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Airbnb IPO

Airbnb has completed its IPO. Here, we explain how you can get exposure to the Airbnb share price.

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Contact us: +44 (20) 7633 5430

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When was Airbnb’s IPO?

Airbnb's IPO was on 10 December 2020. The company first filed its listing in November 2020.

Airbnb was originally expected to list much earlier in 2020, but had to put its plans on hold when bookings and revenues fell dramatically as a result of the coronavirus pandemic. Airbnb has since let 25% of its staff go to cut costs, and diversified to offer a range of online experiences.

Our analysis on the Airbnb IPO

By Sam Dickens, portfolio manager
23 November 2020

Airbnb, the leading home-sharing platform, has filed for its IPO which is expected before the end of 2020. Investors have waited patiently for the opportunity to invest in a start-up which boasts a global brand but has also proven it can be profitable in its own right – unlike many of the tech unicorns that floated in 2019.

While it seem a strange time to go public given how hard the travel sector has been hit as a result of the coronavirus pandemic, the company showed it was able to bounce back in the third quarter of 2020. The recent confirmation of the IPO coincides with a positive set of preliminary vaccine results which have buoyed global stock markets and investor confidence.

A key reason for the IPO is to meet employee share obligations, which enable long-serving employees cash-in their shares. Start-ups generally choose to issue shares to the public to raise extra cash to fuel future growth, but Airbnb is in the enviable position where it has over $4 billion in cash on its balance sheet (it added a further $2 billion through two separate debt issues in April this year).

But unlike recent flops such as WeWork, Airbnb’s business model has proven it can generate a positive cash flow, which means the company can grow organically and not have to rely on external funding to survive.

The chart below looks at the share prices of three listed technology-focused companies that operate within the travel and hospitality sector; Booking.com, Expedia and TripAdvisor. These saw their share price close to halve earlier this year, underperforming the broader market.

The sharp decline in the share price of these companies is largely due to a steep drop in revenue during the pandemic, which led to heavy losses over the first half of the year. The table below shows that revenue declined by between 52%-58% for the three firms in the first half of 2020, compared to the same period in 2019.

Booking.com Expedia TripAdvisor Airbnb
Nine Months Ended 30 Sep 2019 11,727 9,320 1,226 3,698
Nine Months Ended 30 Sep 2020 5,558 4,279 488 2,519
% Change -56% -54% -60% -32%

Airbnb was valued at around $35 billion in 2019. This valuation almost halved earlier this year as warrants connected to a debt issuance valued the company at $18 billion.3 It Is thought that Airbnb is now aiming to raise $3 billion at a $30 billion valuation.

Is $30 billion a fair valuation? Looking at the wider stock market, investors had largely discounted 2020 as a non-event for earnings, but had expected them to snap back in 2021. But analysts have been busy revising down their estimates for 2021 earnings which has further elevated price multiples.

The table below shows that analysts do not expect earnings to recover to pre-pandemic levels by 2022. In fact, Expedia are not expected to beat 2019 revenue until 2024.

Booking.com Expedia TripAdvisor Airbnb
2019 ($billion) 15.1 12.1 1.6 4.8
2020 (e) ($billion) 6.8 5.5 0.6 3.4*
2021 (e) $billion) 10.3 7.9 1.0 4.4*
2022 (e) $billion 14.1 10.5 1.2 5.7*
Forward price-to-sales 5.8 1.6 2.8 6.0*
Valuation ($billion) 81.6 17.0 3.5 34.9*

*IG analyst estiamte on 23 November 2020

Using 2022 expected sales, forward price-to-sales multiples shows that Booking.com is currently valued at a higher ratio compared to Expedia and TripAdvisor. This is due to its ability to convert a higher proportion of its revenues into earnings, with a three-year average EBITDA margin of 39% compared to 16% and 18% for Expedia and TripAdvisor, respectively. In a report by The Information, an EBITDA margin of 25% was touted for Airbnb.

Price multiples are also highly influenced by expected growth rates for revenue. Airbnb’s average annual revenue growth over the last three years was 37%; far greater than Booking.com which has seen sales rise by 12% a year on average.

The combination of higher potential revenue growth but lower profit margins suggests a slightly higher price-to-book ratio could be used to value Airbnb. In our estimate we have used a forward price-to-sales ratio of 6.0. This hints at a valuation around $35 billion, higher than what Airbnb are seeking to achieve in its IPO.

But this is all based on current valuations for similar travel and hospitality companies – which appear rich. If the earnings growth that is predicted fails to materialise, share prices are likely to fall back to support more realistic price multiples.

Why did Airbnb list?

Airbn didn't issue a public statement on the the reasons for the listing, but it could be that the ocmpany wanted to cash in on increased interest in the IPO market following successful listings by Warner Music Group and Lemonade earlier in the year.

The company may also require a further cash injection to see it through the coronavirus crisis, having cut revenue expectations on the back of reduced demand for holiday accommodation worldwide.

Who were Airbnb's investors ahead of the IPO?

Airbnb’s investors ahead of the IPO were Silver Lake, Sixth Street, CapitalG, TCV, FirstMark, Sequoia Capital, and dozens of other notable individuals and businesses. In total it had 57 investors, of which 14 were lead investors and from which it has raised $5.4 billion in funding. Silver Lake and Sixth Street were the most recent Airbnb financier before the company completed its IPO.

What's the outlook for Airbnb?

Airbnb has had major success since its launch in 2008, quickly becoming one of the travel industry’s dominant players. However, revenue forecasts have suffered in the short term as a result of the coronavirus pandemic, which has caused demand for holiday accommodation fall dramatically this year.

To remain competitive, Airbnb has been working to diversify its offering to include complimentary travel services and experiences in recent years – including online experiences in 2020. Plans also include launching a loyalty programme, attracting higher quality hotels, and creating a corporate travel business.

By the year 2022, experiences, transportation and other unexplored segments could make up a considerable part of the business – even though it may still rely heavily on accommodation to create revenue.

What is Airbnb's business model?

Airbnb’s business model is based on helping travellers to book privately owned accommodation online. It acts as a broker between traveller and property owner – allowing the owner to list their space for rent and connecting them to the traveller. Airbnb also manages payments, acts as a mediator in the case of grievances, and lists reviews of both hosts and travellers.

The accommodation listed by Airbnb ranges from private homes to hotel rooms, and even novelty lodges such as treehouses. There are over 7 million listings in over 220 countries and regions to choose from. Besides accommodation, the business also offers restaurant and experience bookings – an area that has seen increased focus this year as a result of the coronavirus pandemic. Users can choose from more than 50,000 activities, many of which can be experienced online.

The strength of the Airbnb business model lies in its competitive pricing, the unique user experience and its huge global presence.

How has Airbnb been performing?

Airbnb has been performing poorly in 2020 compared to previous years, as a result of the coronavirus pandemic. Chief executive officer (CEO) Brian Chesky announced a 25% staff cut earlier in the year to reduce costs, stating that he expected revenues to be less than half of 2019 figures ($4.8 billion).

While the company does not release earnings reports, recent estimates suggest that Airbnb made a loss of $322 million in the first nine months of 2019 with costs spiralling as it sought to expand its offering. However, the company is said to have made a profit in the two previous years as a result of rapid growth.

How the company performs in future years will depend on how quickly the coronavirus crisis comes to an end, and also how popular its experiential offering proves to be. Revenues are likely to grow rapidly once demand for holiday activities and accommodation begins to return to pre-Covid-19 levels.

Who are Airbnb's biggest competitors?

Airbnb’s biggest home-sharing competitors are HomeAway, VacayHero and HouseTrip, to name a few. However, Airbnb’s presence across the globe far outweighs any of these companies. As for online travel sites, Airbnb shares the limelight with the likes of Booking.com.

While there are many similarities between Airbnb and other home-sharing services, it remains the forerunner in the market. Besides having more rooms listed than the top five hotel groups combined – a staggering 7 million – Airbnb also has more (and less conventional) options to choose from, such as castles, boathouses and treehouses.

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How do IPOs work?

IPOs are released when a company decides to start selling its shares to the public. The company will decide how many shares it wants to offer, and the investment bank will decide on the initial price of the stocks based on supply and demand.

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FAQs

What is a grey market?

A grey market enables you to speculate on a company’s estimated market cap before its shares are released. If you think the estimated value of the company is over- or under-priced, you can use the grey market to back your prediction.

It’s important to note that, when you decide to trade the grey market, you’re trading on the estimated valuation. The official market valuation (what the market thinks the stock is worth) is released after the first day of trading – and it is based on the demand shown by the market that day. When this happens, the grey market will settle.

Who owns Airbnb?

There is no single person or company who owns Airbnb. It does have many private investors, but most of the Airbnb stock belongs to the founders, Brian Chesky, Joe Gebbia and Nathan Blecharczyk, who started the business in 2008.

How does Airbnb make money?

Airbnb makes money by charging travellers service fees for booking accommodation through their website or app. The service fee can be up to 12% of the reservation costs. The more expensive the booking, the lower the fee. Hosts are also charged a processing fee of up to 3% of the booking total. Further, Airbnb may charge VAT for accommodation booked in certain countries.

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