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Capital Markets

Airbnb files to go public

Introduction

Airbnb has filed a confidential draft registration statement with the US Securities and Exchange Commission for an IPO, which is likely to be one of the biggest this year. With this announcement, the accommodation booking company becomes the latest to join numerous other companies looking to go public to take advantage of the surging stock market conditions. However, Airbnb’s pandemic-induced losses of $741m for the first half of 2020 have had a considerable toll on the company’s valuation in recent months. Although its bookings are beginning to show signs of recovery, the current uncertainty surrounding the travel industry makes it difficult to anticipate how investors will react to its public debut.

Airbnb Inc

Founded: 2008

Sector: Lodging

CEO: Brian Chesky

HQ: San Francisco, California, United States

Type: Private

Revenue (Q2 2020):  $335m

Net loss (Q2 2020): $400m

Deal overview

On August 17th, Airbnb confidentially filed to go public, pursuing its long-anticipated plans despite the impact of  the travel slowdown this year. Although the San Francisco-based company had previously considered raising funds through a direct listing, in which no new shares are sold, it indicated last week that it would undergo a traditional IPO instead. Airbnb has yet to specify the quantity and price the shares would be offered at, as well as disclose its financial information.

Founded in 2008, Airbnb was created as a way to connect people wanting to rent out their house or apartment to others. Since then, it has developed into one of the largest so-called “sharing economy companies”, a term used to describe companies that enable people to share services with one another, eliminating the need to form a fully-fledged business. This IPO sees Airbnb follow in the footsteps of other sharing economy companies such as Uber and Lyft, both of whom have gone public in the past 18 months. However, both companies had very high valuations in the private markets yet failed to convince investors during their public debuts, with shares prices falling sharply in their first days of trading. This creates uncertainty with regard to how investors will react to Airbnb going public, particularly in light of the current situation in the travel industry.

The effect of the pandemic on Airbnb

The Coronavirus pandemic has led to significant disruption in the travel industry, with the US Travel Association estimating that it has lost out on $330b worth of revenue since the start of March. This disruption has hit Airbnb hard, with 2020 revenues expected to be roughly half of its $4.8b revenue in 2019. As a result, the company was forced to cut costs, resulting in roughly 25% of the workforce being laid off, nearly 1,900 employees, as well as slashing marketing costs and raising billions of dollars in debt. Despite this, Airbnb CEO Brian Chesky remains optimistic about the company’s future, saying that “we are down, but we’re not out.” 

Airbnb has shown promising signs of recovery in recent months, with gross revenues rising to last year’s levels in June and July as more people sought to take summer road trips and stay in private homes away from crowds. This recovery has been strongly influenced by booking in rural areas, which were up 25% in June compared to the same month last year, according to data from AirDNA. However, Airbnb’s more profitable European and American urban markets are still well below last year’s levels. The company is likely to pitch to investors on its ability to adapt its approach to these unprecedented circumstances in order to convince investors that the company  is able to prosper in an era of limited travel.

Timing and valuation of the IPO

In April this year, the huge disruption of the pandemic saw Airbnb raise $2b in emergency funding at an implied valuation of $18b, significantly lower than the $31b figure at which the company was valued during a round of funding in 2017. However, having shown positive signs since then, the company may be able to obtain a higher valuation in its IPO than it had in April, but it remains unclear what this figure may be.

The surging market conditions may help Airbnb’s valuation as it makes its public debut, with the Nasdaq index reaching record highs and up 60% since Airbnb’s emergency debt funding in April. This announcement makes Airbnb the latest to join a host of companies looking to go public in the coming months in order to benefit from the rallying stock market. This is planned before the US presidential election in November, which tends to lead to stock market volatility. Professor Aswath Damodaran of NYU Stern School of Business, an expert on company valuations, told Bloomberg last week that Airbnb will be able to achieve the top of their valuation potential not only due to optimal market conditions, but because its brick-and-mortar competitors, such as Hilton and Marriott “are going to come out of this crisis a lot more damaged than Airbnb ever will.” Hence, having a business model built on low capital-intensity could ultimately help Airbnb reach a higher valuation in its IPO.

Sources

https://www.ft.com/content/a35a84b1-8177-40de-99d5-ca04d375cd3b

https://www.cnbc.com/2020/08/19/airbnb-has-filed-confidential-ipo-paperwork.html

https://www.washingtonpost.com/technology/2020/08/19/airbnb-ipo-filing/

https://www.phocuswire.com/airbnb-set-for-blockbuster-ipo

https://markets.businessinsider.com/news/stocks/airbnb-ipo-price-timing-right-coronavirus-hurt-competitors-nyu-damodaran-2020-8-1029522142

https://www.bloomberg.com/news/articles/2020-08-12/airbnb-revenue-tanks-67-in-second-quarter-ipo-planned-for-2020

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