In the wake of the global slowdown caused by the COVID-19 pandemic last year, the stock market has recovered and galloped ahead at an astonishing pace since a correction last March. This bullishness was reflected in the primary market also. The market witnessed saw big surge in capital raising activity through initial public offerings (IPOs) on the U.S. exchanges last year. According to FactSet data, the volume of IPOs in 2020 more than doubled from 2019 to a record 494 IPOs, the highest number in the past two decades. In aggregate, companies raised $174 billion through IPOs in 2020, representing a 150% increase over 2019.
While the driving force behind the IPO rush has been the booming tech industry, with investors oversubscribing to these shares, many non-tech IPOs have benefitted too. The market’s risk-on sentiment has driven many start-ups to trade at lofty valuations, in line with the established peers.
Airbnb Inc. (ABNB), Snowflake, Inc. (SNOW), and KE Holdings Inc. (BEKE) are three recently listed companies that have run too far too fast and it appears to us from the disconnect between their financials and current valuation multiples that a pullback is due for them. So, we think it’s better to avoid these stocks for now.
Airbnb Inc. (ABNB)
ABNB’s public market debut came in on December 10, 2020, 12 years after the company was founded. It sold 50 million shares at $68 per share, up from its $56 – $60 price guidance. However, ABNB opened at $146 per share on its first day of trading, and then leaped to as high as $160, representing a 135% increase from its IPO. The stock closed the day at $144.71, rising 112.8%, and giving the home-sharing company a market cap of approximately $86.5 billion. In fact, the surge made ABNB the tenth best debut in 2020 based on its price gain from its IPO.
In terms of its forward p/s ratio, ABNB is currently trading at 25.41x, which is 1,746.9% higher than the industry average 1.38x. ABNB is still up nearly 40% since its debut. The stock garnered momentum before the release of ABNB’s fourth quarter results in late February. However, it has lost nearly 2.5% so far this month after the company raised $2 billion in an offering of 0% convertible senior notes on March 4. ABNB closed yesterday’s session at $201.36 and is currently trading 8.5% below its all-time high of $219.94.
In the fourth quarter ended December 31, ABNB’s revenue fell 22% year-over-year to $859 million. Its nights and experiences booked–a measure of reservations facilitated– declined 39% during the quarter, while its gross booking value (GBV) deteriorated 31% versus the prior year. Despite trimming its employees by 25% during the year and pausing its non-core operations, the company could not avoid losses. ABNB reported a loss of $3.9 billion for the quarter, compared to the year-ago loss of $351 million.
In recent months, several analysts have expressed skepticism about ABNB’s estimated total addressable market of $3.4 trillion, according to its IPO prospectus. They believe that the numbers are too big to be true and that they do not justify the company’s top-line. In addition, ABNB was generating losses even prior to the COVID-19 pandemic, widening year-over-year. And even though ABNB’s management is gearing up to exploit “unusual pent-up demand for travel” as restrictions lift and a global mass coronavirus vaccination drive picks up pace, the virus is still far from contained and discretionary travel is not expected to regain pre-pandemic levels anytime soon.
ABNB’s POWR Ratings reflect its poor prospects. It has a D grade for Growth, Value and Stability. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance. In the 21-stock, D-rated Travel – Hotels/Resorts industry, it is ranked #15.
In total, we rate ABNB on eight different levels. Click here to see the additional POWR Ratings for ABNB ( Momentum, Sentiment and Quality).
Snowflake, Inc. (SNOW)
California-based SNOW is an international cloud-based data platform that enables customers to consolidate data into a single source to drive meaningful business insights, build data-driven applications, and share data. Various organizations use the platform across a vast range of industries. SNOW has existed since 2012 but went public as recently as September 16, 2020.
SNOW’s management had initially planned an IPO priced $75-$85; It ultimately priced at $120 per share. The company secured commitments to buy its shares from Warren Buffett’s Berkshire Hathaway (BRK.B) and Marc Benioff’s Salesforce Ventures (CRM). It sold 28 million shares and raised nearly $3.4 billion from the IPO. Due to unprecedented demand, the stock opened at $245 a share and quickly climbed above $300, gaining 150%. SNOW closed its debut session at just below $254, rising 112% to become the biggest software IPO of all time.
Last month, SNOW entered a strategic partnership with BlackRock, Inc. (BLK) to deliver a next-generation solution for the investment management industry. As part of the deal, BLK will launch Aladdin Data Cloud, which allows investment managers to expand the utility of their data, powered by SNOW’s platform. SNOW also last month entered a partnership with Abacus Insights, a leading healthcare data integration and interoperability platform, to allow the healthcare industry seamless access to data insights at scale.
In its fiscal fourth quarter (ended January 31, 2021), SNOW generated product revenue of $178.3 million, representing 116% year-over-year growth. SNOW had 4,139 customers at the end of the quarter and 77 customers with trailing 12-month product revenue greater than $1 million. Its net revenue retention rate was 168%, along with $1.3 billion of remaining performance obligations. However, its operating losses widened further to $200.4 million from its $85.1 million year-ago loss. In addition, the company reported a loss of $0.70 per share.
In terms of forward p/s, SNOW is currently trading at 146.19x, 3270% higher than the industry average 4.53x. SNOW has also been caught up in the selloff of high-flying growth tech stocks due to rising bond yields and a resulting rotation by investors into value stocks. The stock has lost more than 20% over the past month to close yesterday’s trading session at 230.30. Although clients of different sizes in a wide array of industries rely on SNOW’s platform, the company is not yet making profits yet and its current valuations are still not justified.
SNOW’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, which translates to Strong Sell in our POWR Ratings system. SNOW also has an F grade for both Value and Quality. It is ranked #79 of 81 stocks in the C-rated Technology – Services industry.
In addition to the POWR Ratings grades we’ve just highlighted, you can see the SNOW’s ratings for Growth, Momentum, Sentiment, and Stability here.
KE Holdings Inc. (BEKE)
BEKE operates an integrated online and offline platform, Beike, for housing transactions and services in the People’s Republic of China. The company facilitates various housing transactions, ranging from existing and new home sales and home rentals to home renovation, real estate financial solutions, and other services.
BEKE was founded in 2001 but was listed on August 13, 2020. Backed by SoftBank Group Corp. (SFTBY) and Tencent Holdings Ltd. (TCEHY), BEKE became the second IPO, after iQiyi Inc. (IQ), to raise $2 billion from a U.S. listing. The company priced its ADS at $20 per share, above its original range of $17-$19. It sold 106 million ADS, with each representing three ordinary company , thereby raising $2.12 billion. BEKE opened 75% higher on its debut at $35.06 and climbed as high as 87% on the day. The stock has gained 79% since its listing to close yesterday’s trading session at $67.00. However, it is currently trading at a 15.6% discount to its all-time high of $79.40.
In terms of forward p/e, BEKE is currently trading at 67.68x, which is 41.4% higher than the industry average 47.88x. And despite being the largest real estate platform in China, BEKE accounted for merely 9% of all real estate transactions in China in 2019 (according to its IPO prospectus). In November 2020, BEKE issued a follow-on public offering of 35.4 million ADS priced at $58 per ADS, from which it raised $2.05 billion.
In the fourth quarter, ended December 31, 2020, BEKE’s net revenue soared 58% year-over-year to $3.49 billion. This was driven by a 65% improvement in its gross transaction value (GTV) to $171.6 billion. All three of its operating segments delivered strong growth on the back of operating leverage, efficiency and the strong network effects of its customers, agents, and property listings. Moreover, its monthly active users (MAUs) on the platform jumped 88.3% to an average of 48.2 million. Its net income per ADS was $0.15, compared to the year-ago loss.
BEKE has been an unprofitable business for years and has reported profits over the trailing two quarters only. However, the sustainability of its bottom-line seems questionable because some Chinese regulators have been raising concerns about a potential bubble in the country’s real estate market. Long-term bond yields have also been rising in China, though not so meaningfully as in the U.S. but sufficiently to influence mortgage rates. In addition, the tensions between China and the U.S. continue to build.
BEKE’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which translates to Sell in our POWR Ratings system. BEKE has a D grade for both Value and Momentum. In the 44-stock D-rated Real Estate Services industry, it is ranked #35.
Beyond what I stated above, we also have given BEKE grades for Growth, Stability, Sentiment and Quality. Get all the BEKE ratings here.
The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
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ABNB shares were trading at $195.72 per share on Thursday afternoon, down $5.64 (-2.80%). Year-to-date, ABNB has gained 33.32%, versus a 5.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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