Airbnb Ready to IPO
2019 has been fertile for the stock market. Two ride-hailing giants Uber and Lyft went public this year. Uber stocks are trading at 34 USD, making the company worth 58 billion USD. Lyft keeps a low profile trading below IPO price around 51 USD and worth around 16 billion USD. Investors did not have the scarcity of unicorns so far. However, 2019 is not over and we still expect the IPO of Airbnb. Is it a good target to invest? What will determine its price? Why do the founders list the company? What should investors expect for its IPO?
Let’s briefly introduce Airbnb. Two roommates who had difficulties to pay their rent founded the company in 2007 as a home rental platform. It provided a good alternative for the people who could not find a hotel room during hectic seasons. The company name is the merger of airbed and breakfast representing what the company provides. Airbnb had a tough start so that the founders had to sell cereals to keep the company alive. Y Combinator and Paul Graham were the turning point of the company. Airbnb graduated from Y Combinator and got investment from Sequoia Capital in 2009. It reached a valuation of 1 billion USD in 2011, thanks to the continuous investment from Sequoia Capital and other investors. Airbnb expanded geographically by launching its German office in the same year. The operational indicators have gone up significantly since then. Airbnb currently hosts over 2 million people per night having a presence in 191 countries.
The management gave the first signal of IPO in 2015. The company decided to postpone the IPO thanks to two extremely successful founding rounds in 2015 and 2016, raising 2.4 billion USD in total. Those investments raised the company valuation to 31 billion USD. This is also the last valuation known publicly.
Co-founder Brian Chesky stated that they would do it only for raising equity, not for a branding event.
Airbnb continued to grow, albeit more slowly and inorganically. Airbnb is a constant acquirer and has made 21 acquisitions since 2007. It acquired Luxury Treats for 200 million USD in 2017, and HotelTonight for an undisclosed amount estimated about 450 million USD in March 2019. The latter gave a big indication for a forthcoming IPO. Because it was a common tactic observed also for UBER IPO, Uber acquiring Middle Eastern competitor Careem two months before its IPO.
Although Airbnb is a private company and does not disclose the full financial statements, the management informs the public about its financial performance consistently. Airbnb has been profitable since 2016. It was stated that in 2017 the company netted 100 million USD in profits with a 2.6 billion USD revenue. 2018 seems to be better as third-quarter revenue exceeds 1 billion USD. The company is still growing with 30% in revenue and expected to get 40 billion USD valuation in a potential IPO. These numbers are excellent and are the key for the investors. However, the future direction of the company is ambiguous. Airbnb currently positions in lodging and challenges hotel chains. However, an ambition to become a broader travel company will change the game. No doubt, this change will need financial capital that can be the most important reason for IPO.
Although Airbnb does not feel the pressure for the timing of the IPO, the competition from well-known booking sites like Booking and Trivago can force Airbnb’s hands. Marriott is rumoured to join the game, launching a home-sharing service. Airbnb attempted several ideas to diversify its product portfolio to counter. It invested 150-200 million USD in an Indian hotel company OYO, which provides budget accommodation in India. Airbnb also partnered up with RXR to open a hotel in New York, which will be available exclusively through the Airbnb platform. Those initiatives could be costly and pave the way of an IPO.
However, there are risks for the business, and shareholders might want to cash-out before those risks substantialize. In that regard, the regulations can play a big part despite no major penalties inflicted so far. Some city councils including LA, New York and Amsterdam limited the number of people in a single apartment and banned certain types of places on Airbnb. Some other city councils forced renters not to list places without informing the owner and list up to a maximum in certain cities (120 days in a year in Paris). Those applications can pressurize the company if they spread.
The management team is crucial in IPOs. Different from the hostile takeovers in the 1980s, the new generation owners do not relinquish their spots using anti-dilution techniques. This can turn the company into a family business. It is rumoured that ex-CFO financial officer, Laurence Tosi left the company because of the amid tension between him and CEO Brian Chesky. Tosi, an investment banking veteran served as CFO/COO of Meryll Lynch and CFO of Blackstone, was the bridge between the company and the investors. His leave could be a reason for the IPO delay. To sum up, the company might seem immaculate with pure financial lenses, but the investors should consider legal and organizational risks.
Despite tiresome valuation efforts, the market is having difficulties to find the optimum price for unicorns. Therefore, a stock fluctuation in the first year is plausible. The market observed those swings in Spotify and Lyft IPOs (discussed earlier stories). The more dramatic example was Snapchat. The Snapchat IPO price was 17 USD in 2017. The stock plummetted to 5 USD erasing two-thirds of the value in January 2019. It needed two years to recover. The price overtook its IPO debut only recently. Therefore, the Airbnb price will likely to fluctuate considering the competition and unknown future. The investors should keep an eye on various factors because Airbnb-like companies are the playground of institutional investors and hedge funds.
