Airbnb Seeks Valuation Of Nearly $35 billion in its IPO
Home rental start-up Airbnb is trying to ride the soaring stock market to stage a comeback. The company plans to price its initial public offering (IPO) at $44 to $50 per share. That gives it a valuation of up to $35 billion on a fully diluted basis. That’s a much lower valuation than those of many tech IPOs this year if you compare it to data warehousing companies like Snowflake (SNOW Stock Report). According to the company’s filing, Airbnb’s revenue rose 32% year over year to $4.8 billion in 2019. Meanwhile, gross bookings grew 29% to $29.4 billion.
The company is among a flock of high-profile tech companies going public before the end of 2020. Food delivery company DoorDash and gaming platform Roblox may also go public before the new year. Airbnb’s last private valuation was $18 billion after it raised $2 billion in debt earlier this year as the company struggled in the early months of the coronavirus pandemic. That was nearly half its peak private valuation of $31 billion from 2017. Airbnb will be trading on Nasdaq under the ticker “ABNB”. Airbnb’s roadshow, where it makes its pitch to investors, will start on December 2.
According to the company’s S-1 filed in mid-November, revenue for the third quarter of 2020 was $1.34 billion. That represented a decrease of about 19% from a year ago. Net income fell by nearly 18% year over year to $219 million. The reality is that travel companies including Airbnb have seen a decline in business no thanks to the COVID-19 pandemic. Perhaps you are wondering, why is the company choosing to go public now?
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Is Airbnb Worth The Investment?
The COVID-19 pandemic hit much of the American economy, but perhaps no industry was hit as hard as travel and leisure. Airbnb was no exception. Revenues for the nine months ended September 30 sank by 32%, with most of the damage coming from the first two quarters of 2020. However, Airbnb saw a rebound in early July, with the company logging one million booked nights in a single day. More travelers are opting for road trips or long term home rentals, and this has been a boon for the company’s core business.
Sure, looking at the state of the global economy and the closed borders imposed today, Airbnb doesn’t look like a good bet. But let’s not forget that biotech companies such as Pfizer (PFE Stock Report), Moderna (MRNA Stock Report), and AstraZeneca (AZN Stock Report) are planning to roll out their vaccines in the coming few months. And we can expect that to bring the travel industry back to life.
While this isn’t a perfect time to go public, it is deemed as the best option for the company. That’s because the company has been burning through cash and borrowed a lot at high-interest rates. Given the number of successful tech IPOs this year, it might actually make sense for Airbnb to ride on that wave. Furthermore, at an IPO valuation that is only slightly above its Series F valuation back in 2017, new investors may be getting a reasonable deal.
Can Airbnb Achieve Sustainable Profitability?
Before making any investments, many investors would look at the financial statements of the company. Profitability is almost always the first thing that comes to mind. While the company may achieve a profitable quarter from time to time, it is still very much in the red overall. In fact, Airbnb has incurred net losses every year since its inception. The company’s accumulated deficit was $2.1 billion as of September 30, 2020. From its filing, it also points out its adjusted EBITDA and free cash flow have also been declining. The company further warns that the downward trend could continue.
Tighter Regulations For Short-Term Home Rentals
Airbnb initially thrived because there weren’t any major online platforms for short-term rentals. So, you could say that they have a first-mover advantage. Similar to Uber, the company’s presence poses a significant disruption to the incumbents in the travel industry. But as the company scales up, it has to deal with its share of challenges. For instance, there were cases of damaged properties and incidents of discrimination by hosts. Nevertheless, some believe that Airbnb has achieved a pretty good level of customer loyalty.
Another risk that has become apparent is the regulatory environment that the company faces. Hotels may be lobbying for new laws to regulate or restrict providers like Airbnb. Besides, some neighborhood associations ban short-term rentals for properties within a particular neighborhood. Airbnb recognizes all these, noting in its filing that a “wide variety of complex, evolving, and sometimes inconsistent and ambiguous laws and regulations” could affect its business.
Increased Competition From Evolving Online Travel Agencies & Hotels
Online travel agencies (OTA) and hotels have been offering staycation packages globally. And that’s where they could have an edge over the short-term rental stays. While Airbnb’s growth initially caught many OTAs and hotels off guard, these companies aren’t just going to sit down and watch their market shares get eaten away. As a result, companies like Booking Holdings (BKNG Stock Report) now provide home and apartment listings on Booking.com and Agoda Home. Besides, Expedia (EXPE Stock Report) bought HomeAway five years ago and expanded its Vacation Rentals by Owner (VRBO) platform to challenge Airbnb. While it is still the leader currently, Airbnb will have to stay ahead of these rivals.
With the effects of the pandemic still lingering, it is no surprise that many investors are cautious about participating in Airbnb’s IPO. While the valuation appears to be reasonable, it remains to be seen how the company can continue growing its revenue and profit. While challenges remain, Airbnb’s business could stabilize after the pandemic ends. In the filing, the founders stated that Airbnb “has become synonymous with a one-of-a-kind travel on a global scale”. You have to admit that they have got a point there. So, if you ask me, is Airbnb worth buying straight out from its IPO? I would take a deep breath before making a move.