This has been a banner year for U.S. tech IPOs, which raked in billions of dollars from investors even as the COVID-19 pandemic disrupted the broader economy.
In fact, three of America's biggest tech IPOs ever occurred this year -- Snowflake (SNOW), Airbnb (ABNB -1.40%), and DoorDash (DASH 0.70%) -- and together those companies raised about $11 billion with their market debuts.
Let's take a closer look at these three companies, how they dazzled investors, and whether or not these three best tech IPOs of 2020 still have room to run in 2021.
Snowflake raised $3.9 billion with its IPO in September, which made it the largest software IPO of all time. The stock was initially priced at $120 a share and that price more than doubled on the first trading day. The stock price blew past $420 a share in early December before pulling back to about $330.
That $330 share price gives the cloud services company a valuation of $93 billion -- or 85 times next year's sales. That frothy price-to-sales ratio makes Snowflake one of the market's priciest tech stocks.
Snowflake impressed investors for three reasons. First, its revenue surged 127% year over year to $401.6 million during the first nine months of fiscal 2021. Its net retention rate, which measures its growth per existing customer, hit 162% in the third quarter. Second, Snowflake's technology is disruptive. Its cloud-based service pulls all of a company's data onto a central cloud-based platform, where it can be analyzed and fed into third-party software. That data warehousing solution helps companies break down silos and streamline their businesses. Lastly, big investments from Berkshire Hathaway and Salesforce attracted a stampede of like-minded bulls.
However, Snowflake isn't profitable, its net loss widened year over year from $265.3 million to $340.2 million in the first nine months, and it faces rising competition from integrated services within Amazon Web Services and Microsoft Azure. Those challenges, along with Snowflake's sky-high valuation, make it too risky to recommend at its current price.
Airbnb raised $3.7 billion earlier this month. It priced its IPO at $68 a share, and the stock price soared to $144 on the first trading day. Shares subsequently dropped back to the mid-$120s, and Airbnb is currently valued at $74.6 billion -- or 17 times next year's sales. Airbnb's P/S ratio is much lower than Snowflake's, but its fundamentals are also weaker.
Its revenue declined 32% year over year to $2.5 billion in the first nine months of 2020 as the COVID-19 crisis halted most non-essential travel worldwide. Its net loss widened from $322.8 million to $696.9 million.
Airbnb's short-term rental platform is disruptive, but it faces a growing number of threats -- including tighter regulations for short-term rentals, conflicts between guests and hosts, and competition from evolving online travel agencies and hotel chains. For example, Booking Holdings now offers home and apartment listings on Booking.com and Agoda Home, while Marriott International works with home rental platform Hostmaker to provide short-term rentals.
That rising pressure could prevent Airbnb from ever generating a profit, even after the pandemic ends and its revenue growth accelerates again. Therefore, Airbnb might seem reasonably valued for a growth stock right now, but it faces too many headwinds to be considered a worthy long-term investment.
DoorDash raised $3.4 billion in its public debut in early December. It initially priced its IPO shares at $102, and the stock closed at $190 a share on the first trading day. It subsequently pulled back to the high-$150s, which gives it a market cap of $50.5 billion. At 12 times next year's sales, DoorDash looks significantly cheaper than Snowflake, Airbnb, and many other hot tech IPOs of 2020.
DoorDash's lower P/S ratio might seem odd since the food delivery company's revenue rose 226% year over year to $1.92 billion in the first nine months of 2020, its total orders jumped 200%, and its net loss narrowed from $534 million to $149 million. It also controls 50% of the U.S. food delivery market, according to Edison Trends, which puts it far ahead of its closest rivals Uber (UBER 0.29%) Eats and Grubhub (GRUB).
However, investors expect DoorDash's growth, which was sparked by stay-at-home measures and restaurant closures during the pandemic, to cool off after the crisis ends. New regulations aimed at "gig economy" companies could also force DoorDash to offer its independent contractors higher wages and more benefits, which would crush its fragile margins.
To make matters worse, restaurants will likely regain the upper hand after the pandemic passes, which could reignite the ugly price war between DoorDash, Uber, and Grubhub. Just Eat Takeaway's upcoming takeover of Grubhub could also breathe fresh life into the former market leader.
I wouldn't buy any shares of DoorDash until I see how it fares after the pandemic, but it looks like one of the most reasonably priced tech IPOs of the year.