Airbnb IPO Will Put Hype to the Test
- By John Engle
On Nov. 16, Airbnb filed its S-1 registration statement with the Securities and Exchange Commission, setting the stage for a much-anticipated initial public offering. Airbnb, which allows travelers to book short-term rentals and experiences, will be the latest sharing economy leader to trade publicly, joining the likes of Uber Technologies Inc. (NYSE:UBER), Lyft Inc. (NASDAQ:LYFT), and Grubhub Inc. (NYSE:GRUB).
Airbnb's IPO will mark a major test for the resilience of the sharing economy amidst untold economic disruption.
Financials present a mixed bag
While most investors in tech stocks tend to be concerned with top-line growth almost exclusively, focus has increasingly turned to companies' ability to translate that performance to the bottom line. At first glance, that shift of focus would seem to benefit Airbnb.
Unlike many of its sharing economy peers, Airbnb has actually demonstrated an ability to deliver profitability from its operations, albeit inconsistently. Three of the company's eight quarters in 2018 and 2019 showed positive net income, as did the most recent quarter of 2020. According to its S-1, Airbnb managed to book a $219 million profit in the third quarter.
Despite its occasional quarterly profits, however, Airbnb has lost money in aggregate and there is little prospect of this overall pattern changing anytime soon. Indeed, there are signs that the losses may get worse. While Airbnb saw $170.6 million in adjusted Ebitda in 2018, this turned negative in 2019 to the tune of $253.3 million. In the first nine months of 2020, adjusted Ebitda was $-230.2 million.
Dealing with disruption
As I have discussed previously, the coronavirus pandemic has devastated the travel industry. Airbnb, which is heavily reliant on a healthy travel market, has struggled to contend with the disruptions wrought by the pandemic. While the company enjoyed revenue growth to the tune of 32% in 2019, its top-line growth trajectory has experienced a severe reversal this year.
Airbnb brought in $1.34 billion in revenue in the third quarter, down 19% from the same period a year ago. This truncated revenue was actually an improvement from earlier in the year. Indeed, Airbnb has seen its revenue decline by 32% in the first nine months of 2020, according to tech analyst Beth Kindig.
With its growth under threat, Airbnb's valuation has suffered. The company is reportedly seeking a valuation of $18 billion at IPO, less than half of what it was before the pandemic struck.
Not another WeWork
With its shaky growth rattling investors, Airbnb's leadership team has taken great pains to avoid comparisons to WeWork, another property-based sharing economy player that experienced a catastrophic meltdown ahead of an aborted IPO last year. On Nov. 11, Airbnb co-founder and CEO Brian Chesky attempted to highlight a key difference between his company and WeWork:
"I think that people used to believe that every company was a tech company. We now realize that [it] is not that they aren't a tech company, it is that tech companies live on a continuum. The best way to understand the continuum is your gross margins or what is your gross profit. Some [companies] like Microsoft and these really big tech firms have really high margins and other companies [have] really low margins. And I think that's the first lesson of WeWork."
Airbnb is certainly more of a tech company than WeWork is, and its gross margins are significantly healthier. Unfortunately, Airbnb's margins have hardly managed to keep up with the pace of the likes of Microsoft and other software companies. Thus, valuing it like a software tech stock may be unwise.
My verdict
Airbnb's IPO is certain to garner significant media and investor attention. The company has considerable marketing momentum, and similar stocks have enjoyed bumpier runs at their respective IPOs.
Whether Airbnb can translate the hype into a successful public market debut remains to be seen.
Disclosure: No positions.
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This article first appeared on GuruFocus.
