Why You Can’t Buy Airbnb At Its IPO Price
As I write this, the investing world is waiting patiently for Airbnb shares to list on the Nasdaq under the ticker symbol ABNB. With an IPO price set at $68 per share, the company looks set to raise close to $3.7 billion from its IPO and will be valued at roughly $47 billion — an incredible comeback from the $18 billion it was valued at last April in the height of the pandemic.
As is par for the course with all public offerings like this, we’ve had the chance already to delve into the details around Airbnb as an investment prospect via its S-1 filing. If you would like to see what we thought, you can read these articles here and here.
However, what I want to address today is a question about the IPO process that we get asked a lot here at MyWallSt — why can’t I invest in the company at its IPO price?
There is a lot of hype surrounding Airbnb’s listing and a lot of parties interested in getting a slice of the pie. Already the company’s offering price range has gone from between $44 - $50 to $56 - $60 until finally settling at $68 a share last night.
However, this doesn’t mean that us retail investors can simply buy Airbnb stock for 68 bucks. What is important to understand here is the difference between offering prices and opening prices.
The offering price of an IPO is the price at which a company decides to sell, usually determined with the help of the bank underwriting the IPO. Initial investors are given access to the stock at this price the night before a floatation. These are typically large, private accredited investors and institutional investors that will buy up vast tranches of stock.
Meanwhile, the opening price is the price at which those shares begin to trade in the open market and are accessible to retail investors like us. This opening price is set by the supply and demand that surrounds the stock ahead of opening. Buy and sell orders will pile up until they are balanced against each other, determining the opening price. If the demand for shares exceeds the supply, the shares open higher than the offering price. Otherwise, they open lower.
(Note: the process of balancing orders is why newly-floated companies don’t list as soon as the market opens).
We can see how this plays in two high-profile examples. Yesterday, DoorDash IPO’d with a share price of $102. However, such was the investor frenzy around the company’s listing that the stock actually opened up on the NYSE at $182 per share — an increase of over 78%. The company went on to close out the day at $187.20.
But DoorDash’s industry-rival Uber didn’t have such a great start to life as a public company. When the company went public back in May 2019, its stock actually fell below its IPO price of $45 once it opened and closed down well over 7% for the day. It seems that the overall valuation of about $80 billion that its IPO price implied might have seemed too pricey and left more supply than demand for the company.
Of course, other factors can influence these opening prices too. The market is on a bull run at the minute buoyed by positive vaccine news and low interest rates, which means investors are actively seeking new places to put their money. When Uber IPO’d, however, there was a worsening trade war going on between the U.S. and China (whatever happened to that actually?) that prompted a lot of people to hold fire on new investments.
Here at MyWallSt, we have an unspoken rule that we don’t add a company to our shortlist of stocks until it has reported on at least two quarters as a public company. In the case of exciting companies like Airbnb coming to market, it can be really hard to adhere to this rule as we get a serious case of FOMO.
Just look at Snowflake — setting an IPO price of $120, opening up at $245 per share (+105%), and sitting today at about $385 (+57%). Who would have thought there was still a short-term upside after seeing an opening day jump like that?
However, as long-term investors, we must remain confident in the belief that when we invest in a company does not matter as much as how long we plan to hold on to it. In all likelihood, Airbnb stock will pop massively today (some rumors are saying higher than $150 at the minute).
Tomorrow, who knows?
What we do know, however, is that as soon as we are confident that the company is a great long-term investment opportunity, that’s the time to add it to our portfolios and hold forever.