RE: Airbnb’s Revised S1 and IPO
Airbnb's Wall Street entrance was nothing short of jaw-dropping!
What happened: Airbnb shares opened on the Nasdaq Thursday at $146 per share, more than double its $68 IPO price and valuing the company at more than $100 billion. The stock closed at nearly $145 and is now valued higher than Marriott, Hilton and Hyatt combined.
For a mature company to see the valuation increase by that much in a matter of ten months is without precedent. Perhaps a testament to Airbnb's ability to quickly turn around its business during the pandemic, cutting costs and focusing more on long-term stays closer to home. It's also symptomatic of investor demand for fast-growing tech startups, as low interest rates limit attractive alternatives.
Equally stunning is the vast fortune left on the table! Had Airbnb priced shares at $146, it would have raised an additional $4bn. That added funding could have been on the company's balance sheet, fueling growth. It’s no doubt that this massive price discrepancy will incite some serious reflection at Morgan Stanley and Goldman Sachs, whose investment bankers led the initial offering. It also means that pre-issue stakeholders missed out.
At its initial offer price, Airbnb’s implied market capitalization of $40.6bn is greater than that of rival travel booker Expedia - $18.2bn – yet still overshadowed by Booking.com, currently valued at $86.3bn. The price indicates the short-term rental company has raised $3.4bn from the IPO, ahead of its Nasdaq debut. The high demand for its IPO caps a sharp rebound for the company, which at the depths of Covid-19 disruption, was forced to raise $2bn in emergency funding as bookings dropped by more than 70% globally.
Airbnb (ABNB) is a rare IPO. The company is a trailblazer in travel, one of the largest sectors in the economy. It's also an industry ravaged by the COVID-19 pandemic, which makes the timing of Airbnb's IPO fascinating. Few would have expected in March that Airbnb would not only meet its goal of going public in 2020 but also at a valuation perhaps above $40B. Its impact on the way we travel and on the broader global housing market - or better said, on individual housing markets around the western world, at least - is meaningful and notorious.
I reviewed ABNB’s updated S-1 filed December 7, 2020. Below, is a high-level overview describing what I perceive as some of the advantages and disadvantages ABNB has.
Advantages
Brand Recognition. Airbnb is the category leader, the “verb” for both hosts and guests. (S-1, pg. 8).
Category Adoption Potential. “As of 9/30/20, the majority of our guests who have ever made a booking on Airbnb were between the ages of 18 and 34.” (S-1, pg. 204).
Sturdy Direct Traffic Funnel. “91% of 2020 visits are direct/unpaid, 77% in 2019.” (S-1, pg. 224).
Post-Vaccine Travel Habits. Persistence of domestic and short-distance travel bodes well for Airbnb. (S-1, pg. 148).
Revenue Growth. 51% CAGR leading into 2020 compared to BKNG’s 10-k reported 13% CAGR. (S-1, pg. 122).
Skin in the Game. Chesky’s full compensation is in shares directly tied to shareholder returns. (S01, pg. 277).
Disadvantages
Non-Exclusivity. Booking lists two million homes on their site (Q3’20), as do several other competitors.
Regulatory Risk. Restrictions on short-term rentals had been imposed in nearly 70% of Airbnb’s top destinations. (S-1, pgs. 228-230, ABNB Prospectus).
Google Vulnerability. Airbnb is reliant on SEA, making them especially vulnerable to Google. (S-1, pg. 53).
Payment Processing. Payment processing is a meaningful cost of revenue. Consistently about 25% of revenue sets them back as compared to Booking.
Correlated to Air Travel Cost. Success is bound to affordable air travel to support medium-to-long-distance traveling.
Debt Financing. To survive the pandemic, Airbnb was forced to raise money at high interest costs (LIBOR + 7.5%-10%), given a (Q2’20) 72.5% decrease in revenue.
One of the strange things about 2020 has been how, even as merciless the year has been for travel, a lot of these companies have already mostly or fully recovered. PAC, OMAB, BKNG, AER, THO, and AENA.MC are up 1.75% on average over the past one-year. Only AER remains down more than 10%. Surely, one could argue that fiscal stimulus, Federal Reserve support, and low interest rates have done their part in inflating asset prices. However true, the market may per chance be providing us with clues that 2021 and especially 2022 will see more travel than ever.
This post is based on an unbiased perspective solely from the S1 and does not incorporate our overcharging analysis on the sector, market forces and Foreward industry-wide outlook.
