Quick Take

Airbnb (ABNB) has filed to raise $1 billion in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides an online platform enabling persons to rent accommodations from other individuals for short periods of time.

ABNB has experienced significant revenue contraction due to the Covid-19 pandemic and I’m concerned that this revenue dampening will continue well into 2021.

I’ll provide a final opinion when we learn further IPO details from management.

Company & Technology

San Francisco, California-based Airbnb was founded to develop a two-sided marketplace between property hosts and consumer guests to provide lodging and related services on a temporary basis worldwide.

Management is headed by co-founder, CEO and Head of Community Brian Chesky, who previously earned a Bachelor of Fine Arts in Industrial Design from the Rhode Island School of Design.

Below is a brief overview video of Airbnb:

Source: Airbnb

The website aggregates supply and demand globally, provides hosts with pricing tools, scheduling capabilities, insurance coverages, and payment facilitation services.

Airbnb has received at least $3.98 billion from investors including Sequoia Capital, Founders Fund, Silver Lake, Sixth Street, DST Global, Greystar Real Estate, and Accel.

Customer/User Acquisition

The firm seeks to obtain new hosts as they are the core of supply providers to its platform.

Hosts learn about the firm through word of mouth and online media. 90% of the firm’s visitors come through organic search engine traffic or direct, so Airbnb has proven to be adept at avoiding the high and increasing acquisition costs associated with paid online marketing.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have fluctuated, as the figures below indicate:

Sales and Marketing

Expenses vs. Revenue

Period

Percentage

Nine Mos. Ended Sept. 30, 2020

21.7%

2019

33.7%

2018

30.2%

Source: Company registration statement

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, swung to negative (2.2x) in the most recent reporting period, due to a drop in revenue stemming from the Covid-19 pandemic, as shown in the table below:

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Sales and Marketing

Efficiency Rate

Period

Multiple

Nine Mos. Ended Sept. 30, 2020

-2.2

2019

0.7

Source: Company registration statement

Market & Competition

According to a 2020 market research report by IBISWorld, the global market for hotels & resort stays grew at an estimated 0.8% from 2015 to 2020.

As the global economy has reacted to the onset of the Covid-19 virus, the hotel & resort industry has contracted.

However, the industry continues to shift investment toward emerging economies as those regions improve their tourism infrastructures.

Also, as the world begins to move past the negative effects of the Covid-19 pandemic with improved treatment, herd immunity and vaccines, pent up demand for travel will likely return, proving growth to the industry perhaps as soon as 2021.

Major competitive or other industry participants include:

Financial Performance

Airbnb’s recent financial results can be summarized as follows:

  • Contracting topline revenue due to Covid-19 pandemic effects

  • Reduced gross profit and gross margin

  • Increased operating losses

  • A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2020

$ 2,518,935,000

-31.9%

2019

$ 4,805,239,000

31.6%

2018

$ 3,651,985,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2020

$ 1,852,640,000

-33.7%

2019

$ 3,608,926,000

29.4%

2018

$ 2,787,953,000

Gross Margin

Period

Gross Margin

Nine Mos. Ended Sept. 30, 2020

73.55%

2019

75.10%

2018

76.34%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Nine Mos. Ended Sept. 30, 2020

$ (489,967,000)

-19.5%

2019

$ (501,543,000)

-10.4%

2018

$ 18,744,000

0.5%

Net Income (Loss)

Period

Net Income (Loss)

Nine Mos. Ended Sept. 30, 2020

$ (696,865,000)

2019

$ (674,339,000)

2018

$ (16,860,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Nine Mos. Ended Sept. 30, 2020

$ (490,622,000)

2019

$ 222,727,000

2018

$ 595,557,000

(Glossary Of Terms)

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Source: Company registration statement

As of September 30, 2020, Airbnb had $4.5 billion in cash and $6.9 billion in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was $95.5 million.

IPO Details

Airbnb intends to raise $1 billion in gross proceeds from an IPO of its Class A common stock, although the final figure may differ.

There are four classes of stock:

  • Class A common stock: public investors, one vote per share

  • Class B common stock: co-founders and some existing investors, 20 votes per share

  • Class C common stock: not yet issued, possibly held for strategic investor, if any

  • Class H common stock: stock for the Airbnb Host Endowment entity, no votes. The company has funded the Endowment with 9.2 million Class H shares and co-founder Chesky has pledged $100 million for this entity to benefit Hosts on the platform on an annual basis.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

We currently intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time.

Management’s presentation of the company roadshow is not available yet.

Listed bookrunners of the IPO are Co-leads Morgan Stanley and Goldman Sachs, plus numerous other major investment banking firms.

Commentary

Airbnb is seeking public capital market investment more than twelve years after its founding in 2008, a rather long period of time for a venture-backed startup before going public.

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The company’s financials show the ill effects of the Covid-19 pandemic on travel and lodging, as 2020’s results show significant topline revenue contraction.

Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have fluctuated; its Sales and Marketing efficiency rate swung to negative territory as 2020 revenue contracted.

The market opportunity for disrupting the hotel stay industry with travelers staying in host properties is large but subject to near-term downward pressures as long as the Covid-19 pandemic is a major factor in traveler plans.

Airbnb has cracked the ability to create a global business from connecting hosts with guests.

Such services existed on the margins for many years before Airbnb came along, but the firm has performed impressively to create a superior system, disrupting the hotel & resort industry in the process.

While the company has faced a backlash in certain cities as the hotel industry fights back through regulatory channels, ABNB has not hesitated to defend its interests and those of its stakeholders.

While the current revenue contraction is ultimately temporary, I have a concern that the ongoing effects of the Covid-19 pandemic will depress activity on the Airbnb system for well into 2021.

When we learn more about the firm’s assumptions on IPO pricing and valuation, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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