$30 Billion Airbnb Valuation Challenges New Bear Market Thesis
The debate between bulls and bears over the general stock market continues on as the S&P 500, Dow Jones and the Nasdaq all have failed to make much headway since February 2015. Stalled bull markets are worrying and do bring along with them waves of technical analysts insisting that stocks can only go down from here. But using stock prices alone to predict future stock prices misses one of the most important features of bull markets and a booming economy. That is the amount of money going into private equity, which often leads to initial public offerings.
It was less than a year ago that the home-renting site Airbnb raised $100 million to reach a valuation of $25.5 billion. The New York Times is now reporting
To get an idea of how big $30 billion is for a company like Airbnb, the four biggest hotel stocks are Hyatt Hotels Corp. (NYSE: H), Starwood Hotels and Resorts Worldwide Inc. (NYSE: HOT), Mariott International Inc. (NASDAQ: MAR), and Hilton Worldwide Holdings Inc. (NYSE: HLT). All of them have underperformed the S&P since February 2015, which is not surprising considering the amount of money going to their main competitor, and the fact that Airbnb fundamentally threatens their business models.
Starwood and Marriott are S&P 500 stocks and they have lost, but the value lost in those stocks is not simply being erased in a recession or deflation or because of bear market conditions. It’s just being moved off of the S&P and into private hands. The most significant number to consider here is that the combined market cap of the 4 biggest hotel stocks is $58.5B as of June 30. That gives Airbnb more than half the value of its 4 biggest competitors combined, nearly equal value to three of them minus Hilton, and the value of all 5 now is much higher than the combined value of the big 4 back in February 2015. Besides, who knows how big Airbnb will get if and when it gets to the point of an IPO?
Other factors to consider are that the US money supply has increased by $1 trillion since February 2015, from $11.8 to $12.8 trillion with stock prices going nowhere. Where is all the money going then? Not into consumption, at least not yet, as consumer prices have only risen 1.6% since stocks topped nearly a year and a half ago. A lot of it has been going into bonds, as interest rates on the 10-year have dropped 40% since July, and dropped 30% on the 30-year. Some is going into the labor market that is much tighter and getting more expensive now. That accounts for some of the money, but not all of it. There are probably big cash balances out there sitting in brokerage accounts waiting for dips to buy.
We’ve seen sharp dips recover very quickly twice since the S&P topped, and three times if we count the October 2014 decline and quick recovery. One main factor that could be keeping investors nervous and stocks from breaking out to new highs may be the Federal Reserve’s complete inability to hike interest rates more than 25 basis points despite repeated assurances that hikes will come, making long term investors nervous about the resilience of the economy. Despite all the nonstop talk of rate hikes, there have been and will probably be precisely zero rate hikes in 2016 now that Brexit has passed. As long as the money keeps flowing though, which it is, downside is limited in stocks even if indexes may have some trouble breaking out to new highs just yet.