What happened
After its blockbuster IPO in December, shares of Airbnb (ABNB +0.40%) gained an additional 25.1% in January, according to data provided by S&P Global Market Intelligence. Many Wall Street analysts started covering the stock for the first time last month, and a fair number of them initiated that coverage with rosy outlooks, exciting investors and sending the stock higher.
So what
Ahead of Airbnb's initial public offering in December, the company had anticipated pricing the shares first in the $44 to $50 range, and then closer to the event in the $56 to $60 range. But due to strong demand, that number was raised to $68 per share. And when the stock hit the open market, the price soared to $144 per share the very first day, making it one of the largest IPOs of all time. Apparently, investors still had a lot of appetite for one of the largest travel platforms in the world, despite the damage the COVID-19 pandemic did to its business in 2020.
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When companies like Airbnb go public, it takes a little time for analysts to start coverage. But as the coverage began rolling in during January, it was mostly positive. For example, the stock popped about 10% when Tigress Financial started it off with a buy rating during the month.
Now what
To be clear, Airbnb rose as analysts and investors alike had time to digest the long-term opportunity. This is a short-term boost to the stock and differs from the long-term benefit of positive business results. But the company couldn't report positive developments because it was still in a quiet period.
Airbnb happened to swing higher in January, but generally speaking, volatility is normal in the wake of an IPO. It takes time for shares to settle into a valuation. It's one reason some investors avoid investing in IPOs altogether.
Long term, Airbnb's business results will be what really matters. Considering it already trades around 31 times trailing sales, the company will need to post strong growth numbers to justify its premium valuation.
