Airbnb: What To Know Before the IPO
For those who do not know, Airbnb is an online vacation rental marketplace that allows users to stay at the homes of the app’s ‘hosts’ during vacation, tourism, and other travel experiences.
Airbnb is without a doubt one of the greatest startup success stories of the 21st century, starting in 2008 with an initial 10-20 bookings per day and growing to a large operation with more than 4.5 million properties globally in 81,000 cities, more than 300 million total guest check-ins, and company hosts having earned over $41 billion, all by 2018. Airbnb (ABNB) filed for a $1 billion IPO on November 16, 2020 with an $18 billion pre-money valuation, meaning that soon non-accredited public equity investors will be able to share in the returns that come with Airbnb’s incredible growth. Airbnb’s stocks will most likely be available on the secondary market by the end of December.
It is hard to deny the magnitude by which the hospitality and travel industries have been affected by the coronavirus pandemic and Airbnb is no exception. However, Airbnb has persisted through the pandemic, even shockingly reporting a $219 million profit in Q3 2020. Airbnb is a company with huge potential, but is their IPO a good investment considering the challenges the company faces today?
Reasons Not to Invest in Airbnb
Airbnb has been under pressure to IPO for some time now, due to mounting frustration amongst its 6000+ employee workforce who want to cash in their stock options. The New York Times reports, “Waiting for the start-up to go public has become a growing source of stress, many said, preventing some from making career changes, starting a family or moving on with their lives… The discontent has been exacerbated because Airbnb doled out two tranches of employee equity that are set to start expiring in November 2020 and in mid-2021; those shares will become worthless if the company is not trading publicly by then, they said.” There is always the chance that this IPO could be more attributed to this internal factor than the company’s management lets on.
In May 2020, due largely to the pandemic, Airbnb was forced to lay off 25% of its workers (2,000 laid off in total), further exacerbating employee anxiety concerning compensation. However, since announcing their IPO several months ago Airbnb has improved their compensation package significantly by offering sabbaticals to longtime employees, extended their parental leave policy, increasing their retirement contribution matching program, and offering higher bonuses and raises.
Mainly due to the coronavirus pandemic, Airbnb’s financials have suffered greatly in 2020, with the company reporting a net loss of $700 million on $2.5 billion in revenue for the first 9 months of 2020.
Airbnb also experienced a large down-round in 2020, going from a $35 billion valuation in 2019 to its $18 billion valuation today.
According to the Wall Street Journal, the company took out a $1 billion loan from private investors to make up for its losses in 2020.
Clearly, 2020 has been a bad year for Airbnb, but what were its financials like before 2020? Well, the company has experienced annual net losses almost every year since its launch in 2008. While accounts vary greatly, according to Bloomberg, Airbnb was profitable in 2017 and 2018. In 2019, Airbnb reported a $674.3 million net loss, on revenue of $4.81 billion. Unfortunately, 2020 is poised to pose the biggest loss to the company yet.
Reasons To Invest in Airbnb
Prior to Airbnb’s employee unrest and the coronavirus pandemic, Airbnb was (at least according to Bloomberg) a profitable company, and therefore had a demonstrably successful and scalable business model. After the pandemic, the company may likely return to profitability and continue to grow, leading to the subsequent increases in share price that foster returns for IPO and other public investors.
The down-round in valuation, while not advantageous for private investors who plan to cash out at IPO, may be beneficial to public investors in that as the pandemic subsides, the company is likely to reach its previous valuation more quickly than before since it already has much of the same infrastructure and customer base that it had in 2019. However, the company will surely have to substantially rebuild its workforce to sustain this regrowth.
While the coronavirus vaccine timeline is still uncertain, it is projected that a vaccine will be finalized and readily distributable by early to mid-2021. This will undoubtedly facilitate a resurgence in the tourism, travel, and hospitality industries. Many projections predict record travel and tourism highs in 2021, with the quarantine-fatigued global population eager for a much-needed vacation. This could mean a quick surge in Airbnb’s share price only a few months after its IPO. Even if 2021 is not the year when travel becomes widely allowed, as soon as the COVID-19 pandemic ends, expect Airbnb’s stock price to rise sharply.
Airbnb is a highly anticipated IPO, because the company has revolutionized the hospitality industry, quickly obtained a large customer base, and has a lot more of traction to speak of. As such, investor sentiment alone may be enough to make the Airbnb IPO successful. The stock market has increased in value despite the pandemic due in large part to investor sentiment, so it is entirely possible that the public market (especially the less experienced investors it is becoming increasingly saturated with) will look past Airbnb’s recent, mainly COVID-related difficulties and the balance of supply and demand for Airbnb’s shares will cause the share price to increase following the company’s IPO.
Airbnb reporting a $219 million profit in Q3 2020 shows promise that the company may not have to wait until the pandemic ends to brandish an annual net profit, as the company stated: “In early 2020, as COVID-19 disrupted travel across the world, Airbnb’s business declined significantly. But within two months, our business model started to rebound even with limited international travel, demonstrating its resilience. People wanted to get out of their homes and yearned to travel, but they did not want to go far or to be in crowded hotel lobbies. Domestic travel quickly rebounded on Airbnb around the world as millions of guests took trips closer to home. Stays of longer than a few days started increasing as work-from-home became work-from-any-home on Airbnb. We believe that the lines between travel and living are blurring, and the global pandemic has accelerated the ability to live anywhere.”
Lastly, Airbnb possesses several competitive advantages over competitors that make them not only likely to grow in the long-term, but to steal market share from other hospitality giants. As a result of Airbnb entering the hospitality market in 2008, the market has grown significantly because Airbnb has tapped into previously underutilized sources of both lodging and customers. Airbnb has made travel far more affordable, even while taking a cut of the price charged by their hosts - while also providing supplemental (and for many, primary) income to said hosts. This income opportunity has attracted homeowners to use the app while the reduced prices and ‘homey’ Airbnb experience has driven both new and seasoned hospitality patrons to the platform. As Airbnb commands this large, loyal marketplace of both hosts and customers, the company is not going anywhere anytime soon.
Another interesting and thoughtful article. Love this site!!!
This is a killer analysis. Great work as always. I would be curious as to your thoughts on Airbnb's regulatory struggles, such as those outlined in this WIRED article:
Do you see this impacting the IPO? This article is from 2019 but I'm sure a fair amount of these legal issues are still being hashed out.
I would think of the regulatory challenges as a reason not to invest, but am mostly curious what you think Jason!