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Many believe that one of the most important events taking place in December will be the Brexit resolution or a new stimulus package by the Fed and ECB, whereas others keep their eye on one of the most long-awaited IPO in this decade – Abnb stock‘s stock market debut.
Rumors about it have been floating around since 2016 but only this November the company filed its preliminary prospectus with the SEC. Timing can look strange but it’s important to remind that despite the difficult year for the economy, the IPO market is literally booming. On the other hand, the company suffered because of the shutdown, and some estimate that since the pandemic has started, Airbnb has lost almost half of its value, from $35 billion to $18 billion. In an interview on CNBC the CEO of Airbnb, Brian Chesky, said “It took us 12 years to build Airbnb, and we lost almost everything in four to six weeks.”
When considering investing in the company it’s crucial to analyze its strong and weak points. What are the challenges Airbnb has been facing with or could affect the business in the future? What could be the strategy to continue growing?
Back In 2014, Airbnb found itself “under growing attack from city authorities around the world.” First thing first, it is important to say that Airbnb was taking profits from the hotel industry. The same year researches found that in the ten US cities with the largest Airbnb market share, 1.3% fewer hotel nights were booked, resulting in a 1.5% loss in hotel revenue. Over the years, those losses have only increased. By one estimate, Airbnb is capturing 10-12% of travel demand in New York City, Paris, and London. Still, it has been encountered that by listing on Airbnb, a hotel can increase its short-term bookings. So, it’s a story of two tails.
Cities are also trying to put sticks in the wheels saying Airbnb violates local laws and regulations. For example, in New York owners or tenants cannot legally rent their apartments out for short periods (less than 30 days) unless they are also living in the property. There is also a tax issue; in many cities, those renting out holiday accommodation are expected to pay for a hotel or tourist tax.
Talking about growth, we should check it’s Capex or acquisitions. Over the past years, Airbnb has made over 20 investments to become a global travel giant, buying up talent, technology, and potential competitors. Some of those acquisitions were: Accoleo (marketplace for short-term rentals based out of Hamburg, Germany), DailyBooth (a photo-blogging social media site based in San Francisco), Pencil Labs (app to help improve its own messaging and scheduling tools), Accomable (app to help travelers with disabilities find accessible travel accommodations) and many others. Thus, we could say that Airbnb took advantage of a climbing number of hosts and guests.
Finally, it’s of vital importance to analyze the company’s financials. In 2019, Adjusted EBITDA decreased to $(253.3) million primarily due to significant investments in growth initiatives and investments in our technical infrastructure. In 2018 and 2017, Adjusted EBITDA was $170.6 million, representing 5% of revenue, and $60.0 million, representing 2% of revenue, respectively. In 2018, Adjusted EBITDA increased as our annual revenue grew 43%, offset by ongoing growth initiatives.
It means that Airbnb is a growing company; however, its growth rate is getting smaller. This can be explained by the fact that the company is getting bigger. Its revenue share, on the other hand, managed to stay relatively stable. As well noted by Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University, “Airbnb is closer to profitability than many of its high profile sharing-economy predecessors (such as Uber and Lyft) and the fact that it was able to report positive operating profits, albeit fleetingly in 2018, puts them ahead of the pack.”
Talking about the coronavirus, Airbnb has been hit hard but it but since May, the company began recovering. With the money from the IPO (it is rumored to raise about $3 billion), the company could retire existing debt and cover future investment needs.
According to the company, they have a substantial market opportunity in the growing travel market and experience economy. “We estimate our serviceable addressable market (“SAM”) today to be $1.5 trillion, including $1.2 trillion for short-term stays and $239 billion for experiences. We estimate our total addressable market (“TAM”) to be $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.”
In conclusion, most probably Airbnb will continue growing, finally reaching profitability. Besides that, it will take additional market share from the hotel business. In this context, margins should improve. Additionally, Airbnb doesn’t have a ton of debt and is quite close to becoming a profitable business.
The question now becomes – will traders actually consider the company’s financials or most of the pricing will depend on the market momentum? Keep safe and be smart
