IPOs this week have DoorDash and Airbnb worth billions of dollars despite not turning a profit


The COVID-19 pandemic has been a boon for tech company shares as lockdown measures for millions of people feed record demand for digital services. And two big names are cashing in on that trend by selling their shares to the public this week for billions of dollars despite not turning an annual profit.

Meal delivery service DoorDash went public on the New York Stock Exchange on Wednesday, selling 33 million shares at $102 US a piece. That values the company at $39 billion US.

DoorDash has quickly become the biggest meal delivery company in the world, providing 543 million meals so far this year. That’s more than $16 billion US worth of takeout to 18 million customer doors — more than twice the amount the company delivered last year.

The San Francisco-based company’s cut of all those takeout orders was almost $2 billion. But despite booming sales, the company continues to lose money, posting a loss of $149 million so far this year. Last year was even worse for DoorDash, losing $667 million on $885 million in sales.

The average DoorDash order was $32.90 this year. The restaurant gets about $20 of that, the driver about $8, and DoorDash’s cut is around 15 to 20 per cent. (Scott Galley/CBC)

That trifling detail isn’t stopping investors from gobbling up shares in the company. At one point Wednesday, their value almost doubled to more than $200 a share on the NYSE.

Vacation rental and travel website Airbnb is poised to do the same on Thursday, with an initial public offering valuing the company at more than $42 billion US. And it, too, has a similar story to tell: booming demand for its services in 2020 has resulted in more than $2.5 billion in revenue, but the company also posted a loss of more than $696 million through the first nine months of the year. 

Both companies are cashing in on feverish investor demand for all things technology. Lawyer Kristine Di Bacco with Fenwick & West, a Silicon Valley law firm that works with technology startups and the venture capitalists who want to fund them, says she’s not surprised by investor appetite to take a bite of both.

Despite their lack of profitability for now, “they were strong companies headed into the pandemic and have only accelerated since,” she said in an interview Wednesday.

Both companies were impacted by the pandemic, but in different ways.

DoorDash saw booming demand from people ordering food to their homes. Airbnb saw its usual business of faraway leisure travel crater in March and April when lockdowns were in force, but the company pivoted to cater to growing interest in longer stays for people looking to hunker down within driving distance of their usual homes.

Sky-high valuations have prompted some speculation that tech stocks could be in the middle of a 1999-style bubble, but Di Bacco rejects that notion.

“Unlike the era of pets.com, the companies you’re seeing go public these days are more mature companies from a business perspective,” she said, pointing out that Airbnb has been around for 12 years, and DoorDash for seven.

“There’s also been a number of successful IPOs this year, so all that money is out there to be reinvested.”

Booming market

More than $163 billion has been raised in initial public offerings in the U.S. so far this year, beating the previous record set all the way back in 1999. That zeal for all things tech is buoying just about every company in the space, almost regardless of what they do.

“Valuations in the software and services market have more than fully recovered from the initial COVID shock, with industry tailwinds propelling the sector to all-time-high valuations,” CIBC equity analyst Stephanie Price said in a recent note to clients. “While valuations [have fallen] from peak levels at the start of September, the fall appears to have paused just in time for the IPO market to heat up.”

The so-called FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — have all been on a tear since the pandemic began, thanks to booming demand for their digital services from millions of customers who are mostly shut in at home for months on end.

DoorDash has grown quickly and controls about half of the food delivery market in the U.S. (Evan Mitsui/CBC)

It’s not just a U.S. phenomenon either, as Ottawa’s Shopify became the most valuable company in Canada this year, with its shares almost tripling in value since March. The company is now worth almost $170 billion. (For perspective, that’s more than oil company Suncor, CIBC, telecom giant BCE and grocery chain Loblaws combined.)

Shares in Canadian payment processing firm Lightspeed have gone from $10 in March to more than $70 today, while its fellow Montreal startup, Nuvei, quietly pulled off the biggest technology IPO in the history of the TSX earlier this year, going public at $26 a share in September. The company’s value has already more than doubled to $65 a share in barely two months.

Bloomberg Intelligence analyst Mandeep Singh says investor appetite for tech stocks, including this week’s two big IPOs, make sense because they are growing quickly and are poised to continue to do so even after the pandemic ends. 

He notes that more than two-thirds of Airbnb’s bookings come from repeat customers, which bodes well for long-term sustainability.

“While Airbnb is yet to be consistently profitable, it’s better positioned for margin expansion due to lower fixed costs from recent job cuts and marketing efficiency gain,” he said.

But not everyone is buying that argument, especially with regards to DoorDash.

Analyst Scott Willis with investment firm Grizzle said the company looked  overpriced at its IPO price of $102 a share, and even more so now that it is changing hands at $180 a share as of Wednesday afternoon.

“The media may be hyped, but this offering is looking more like a … pump and dump than a valuable IPO,” he said.

Airbnb shifted its focus during the pandemic away from leisure travel and toward the demand for places to hunker down in during lockdowns. (Yuya Shino/Reuters)

Prior to the pandemic, DoorDash grew from one sixth of the U.S. food delivery market to more than half mainly by slashing fees and spending lots of money on ads to undercut the competition. But the company has spent less than a third of what it normally does on marketing during the global health crisis, since drumming up new business has been easy.

“Once the coronavirus is gone and consumers again can choose between delivery, pickup or a night out, the promotions will have to start back up,” Willis said.

Barry Schwartz, chief investment officer with Toronto-based money manager Baskin Financial, says he isn’t interested in buying shares in either company right now at any price, but that doesn’t mean he thinks they aren’t worthwhile companies.

“Is the valuation absurd? Only time will tell,” he said in an interview. “If in five years they are not profitable or don’t look like they are going to be, then, yeah, they are completely overvalued and people made huge mistakes.”

A fear of missing out on future gains is part of what’s driving investors to buy in while they can, at any price, but despite the lofty valuations both are fundamentally “really high-quality businesses,” Schwartz said.

“This is not your parent’s dot.com bubble.”

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