Is AirBNB The Hottest IPO of 2020?
Don’t Listen To Me, But Please, Hear Me Out: # 24
Shaheeda Abdul Kader, November 26 2020
Is AirBNB the hottest AND nicest IPO of 2020? Will it beat SnowFlake’s history making IPO pop of 104%? I have been eagerly looking forward to AirBNB’s IPO.
Everyone’s got a moment or two in their life where something happens and you make a decision and then your entire life changes.Brian Chesky, Founder & CEO, AirBNB
After 13 years and a tumultuous 2020, AirBNB finally filed its S1 last week and I have been geeking on it. S1 is the SEC form that a company must register to file its intent for an Initial Public Offering, or IPO.
In this blog, I will highlight all the things that I like about AirBNB and things that give me pause. I will also briefly compare AirBNB’s performance to an established hotel chain like Marriot Group. There are a plethora of analysis and articles about AirBNB’s S1, so I I’ll try to not regurgitate.
Our “overnight” success took 1,000 days.Brian Chesky, Founder & CEO, AirBNB
The Management Team
In a world of startups where one has to contend with the seeming sociopathy of a Mark Zuckerberg, self-aggrandizing delusions of an Adam Neumann or the toxic, ruthlessness of a Travis Kalanick, it is absolutely refreshing to see more humane, empathetic leadership like that of Brian Chesky, Joe Gebbia and Nathan Blecharczyk, the founders of AirBNB.
Chesky is the CEO and face of the company. Although I obviously do not know him personally, I have found his interviews to be very thoughtful and empathetic. He makes me believe AirBNB truly cares about every stakeholder from Employees, to Hosts, to Guests, to the Communities in which they operate as well as the investors.
Superhost Relief Fund
Coronavirus (COVID-19) devastated the travel industry this year, impacting hosts around the world. To support our community, Airbnb employees donated $1 million from their own pockets to kickstart a fund for hosts struggling to make ends meet. Airbnb’s founders also personally contributed $9 million—in addition to another $7 million from investors—for a total of $17 million.AirBNB
Additionally, AirBNB distributed $250 Million to offset losses that hosts suffered due to Covid19 cancellations. This had a significant impact on its bottom line.
Most wonderfully, Airbnb has created a Host Endowment Fund with 9.2 million Airbnb shares. So the IPO will not just benefit investors but also hosts. AirBNB would invest the endowment in educational and financial support for hosts when the fund value reaches $1 billion.
4 Million Hosts earned $110 Billion cumulatively over the last 13 years.
This means that, hosts earned $27,500 on average in 13 years which may not seem like a lot, but considering this category did not exist, it is a great source of additional income.
In 2019, 50% of new hosts received a booking within 4 days of listing an available unit, and 75% received a booking within 16 days of becoming available.
As a result, hosts are also great and the review system works because 84% of AirBNB revenues in 2019 was from hosts who had at least 1 booking in the previous year.
The hosts are loyal because of these benefits as shown below. In other words, by year 3, AirBNB us able to retain 93% or more of the host revenues!
|Host Cohort Revenue Retention|
|Year 1||Year 2||Year 3||Year 4||Year 5|
AirBNB is present in 220 countries or 100,000 cities. AirBNB experiences are available in 1,000 cities. Marriot Group is present in 134 countries. Note that Marriot went public in 1953 and further bought Starwood Hotels in 2018.
86% of the 4 million hosts are located outside the USA. For FY 2019, 63% of the revenue came outside the USA, so it is well diversified.
7.4 million Listings of which 5.6 million are active. Comparatively, Marriot has 1.38 million rooms.
825 million guests stayed in an AirBNB accommodation over the last 13 years.
Each guest spent about $133 in 13 years.
In 2019, 54 million active bookers worldwide booked 327 million nights and experiences.
430 million cumulative reviews as of September 30, 2020. For context, Yelp had about 825 Million reviews from 2.1 billion visits to their website in the past 12 months. (See Resources for sources.)
69% of AirBNB revenue in 2019 was generated from stays in that year by repeat guests.
|Guest Cohort Revenue Retention|
|Year 1||Year 2||Year 3||Year 4||Year 5|
“I am AirBNB’ing it” is now a common phrase. You know you’ve made it when you become a verb. Funny thing is, AirBNB’s ubiquity is killing another verb, “google it”.
This alone is a tremendous advantage and AirBNB was able to save $609 million in marketing spend up to Sep 30, 2020. AirBNB expects to decrease its performance based marketing spend in the coming years.
Think about it. How many companies do you know that can get away without paying the google tax?
Opportunity – Tip Of The Iceberg
AirBNB believes their SAM or Serviceable Addressable Market is a whopping $1.5 Trillion.:
- $1.2 trillion from short-term stays
- $239 billion from experiences.
AirBNB estimates the TAM (Total Addressable Market) to be $3.4 Trillion.
So, AirBNB has a lot of strengths and wind in its sails. But how are the financials? Let’s look at some numbers.
AirBNB had a healthy gross margin of 75% in FY 2019. For comparison, Marriot Group had a slightly better gross margin of 75.5% in 2019 and Hilton Worldwide had 63.5% and Hyatt Hotels’s gross margin was 26.7% according to research tool finbox.
Gross Booking Value or GBV
Obviously, the GBV has decreased drastically in pandemic ridden 2020. But what I feel excited about is best illustrated with the 2 charts below. AirBNB has a seasonal business and in general the 3rd quarter is their best quarter. But what is remarkable is the way in which they roared back in Q3 of 2020.
In 2019, arguably, AirBNB’s best year, GBV from Q2 to Q3 decreased by 1% whereas in 2020, AirBNB was able to leapfrog Q2’s GBV by 150%. If AirBNB can maintain this momentum and keep GBV in Q4 at close to $8 billion, then the stock price should shoot up in the new year.
- Monthly Nights and Experiences Booked Trends, Page 137, S1
- Monthly Gross Booking Value Trends, Page 138, S1
I am convinced that Risks section in S1 is purely as a deterrent to competitors, for if you look at the complexity of the business and all the risks outlined, you would indeed have to be a very Braveheart to venture into this arena.
However, I will only highlight a few that are troublesome even for me.
AirBNB is not profitable despite its very healthy gross margins of 75%. In fact it had a Net operating loss of $0.5 billion in 2019 and almost $0.5 billion in the first 9 months of 2020. It doesn’t expect to be profitable for some time.
Free Cash Flow (FCF) & Debt
As AirBNB’s business is seasonal and revenue is recognized only after a guest checks in, it has erratic FCF each quarter.
Moreover, the pandemic compelled it to take $2 Billion in Long Term Debt due on September 30 2025. The interest rates are high and based on LIBOR, these can have an adverse impact.
IRS is investigating AirBNB’s 2017 earnings and may have to pay much larger taxes and penalty over the amount reserved for such payments.
Cybersecurity & Payment Fraud
I believe this is one of the greatest threats to AirBNB because they are essentially a technology company. Their tech platform IS their Business. Any hack or data breach or denial of service attacks can have a tremendous negative impact on AirBNB.
Payment related fraud: In 2019, AirBNB paid $92.2 million in chargebacks due to payment frauds and these numbers are increasing.
Changing regulation around data protection and privacy laws across the 220 countries it operates in can have a significant impact on AirBNB.
This is the BIGGEST RISK I see. AirBNB is optimized for desktop experience. As you know, more and more of us are doing more and more with our mobile phones. Depending on the features and technology of the user’s phone, the experience may not be optimal and AirBNB could lose potential customers. Most of us travel about once or twice a year and therefore won’t download an app just to use once or twice a year. So, AirBNB must make sure their mobile experience is absolutely flawless.
If the features, speed, resolution, wifi strength etc., of the customer’s phone is not the best, they may have a poor experience on AirBNB site and may not complete a search or transaction.
I have often wondered why do technology companies have to raise so much money if technology automates everything and AirBNB is an asset light tech platform. For example, AirBNB raised $6.4 billion in funding.
Well the answer is TECHNOLOGY is EXPENSIVE! AirBNB is investing heavily in product development so that AirBNB can scale its platform as it grows. If their technology investments fail, then this is a serious risk.
This is also the reason that despite a 75% margin, AirBNB is not profitable now and won’t be for sometime to come.
Increasing Insurance Costs
AirBNB has a wholly owned subsidiary, Captive Insurance Company but relies heavily on 3rd party insurance providers. Losses due to claims are and consequently insurance premiums are also increasing. If the trend continues it may not be feasible to provide adequate insurance cover.
AirBNB bears currency exchange risks when guests want to pay in a different currency and hosts want to receive funds in a different currency.
I am looking forward to AirBNB’s IPO. Although I am disappointed because it is unlikely I will be able to buy at the IPO opening price, I will certainly invest in AirBNB when there is a dip. There is usually a dip after the flurry of IPO profit taking.
I love this company because:
- The Management
- The Culture
- Great Potential for Tremendous Growth
- Crushing incumbent hotel groups both in global reach, listings, nights and experiences booked.
I recommend you checkout some of the resources I used to make my analysis. I especially enjoyed Professor Scott Galloway’s take on AirBNB. He compares AirBNB to Credit Card companies and expects AirBNB to have a $120 billion valuation post IPO.
AirBNB’s last valuation was $30 Billion.
If you are worried about investing in an unprofitable company, let me leave this with you.
In the last 5 years, a mostly profitable Marriott Group’s stock returned 82% as on Nov 25, 2020. Had you bought Marriott stock at the bottom of the March 2020 crash, today your Marriott stock would’ve given you a handsome 118% return.
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