It must take incredible confidence to undertake a hospitality stock IPO during a global pandemic that has grounded nearly all travel, but that is exactly what Airbnb is about to do.

The peer-to-peer home-sharing company recently released its prospectus for an initial public offering (IPO), giving us our first in-depth look at its operations. A specific date for the IPO is yet to be announced but odds are it will take place in early December.

Up first, the headline items for the first nine trading months of 2020:

  • Revenue: $2.5bn (declining by $1.2bn from the same period in 2019, driven by a 42% decrease in bookings)
  • PBT: Airbnb recorded a $697m loss (declining by $374m, and already $22.5m higher than 2019’s full year loss)
  • Adjusted EBITDA: A loss of $230m (compared to a $23m profit from the same period in 2019)
  • Revenue multiple: At an estimated valuation of $18 billion, the company is hoping to raise in the ballpark of $3 billion. That would list it at a 6x revenue multiple (assuming ~$3.3bn revenue for the full 2020) that could increase if performance improves post-pandemic.

The prospectus also revealed a lot more about how COVID-19 impacted the company:

  • The pandemic wreaked havoc: Revenue decreased 42% and 72% year-on-year for March and April respectively.
  • The summer provided a respite: Airbnb benefitted from lockdown restrictions easing in the USA and Europe over the summer months. For Q3 2020 (Jul to Sept) it managed to record a profit of $219m (Q3 2019: $266m). Considering the circumstances, an 18% decline in revenue while still showing a profit is a win all around.
  • The profit didn’t come without casualties: Part of the reason that Airbnb was able to reflect a Q3 profit was that it laid off 25% of its staff, nearly 1900 employees. It slashed sales and marketing expenses (normally its largest expenditure) to 8% of revenue (2019: 26%).

The general investor appetite for Airbnb’s stock will be mixed. There are a great number of variables at play and, until the company has been listed for long enough to make an objective decision, no single stance is wrong.

The Case for Airbnb(oom)

The bull case for Airbnb is less rooted in the past and Airbnb’s current context, and looks to two or three years down the line.

  • Strong cash position: Airbnb is sitting on $5 billion in cash and, apart from 2018, has had strong positive cash flows each year. This fits squarely within what makes their business model so fascinating. Unlike hotel companies, Airbnb collects the booking free upfront and pays it out once the stay has actually occurred. It also charges both sides of the booking (guest & host) a separate service fee. If you book a hotel through an online platform like Expedia or Priceline, as the traveler you pay nothing, only the hotel does.
  • Local is lekker: With international travel clamped, guests opted to explore within their own borders. Domestic bookings were 77% of total bookings in September, compared to 52% in January, and short-distance bookings (accommodation booked less than 800km away from the guest’s home) grew 66% year-on-year in June, and 38% in September.
  • Diversification: No single city accounts for more than 2.5% of Airbnb’s revenue, and in 2019 63% of its revenue came from hosts outside the United States. It also enjoys a healthy spread of revenue across continents. In 2019, 41% of revenue was generated in North America and 40% in EMEA (Europe, Middle East and Africa). Asia Pacific and Latin America account for 12% and 7% respectively (with Airbnb hoping to grow their share in China).
  • Long-term rentals are thriving: While the category of 1 to 27 nights (short-term stays) was down 81% year over year in April, long-term stays were down only 13% year-on-year and saw growth from May through September 2020. Additionally, revenue from long-term stays was up 50% year-on-year in September 2020. This may help Airbnb weather future short-term shocks.

The Case for Airbnb(ust)

The bear case for Airbnb looks down the rocky road that has led Airbnb to this point, and doesn’t see the dust settling.

  • A hefty debt commitment: In April, Airbnb entered into two 5-year $1 billion loans at steep interest rates: 8% and 10.5% respectively. It plans to pay $42.5m over the next 4 years and make a bullet repayment of $1.9bn in 2025. An investor with an already tenuous outlook is not going to find those terms favourable.
  • The Google conundrum: Google received a special (unceremonious) mention in the Airbnb prospectus. Google’s ability to promote its own travel search services is listed prominently among the risk factors:”How Google presents travel search results such as Google Travel and Google Vacation Rental Ads and their practices concerning search rankings, could decrease our search traffic, increase traffic acquisition costs, and/or disintermediate our platform. These parties can also offer their own comprehensive travel planning and booking tools, or refer leads directly to suppliers, other favored partners, or themselves.” Looks like Google might have another anti-trust case stacking up against it.
  • A business can’t survive on Q3 alone: A profitable Q3 each year won’t be enough to rescue Airbnb’s ailing profitability, especially not when it is staring down the barrel of $1 billion loss this year. It’s also not clear where the cuts can come from. Cutting sales and marketing expenses may help in the short-term but that spending will be necessary when you’re up against the world’s number one search engine.
  • The long arm of the law: Airbnb still has a number of tough legal battles up ahead with regards to rental laws and regulations. The powerful hotel industry lobby has been aggressively working to get municipalities to enact strict regulations against Airbnb. Some prominent cities are leading the charge. In London and San Francisco, rentals can only be booked out for a total of 90 days per calendar year. Amsterdam has taken a stricter approach: capping bookings at 30 days.

Ultimately, Airbnb has grown exceptionally over the past few years and redefined the hospitality sector. They estimate their total addressable market at $2 trillion, which is possible when you provide a service for any empty bedroom anywhere in the world.

However, as Uber’s listing has shown, empty spaces can just as well translate into empty profits.

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