year, which is just shocking. Because historically IPO’s have not done that well, but this is not a normal year. And clearly investors are loving IPO’s these days. If in fact, you do want to get involved in DoorDash trading under the symbol, DASH, but we’ll see. This one, investors certainly ascribing a lot of positivity to the stock and a lot of high expectations. So, we’ll monitor this one over the next while to see if those expectations come to fruition. 

ELECTRIC VEHICLE DEALS PROLIFERATE AS FOUR SPAC ANNOUNCE EV MERGERS

Julian Klymochko: So last thing I wanted to chat about is, you know, bull market, and IPO’s certainly. Massive frenzy in SPAC, EV, electrical electric vehicle and related transactions, kind of just going crazy. We had four of them announced this week, electric vehicle and EV related SPAC business combinations, and all these stocks are absolutely surging.

The first one, which I thought was the funniest one, because it’s another case of a cannabis blank check company, pivoting to electric vehicles. This one specifically Collective Growth announced a merger with LiDAR sensor from Innoviz Technologies, and it stock rallied more than 31% on the news. GigCapital3, struck a deal with Lightning eMotors saw its stock rally 28 and a half percent over the past couple of weeks. SPAC Forum Merger III announced business combination with EV manufacturer Electric Last Mile and shares rallied 27.4% this month. And lastly, I mean the big kahuna TPG Pace Beneficial Finance, it’s a bit of a mouthful. They did sign a deal with EV charging company, EVBox, and it stock more than doubled over night. You wake up and the stocks up about 115%. So, we are long a number of these in The Accelerate Arbitrage Fund. Having acquired them either in the IPO at $10 dollar, or perhaps even below $10 dollar, they are significantly above that now, but that’s what we look to do, is buy pre deal and capitalize on the SPAC pop of which all of these are showing. Unfortunately, Mike, we are not long of TPG Pace. I don’t know what we were thinking that day, what was happening with us? Why aren’t we allowing that one but long the others?

Michael Kesslering: Yeah, that always is a little frustrating, especially when you look at it ex post it. All the winners become clear after the fact, but that’s why we ultimately do run a diversified book. But when you’re looking at this week in general, I mean, this was just a crazy week. You have all of these deals being done, then you also have all the 20 IPO’s this week.

Julian Klymochko: Oh, man, just insane.

Michael Kesslering: $4.7 billion dollars raised. This I think is the craziest part, is that of those 20 IPO’s you only have two that are trading at a discount to their nav.

Julian Klymochko: And those one were overfunded trusts too. 

Michael Kesslering: Exactly, both of those overfunded in their trust to $10.15 cents.

Julian Klymochko: Well, the wild thing is that basically every IPO was massively over-subscribed like three to four times, if not greater. And we subscribe to a number of IPOs this week and our allocations were as low as 20%, but I think 60% at the high end. So, it just goes to show you that it’s extremely competitive out there and there’s effectively unlimited demand for SPACs right now. So, if you’re a sponsor, then I think you can get one off the ground pretty easily these days.

Michael Kesslering: Yeah, exactly. And just to highlight a few other things is the PIPE financings. And if you look at the Lightning eMotors, I’ll just give a couple of examples. Where they have $125 million dollar PIPE for the Form III deal with Electric Last Mile. They, I believe was $150 million PIPE, and when you combine those with the trust value which assumes that these will continue to trade at a premium and they don’t have a you know, a majority of their trusts redeemed, you know. These companies have a lot of capital to deploy, in Lightning. You have over $325 million dollars.

Julian Klymochko: I believe on that deal; a large portion of the PIPE was actually a convertible.

Michael Kesslering: Oh, okay. With Electric Mile, they’ll have $400 million dollars. These PIPE financings, they’re exposing these EV companies to more traditional set of investors a lot earlier than what historically be the case. Like historically this would still really be the domain of VCs. But this transfer from late-stage VC money to some of these more traditional, where you’re seeing large banks their growth arms are getting involved or a mutual fund companies that are getting involved in this space. You know, this is really out of necessity, just given the absolute dollar amount of growth capital being raised. There’s no other way that they’d be able to raise this type of money without institutional backing from these larger players, just relative to venture capital. There’s just a lot more money and kind of some of the more traditional areas of the market. So, I just thought that was kind of interesting to point out is, you know, there’s just a ton of money being raised right now. And it’s a lot earlier stage than some of them historically. And, you know, these aren’t companies like DoorDash and Airbnb that have been around quite a bit longer and more, I guess, top of mind from the investor community, but crazy times, indeed.

Julian Klymochko: And it really shows that the difference between traditional IPO and SPAC, because SPAC is really to raise a tremendous amount of growth capital for much earlier stage companies. Meanwhile DoorDash and Airbnb are a bit more mature and significantly larger than what we’re seeing in the blank check space and a comment on the PIPE financings because every hot SPAC deal comes with a fairly large by PIPE financing, and it’s no surprise why. Like Fidelity and Wellington, and those kinds of long, only mutual funds are big into it. Those long, only mutual funds that are heavily benchmarked against the S&P. So, if you have the opportunity to buy stock that, you know, buy stock at $10 dollar that you know is going to trade instantly the $13, you know, that’s great P&L going into the end of the year, that will perhaps help you beat the benchmark and earn a big bonus.

So, you got to look at what are the incentives are, and on these PIPE deals, clearly the incentive is to get cheap stock, you know, show a good P&L gain into the end of the year. And as long as that dynamic exists, like the PIPEs are fed by the SPAC pop. If the SPAC pop goes away, I think the attractiveness of these PIPE financings to a lot of these long, only mutual funds is really going to decline perhaps. But it’s just a theory of mine, I guess, we’ll see. But Mike, these EVs SPAC deals, what’s going to stop them? I mean, once every EV company is public and there’s nothing else to do, perhaps that will be the end of it. But as of this point, there really is no end in sight, in my opinion.

Michael Kesslering: Yeah, no, there really isn’t. And then I guess theoretically SPACs, we’ll move over to the next hot sector. And see if investors have an insatiable demand for that sector as well.

Julian Klymochko: You know, as Jim Cramer says, “There’s always a bull market somewhere”. And we’ve seen time and time again, there’s always a hot story. I’m sure we’ll see something after the EV boom has played out, but that about wraps it up for us this week on The Absolute Return Podcast, hope you enjoyed it. If you did, definitely leave us a review, check out more @absolutereturnpodcast.com, certainly follow Mike on the Twitter. What’s your handle?

Michael Kesslering: It is @M_Kesslering

Julian Klymochko: And you can find me @JulianKlymochko on the tweet machine. And like I said, no more sort of weekly insights and analysis, but we will be dropping a few really good interview podcast episodes over the next few weeks. So, we’ll chat with you in the new year and hope you have a great holiday season, best of luck with your security selections, and good luck with your investing chat with you soon, bye.

Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.

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