Stocks drifted higher yesterday, led by the tech group. Energy stocks were the laggards early, but recovered. All in all, it was a quiet day. The big news was the first vaccine injections against Covid-19 in the UK. Hopefully it will be a start on the road to the end of the pandemic.
As I have noted, we are now at that point in the quarter where the news is sparse. Most major economic reports for November came last week. Corporate earnings are more than a month away. The deciding factors, notably Christmas season and year end investments, still lie in front of us. Hedge funds and other institutional traders, whose performance is rewarded on an annual basis, are closing their books. If they were tech heavy this year, they are closing them with a smile.
But on Wall Street there are always sparks of excitement. This year a preponderance of the excitement has centered around the new issue market. Two big names are coming this week, one today and one tomorrow. Their reception could set a tone for many weeks ahead.
Today’s new issue is DoorDash, the leader in food delivery. This has been a crowded field with names like GrubHub, Caviar, and Postmates all fighting DoorDash for the same delivery. And that doesn’t include restaurants that have their own delivery system. Pizza vendors have been delivering for decades. What has distinguished DoorDash is that it has been consistently gaining market share, a sign that consumers feel better about them than anyone else. DoorDash got its start away from urban centers and branched out from there. But in the end, this is a commodity business. You order a meal and someone delivers it to you for a fee, paid for by the consumer or restaurant in some combination. GrubHub has already been public before being acquired. Indeed, 2020 has marked a consolidation of the leaders. Soon there will be just two or three.
The key questions for potential DoorDash investors are:
1. Does the company have an earnings model that provides an adequate return on investment at volume?
2. Can it continue to differentiate itself from competition by better execution?
3. Is the total addressable market limited to restaurant food delivery, or can DoorDash drivers deliver almost anything? Amazon can deliver in a day. Can DoorDash deliver in an hour?
Amazon started selling books. Look where it is now. Can DoorDash do the same? Don’t look to me for answers, I have no idea. Replicating Amazon isn’t a trivial task. And, by the way, maybe Amazon someday will enter DoorDash’s space as a competitor. The market will make a judgment this week. I suspect it will be positive given its current mood. But history also shows that 90% of new public offerings eventually sell below their offering price.
Tomorrow will see the debut of Airbnb, maybe the most anticipated new deal this year. Airbnb has certainly revolutionized what many of us think of as holiday accommodation. The company has had and will continue to have confrontations with regulators, but it seems clear that the Airbnb concept is revolutionary, disruptive and lasting. But it isn’t without competition. Expedia’s VRBO subsidiary, which stands for vacation rental by owners, isn’t an exact clone, but overlaps the Airbnb space. It makes money today and has a good roadmap ahead. With Barry Diller’s Interactive Corporation behind it, it has management talent and money to compete. Chains like Marriott and Hilton are also experimenting in this space.
To date, Airbnb’s customers have been leisure and small business travelers. The hotel industry obviously wants to retain as much of that business as it can. Its properties offer amenities like pools, gyms and restaurants that Airbnb can’t match. But Airbnb is particularly appealing to families and to those who want to feel more at home. Airbnb options are often cheaper and better located. There is room for both, and the market is huge.
As for the stock, it too should be in high initial demand. Retail investors love to buy stocks where they know the name and have had good experiences. But valuation also matters. It is highly possible that by the close of business tomorrow, Airbnb will have a larger market capitalization than Marriott. But then again, Tesla today has a larger market capitalization than Ford and General Motors combined. Is that a short-term blip or a long-term statement? I guess we will see over time. Right now, investor sentiment strongly favors the new disruptors. But as Warren Buffett likes to say, you never know who is swimming naked until the tide goes out. For every Amazon or Apple# that hits a home run, there is a graveyard filled with pretenders. DoorDash and Airbnb could be starting their climb up the mountain this week. Or they could fall off the cliff trying. My only guarantee is that there will be books someday telling the tale of each episode.
Today, Shark Tank’s Lori Greiner is 51. Donny Osmond is 63. Dick Butkus is 78. Finally, Judy Dench turns 86.
James M. Meyer, CFA 610-260-2220