What a difference a few months makes: Home-rental company Airbnb Inc. announced Wednesday that it has confidentially filed for an initial public offering.
The San Francisco-based startup was hit hard by the COVID-19 pandemic as travel came to a halt in many parts of the world in March, with its valuation reportedly dropping from $31 billion to $18 billion a month later. It laid off almost 1,900 employees, or nearly 25% of its workforce, in May. But the company said in a news release after trading closed Wednesday that it had filed a draft registration statement for an IPO — not a direct listing — with the U.S. Securities and Exchange Commission.
“It was hard to imagine in mid-March and April that Airbnb would be going public this year,” Tom White, an analyst with D.A. Davidson, said Wednesday.
With travel for business and pleasure “decimated,” however, the bright spot in the industry has been alternative accommodations and vacation-rental inventory.
“People have been cooped up, and the virus-safe option is renting a house,” White said.
Airbnb has turned to focusing on promoting trips closer to customers’ homes. “I think you’re going to start to see travel becoming more intimate, more local, to smaller communities,” Airbnb CEO Brian Chesky told Axios in June.
Airbnb did see its bookings situation improve late in the quarter, however, with Bloomberg reporting that bookings dropped 30% in June after a 70% decline in May. That tracks with bookings improvements elsewhere in the industry — Expedia Group Inc. EXPE, +2.74%
revealed second-quarter results that were drastically affected by the pandemic at the end of July, but said bookings improved thanks to growth at its Vrbo division, an Airbnb competitor.
“The appetite for secular growth stories is strong in this market,” said Dan Ives, managing director of equity research at Wedbush Securities. “It’s a very complex environment for investors to navigate… with Airbnb being a stalwart of the industry.”
If Airbnb stock begins trading this year as expected, it will join a select crop of big IPOs that have already taken place in an uncertain economy, including those of insurance startup Lemonade Inc. LMND, +0.56%
and Warner Music Group Corp. WMG, -1.05%.
Other high-profile companies expected to go public this year include Palantir Technologies Inc. and DoorDash Inc.
Airbnb executives had previously considered a direct listing — which involves no new shares created and allows existing investors to sell their stock directly on public markets — according to reports.
After Tesla and Apple announced plans to split their shares within weeks of each another, there has been a growing buzz that more companies with triple and quadruple-digit share prices will follow in their footsteps.
“Everybody’s talking about it,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told MarketWatch in an interview on Thursday.
“I’m getting requests from companies looking for raw data… asking, ‘Is there a reason I should split [my shares]?’ he said.
Silverblatt said he thought boards of companies might indeed follow Tesla and Apple’s lead at some point and split their shares in an effort to appeal to a wider retail audience, even if doing so is almost an entirely cosmetic exercise by a company and one that could be expensive.
“Will, there be others that split? I have to say yes. Those [companies] can’t be the only ones,” he said, referring to Apple and Tesla.
Apple AAPL, +1.77%
on July 30 announced a 4-for-1 stock split that will take effect on Aug. 31. At the time of its announcement, made after the close of regular trade, shares of the iPhone maker had closed at $384.76. They have gained nearly 20% since then to $460, as of Thursday.
Earlier this week, Tesla TSLA, +4.26%
said it would complete a 5-for-1 stock split by Aug. 31, that also sent the electric-vehicle maker’s shares zooming higher.
Stock splits were once a common occurrence on Wall Street, as companies attempted to make their share prices more enticing to average investors.
Back in the late 1990s and early 2000s, amid the dot-com boom, stock splits were all the rage (see attached chart).
But such divisions, of companies creating more shares, are a rarity nowadays.
Indeed, Tesla and Apple are the only stock splits thus far in 2020, even though the average share price among publicly traded companies is $149.32, compared with an average share price of $51.08 in 1997 when there were 102 stock splits, marking the greatest number of splits over the past three decades, S&P Dow Jones Indices data show .
The Wall Street Journal in a 2017 article titled the “Split Decision: The Pros and Cons of Splitting Shares,” wrote that beyond appealing to retail investors, making a stock appear more liquid and less overvalued have been among some of the reasons that companies had opted to enact splits.
MarketWatch columnist Mark Hulbert back during Apple’s last announcement of a stock split in 2014 said that stock splits could also be read as a vote of confidence by a company’s management.
“Of course, the stock split itself is simply a cosmetic accounting thing that brings the stock price down. The reason that it’s bullish is that it’s a signal of something that is good news on the fundamental side and that good news is confidence on the part of management that their stock price will not only stay at its current level but keep growing and for that reason they need to split it in order bring the stock price back to a sweet spot,” he explained.
Talk of stock splits now come as mom-and-pop investors find themselves in a veritable golden age of trading, where commissions are at or near $0 and many brokerage platforms offer fractional share ownership of stocks, making purchasing small stakes in companies attainable and relatively low cost.
On top of that, a recent spate of outperformance by retail investors, who have made aggressive and thus far successful bets on the comeback of a number of coronavirus-stricken industries, compared against professionals, has cast a spotlight on investing by a new, young cohort of stock buyers.
That backdrop would presumably weaken the case for stock splits to drive retail ownership but proponents of the move say that fostering an environment that is pro-retail may be a long-term good for the stock market overall and companies.
“Remember, the size of the price tag matters with this [young investing] crowd” and “you want this no-commission paying crowd in your stock,” CNBC’s Jim Cramer said during “Mad Money” on Wednesday.
“This new cohort of investors, the ones who love low-dollar amount stocks, will start buying and holding these best-of-breed names rather than the darned penny stocks,” he said.
Lindsey Bell, chief investment strategist at Ally Invest, wrote last week, after Apple’s announcement that it’s “tough to say if this is the start of a new stock split fad.”
That said, Bell says that “a little support from companies with expensive stocks could be a big win for those wanting a bite of the Apple (and other big tech/high priced stocks).”
Silverblatt said that there are a number of high-priced companies who might fit the profile of those interested in slashing their share price by virtue of a split.
His data show that there are 63 companies with a share price at or above $250, up from 44, as of Aug 12, 14 companies with stocks at $500 and over, up from 10 at the end of 2019; nine trading at or above $750 a share, up from six, and seven companies boasting a share price of $1,000 or greater, two more than the end of last year, and two issues that carry a price tag of $2,000 a share or better, when there were none at the end of 2019.
Amazon, whose shares closed at around $3,161 on Thursday, hasn’t split its stock since 1999.
A Wall Street Journal article recently said administrative costs may serve as an additional deterrent to companies considering a stock split, citing an academic paper that pegged the administrative cost of a stock split at around $800,000 for a large company.
That cost for some megalith companies is relatively tiny, particularly if management thinks the long-term value of a split outweighs the expense.
Hulbert, citing a study authored by David Ikenberry, a finance professor at the University of Colorado, says that the average stock undergoing a two-for-one stock split beat the market by 7.9% over the year after the announcement of the split — and by 12.2% over the three years after that announcement.
KE Holdings Inc. on Thursday became the first Chinese initial public offering to raise $2 billion from a U.S. listing since iQiyi Inc., then saw its stock soar 87% into the close.
Less than an hour later, iQiyi gave a stark reminder of the rocky path that many young Chinese stocks have walked on U.S. exchanges. Hovering over everything is the possibility that all Chinese companies could soon have to choose between living up to the laws of their own country or allowing U.S. investors greater visibility into their finances.
That tale feels too familiar to U.S. investors in Chinese stocks. Not long before Wolfpack’s iQiyi report, Luckin Coffee Inc. LKNCY, -3.30%,
dubbed the Starbucks of China, plunged after similar accusations of over-inflating numbers. Luckin has now lost 94% of its value, and the stock has been delisted from the Nasdaq and is now trading over the counter. Luckin, however, was not the first company to pull the wool over the eyes of investors. According to Stop The China Hustle, a website created by Geoinvesting to draw attention to the issue, U.S. investors have been defrauded of more than $50 billion by publicly traded Chinese companies listed on the NYSE or the Nasdaq over the past 10 years.
While Chinese IPOs are required to file financial statements and other corporate filings with the SEC, they are extremely risky for investors. These companies have complex business structures created to evade both litigation from investors and repercussions from the Chinese government, which prohibits foreign investment in certain types of Chinese companies, including technology firms. In addition, their auditing firms do not have access to what is called the working papers of the company, so they can only conduct their audits based on materials they are given by company executives.
Yet nothing stops the constant parade of Chinese companies on Wall Street. According to Renaissance Capital, which tracks IPOs and manages IPO ETFs IPO, +0.88% IPOS, -0.33%,
18 Chinese companies, including KE Holdings BEKE, +87.20%
, have gone public so far this year, raising $5.5 billion, excluding blank-check companies (yes, China is getting involved in those too). That compares with 13 deals that raised $2.7 billion in the same time frame last year. So far this year, Chinese companies have already raised more cash than the full year of 2019, when 25 companies raised $3.5 billion, according to Dealogic.
Investors clearly cannot get enough of Chinese initial public offerings. Since they missed the boat on the real Netflix and many other now-hot tech companies in the U.S., they are hoping to catch the upside on a copycat company with an even more massive addressable market in China. But until these companies are held to the same accounting standards as U.S. companies, they will always be much higher risk because it is easier for executives to fudge or fabricate numbers with fewer safeguards and watchdogs. Investors need to be cognizant of the big risks.
The inclusion, expected to happen within a few months, would unleash a torrent of new money from countless exchange-traded funds, and be followed by pension, mutual and other actively managed funds in the U.S. and overseas, that track the large-cap benchmark or have size or other restrictions on which stocks to add to their holdings.
Besides Tesla’s profitability, several analysts have praised Tesla’s cash reserves, the continued strong demand for its electric vehicles, its new factories being built in Texas and in Germany, and a “battery day” scheduled for Sept. 15 as well as the expected launch of the Cybertruck, its electric pickup.
Fintech behemoth Ant Group Co. will attempt the world’s largest ever IPO by raising $30 billion in Shanghai and Hong Kong, likely by October, Chinese media reported Monday.
Ant is valued at roughly $200 billion, and will aim to sell 10% of its shares on Shanghai’s Nasdaq-like STAR board and 5% on the Hong Kong Stock Exchange, sources told Caixin, one of China’s most reputable and independent financial publications.
“[The listing process] will surely be fast,” a source close to the IPO underwriters was quoted as saying. “The offering will probably take place in September or October.”
Ant affiliate Alibaba BABA, +2.75%,
founded by Jack Ma, had held the record for largest IPO for years until Saudi Aramco 2222, +0.15%
shattered it in December, raising $26 billion. If successful, the Ant offering would not only break that record but would become a crowning achievement in Beijing’s ongoing attempt to lure Chinese tech companies back home to domestic exchanges — a goal that has only become more acute amid increasing U.S.-China tensions.
Ant’s success has been due in large part to the massive adoption in China of its mobile-payment platform Alipay. The platform now commands a 55% share of the country’s mobile-payment market, versus rival WeChat Pay’s 39%, according to iResearch.
Ant, in comparison with WeChat, has also expanded into a more extensive range of financial services, such as consumer lending, credit ratings and insurance. And it also runs one of the world’s biggest money-market funds, Tianhong Yu’e Bao, in which nearly half of China’s population has some form of investment.
The listing also marks a milestone for Shanghai’s year-old STAR market, which Beijing has worked to shape into a Chinese Nasdaq. In fact, the tech board has surged to become one of 2020’s most lucrative IPO arenas — with its listings raising more than double the funds raised by the Shanghai exchange’s main board. The STAR’s aggregate $19 billion in IPOs this year trails only the $29 billion brought in each by the New York Stock Exchange and the Nasdaq, according to Bloomberg data.
Thus, the estimated $20 billion portion of Ant’s anticipated dual listing raised via the STAR market could make this year’s top IPO forum not a New York or even a Hong Kong exchange, but rather a still-nascent board within the Shanghai bourse.
And beyond its initial listings, the STAR market’s gains this year have been eye-catching. It finally rolled out a benchmark index last week, the STAR 50, which tracks its large caps. The rollout showed a roughly 50% gain so far this year — more than double that of the Nasdaq 100 NDX, +1.36% QIV, +1.21%.
A cloud hanging over Ant’s IPO is the recent news that China’s antitrust watchdog is considering an investigation into both Alipay and WeChat Pay. The State Council’s antitrust regulator has been gathering information on both players for more than a month, Reuters reported Friday, seeking to determine if the two have used their leading positions to block competition.
Calls to Ant Group’s Hangzhou headquarters for comment went unanswered.
Tanner Brown covers China for MarketWatch and Barron’s.
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