The online home rental platform has struggled during the pandemic, but its IPO could be better received by investors than the likes of Uber and WeWork.
Thursday 10 Sep 2020 Author: Yoosof Farah

Online home rental marketplace Airbnb is set for a blockbuster stock market debut this year as it gets ready to launch a multi-billion dollar initial public offering (IPO) in the US.

The company is expected to list before the end of 2020 after it confirmed it had confidentially filed the necessary paperwork with US finance regulator the Securities and Exchange Commission (SEC).

It’s not entirely clear what Airbnb’s market value will be once it lists, but its most recent funding round in April saw it raise $1 billion at a pre-money valuation of $17 billion, so it’s likely to target a valuation above the post-money figure of $18 billion.

For comparison, Booking.com is the most valuable in the sector with a $72 billion valuation, followed by Expedia at $11.96 billion and TripAdvisor at $2.98 billion.

VALUATION HIT BY COVID

Either way the figure is likely to be below pre-coronavirus estimates. According to the Financial Times, private investors were trading indirect stakes in November 2019 which valued Airbnb at close to $42 billion. The $18 billion figure is also below Airbnb’s internal $26 billion estimate of its own valuation reported in early March.

The company has been hit hard by the pandemic, and shelved plans to list much earlier this year. Given it is currently a private company, Airbnb doesn’t often publish its financial information or provide much of a breakdown, but its second quarter revenue in 2020 reportedly tumbled by at least 67% to $335 million, down from more than $1 billion in the second quarter of 2019, and well below the $842 million it recorded in sales during the first quarter.

But it has seen signs of a strong recovery since, and CEO Brian Chesky told US media at the end of June that Airbnb’s bookings are ‘recovering way faster than any one of us imagined’, adding that business is ‘above where we were last year, and we could get even higher than what we would have forecast before Covid’.

In July, total consumer spending on Airbnb was 22% higher than the same period last year according to Edison Trends, and the company said it surpassed a million bookings on a single day in July, led by an increase in stays at nearby destinations.

PROVEN PROFITABILITY

Unlike other tech unicorns with disappointing or failed IPOs like Uber and WeWork, Airbnb has actually proven it can be profitable, having reportedly made a profit of over $200 million and turned cash flow positive in 2018. The company is also said to have around $4 billion in cash on its balance sheet.

That’s important for potential investors as it means Airbnb can grow organically and doesn’t have to continually go cap in hand to the market just to survive.

But being profitable on a regular basis is still a problem for Airbnb, and in the first nine months of 2019 it reported a loss of $322 million according to the Wall Street Journal, as the company spent big to deal with safety issues, upgrade its technology and grow its user base ahead of its IPO.

The company makes a small amount of money from its tours and activities business Airbnb Experiences, but the majority of its income comes from charging a service fee, a percentage of the total transaction, to both people who rent their rooms or properties via Airbnb’s platform (the hosts) and the people who stay there (the guests).

THE ‘SECRET SAUCE’

This is what’s considered by investors to be Airbnb’s ‘secret sauce’, a network of guests and hosts loyal to the platform who use Airbnb as their first port of call when renting out their room/property or when looking for somewhere to stay when in town, with the company enjoying the regular, recurring revenue via the service fee both guests and hosts are seemingly happy to pay.

At the same time the majority of expenses fall on the properties’ hosts, so in theory Airbnb’s service fee is mostly profit.

But the company has a lot of other costs, and ahead of its IPO has had to ramp some of them up. It has spent around $150 million making its platform safer after several safety issues involving a wide range of things including racism, prostitution and gun violence, and has also tied employee bonuses to safety metrics.

In addition, the Wall Street Journal reported that Airbnb has spent another $100 million upgrading its technology, while the firm’s administration costs – HR, accounting, legal, running its headquarters, etc – had growth substantially in the third quarter of 2019 to around $175 million.

Also adding to costs ahead of its IPO is marketing spend. While this may help growth down the line, it eats into profits now. Airbnb spent $367 million on sales and marketing in the first quarter of 2019, and reports suggest it may have spent more than $1.1 billion in the year as a whole.

The company did halt all marketing spend in March this year as the pandemic hit in a move it estimated would save $800 million in 2020, though it’s likely it will ramp this up again in the near future with the travel and leisure sector, particularly domestically in the US, showing strong signs of recovery.

COMPETITIVE LANDSCAPE

In terms of competition, there is a direct competitor in Expedia-owned Vrbo (short for Vacation Rental By Owner), another US-based home rental platform.

Vrbo is smaller than Airbnb, with 2 million listings on its website compared to over 7 million for Airbnb, and also has a smaller user base than Airbnb’s 150 million.

But it is growing at a significant rate and in July, Expedia said Vrbo had been the largest contributor to the improved booking trends it had seen as the travel and leisure sector in the US started its recovery, with the division an outlier in an otherwise underwhelming trading update from the group.

Like Airbnb it makes most of its money from charging a service fee. While the business is smaller than Airbnb, it could be a potential threat as it continues growing, particularly if there are signs that some of Airbnb’s loyal networks of users could be switching to Vrbo.

ESG RISKS

One issue for investors worth pointing out relates to environmental, social and governance (ESG) concerns, particularly on the social side. Airbnb has been accused of distorting the local housing market in many cities across the US and the UK, and criticised for the crippling effect this has had in some cases on affordable housing. With institutional investors applying an ever greater focus on ESG, this is likely to be an area where Airbnb will feel the heat from investors.

But overall Airbnb’s stock market debut is likely to be better received by investors than the likes of WeWork and Uber, given it has that all-important track record of profitability and already has the money it needs (the $4 billion cash on its balance sheet) to fuel future growth.

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