Why is Airbnb going against all odds?
Airbnb, Inc. is expected to launch its Initial Public Offering (IPO) on December 10, 2020, under the ticker symbol of ABNB. The stock will be listed on the NASDAQ Global Select Stock Exchange. Morgan Stanley and Goldman Sachs will be the main underwriters.
Is Airbnb a good investment?
Is it the best time to invest in Airbnb?
WHAT IS AIRBNB?
Airbnb is the UBER for short-term home rentals. The company operates a digital platform to allow homeowners to rent their unused space to guests. Many travelers are attracted to Airbnb as it offers a unique local experience with a cheaper option than hotels. At the same time, the homeowners can generate extra income for the unused space.
Airbnb’s business has grown significantly and expanded into several market segments: workplace, luxury rental, Olympics, and last-minute hotel. Airbnb has a strong differentiation over other platforms because it has comprehensive systems for review, analytics, advertisement, and payment. The company can maintain a good quality of members and maximize earnings for its hosts.
Besides, Airbnb has created a strong community of entrepreneurs and a loyal follower of travelers. Airbnb App allows guests to book local activities, tours, restaurants, cooking classes, and adventures. This allows the local economy to grow and create small businesses’ opportunity to offer a unique local experience.
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Based on the report ended in Sep. 2020, Airbnb has 5.6 million listings globally, operates in more than 100,000 cities and 220 counties. The platform serves four million hosts and eight million guests and generates nearly $8,000 in earnings per host .
Airbnb, Inc. is expecting to raise more than $2.8 billion on the first trading day. The company will offer 52 million shares of Class A common stock with a target price between $44 – $50. The start-up is targeting a $35 billion valuation on its IPO day .
Below is Airbnb’s income statement, Inc. on November 16, 2020, for the IPO filing to the Security and Exchange Commission. The company reported $2.5 billion in 2017, $3.6 billion in 2018, and $4.8 billion in 2019. The revenue grew more than doubled over three fiscal years.
Despite the lockdown, Airbnb reported revenue of $2.5 billion in the first nine months of 2020. The revenue is equal to its earnings in 2017. It shows that Airbnb has a strong and resilient business model against the worst-case scenario. The gross booking cratered in April 2020, but it shows an upward trend matching the pre-pandemic numbers in the summer [page 10, Airbnb prospectus].
Airbnb performs better than its competitors in the hospitality industry. The company does not maintain and operate real estate properties that can be costly. The hosts have full exposure to real estate risk. The company only offers a digital service platform to bridge the homeowners and guests while collecting a service fee.
In 2017, Airbnb was valued at $31 billion as the start-up managed to disrupt hotels and the short-term rental industry. The business model was successful and showed 37% revenue growth year-over-year (YOY) from 2017 to 2019. Simultaneously, the total costs and expenses grew faster than the revenue at an average of 42% year-over-year (YOY).
The most considerable portion of the total costs and expenses comes from sales and marketing. It makes up more than 30% of the cost, followed by the cost of revenue of 24% and product development of 18%. The company had to layoff 2,000 out of its 7,500 employees and suspended the sales and marketing expenses during the pandemic.
The cost-cutting measures were crucial as gross booking dropped nearly 80%. Airbnb, Inc. raised $2 billion of debt financing at an $18 billion valuations to maintain liquidity. It is required as it was unclear when the economy would return to normal, and the cost of debt is low.
Airbnb was originally scheduled to go public in March 2020. However, the COVID-19 pandemic had a significant impact on Airbnb’s business that was highly dependent on travel and tourism. The company decided to delay the IPO until the restriction is reduced, and the economy returns to normal.
However, the early employees will likely lose an opportunity to cash out as the stock option will expire before the end of the year if Airbnb delays the IPO until 2021. Based on the prospectus, the founders, Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, plan to sell their stocks during the IPO, valued at nearly $95 million.
Therefore, Airbnb has been working with its underwriters to push the IPO date before 2020 ends. One of the measures is to conduct drastic cost-cutting measures to prove that the company is agile and investible in the worst economic downturn.
Airbnb will continue its IPO proceeding with a narrative of investing a start-up at the dip with a potentially big return when the economy recovers. The company’s gross booking has improved throughout the summer of 2020, but the second wave of COVID-19 in Q4 2020 provides a negative sentiment on the IPO market.
From the corporate finance standpoint, the IPO’s timing cannot be better because the long-term government bond yield is at the lowest level. This condition is appealing for investors and asset managers to invest in the stock market. The yield of 30 years US Treasury Bills has dropped from 3% to 1.42%, or equal to more than 50% reduction from the pre-pandemic era .
The long-term government bonds heavily influence the discount rate used to calculate the net present value of future cash flow. The decline of 30 years Treasury Bills yield reduces the discount rate, which will increase the net present value of Airbnb.
The valuation of Airbnb will be at the highest level during this time despite short-term cash flow disruption because the net present value of Airbnb is not based on the cash flow today, but it will factor the cash flow from 5 to 10 years in the future.
Therefore, it is crucial to prove that the company has a resilient cash flow during the pandemic. Airbnb reported a $219 million profit on $1.34 revenue in the third quarter of 2020 after a drastic cost-cutting measure and deferment of sales and marketing campaign .
Despite short-term revenue decline during the pandemic, Airbnb expects the public to buy into its unique and disruptive business model. The company is offering a service at the lower end of the market and empowers small businesses to participate in economic activities.
Airbnb provides extra income, but it also creates employment, increases tax revenue for the government, and improves the quality of life for the local economy. Airbnb has created a strong community for entrepreneurs, and lets travelers discover hidden gems around the world.
The market response is positive, based on polls and social media feedback. The rise of millennial investors and the massive stimulus program may help Airbnb to get a positive response from the market and exceed its target valuation. However, the negative sentiment still shadows the Airbnb IPO as the vaccine release is still unclear despite positive trial results.
In conclusion, Airbnb is a disruptor in the short-term rental and hospitality industry. The company is in direct competition with hotels and resorts by offering a unique experience and a low-cost option for travelers. Simultaneously, the company can create opportunities for small businesses and entrepreneurs to participate and create positive contributions to the economy.
Airbnb is a good investment in the long run. The negative sentiment may influence the IPO next week and create short-term volatility. However, it is the best timing for Airbnb to get a high valuation as the yield of long-term government bonds is at the lowest level, and the vaccine development is showing positive results.
Will Airbnb exceed its IPO target price? It is difficult to predict the real reaction of the market on the IPO day. Still, the company will do well in the long run because it has a resilient business model, agile organization, and innovative organization to provide better value for its hosts and guests.