23 November 2020

Financial Times: “Five takeaways from Airbnb’s IPO filing”

Airbnb’s IPO prospectus showed that revenue growth had been slowing well before the coronavirus pandemic threw its business into disarray.

In 2016, Airbnb increased revenues by 80 per cent from the year prior to nearly $1.7bn, while producing positive free cash flows. Months later, investors injected $1bn in new equity that valued the company at $31bn.

But by 2019, Airbnb was experiencing its third straight year of slowing growth, with revenues increasing 32 per cent from the previous year. By comparison, the ride-hailing company Uber boosted revenues at a rate of 42 per cent in the final full year before its IPO in 2019.

Airbnb warned it expected growth to continue slowing in the future, suggesting its most explosive years may have passed.

Dave Lee & Miles Kruppa

Among the many articles dedicated to Airbnb’s upcoming IPO this one is the most balanced and I think it captures the reality of the business well. While the pandemic has carved out a big chunk of revenues and forced the company to take drastic measures to reduce costs, financial problems were apparent even before 2020 started. Airbnb incurred a massive net loss at the end of 2019 compared to previous years. Looking at the numbers, it appears that the final quarter of 2019 was unusually rough: between September end and year-end 2019 the free cash flow declined from $319.8 million to $97.3 million and the net loss expanded from $322.8 million to $674.3 million. As of September 2020, Airbnb reported a free cash flow of negative $520.1 million – having burned through more than $1 billion since the end of 2018!

Airbnb Monthly Nights and Experiences Booked and Gross Booking Value Trends
Airbnb: Monthly Nights and Experiences Booked and Gross Booking Value Trends according to IPO filing

While the number of bookings have recovered after the massive decline in the spring, the numbers are roughly 30% lower than last year – and declining. But with rising numbers of infections in its more lucrative markets, more travel restrictions and lockdowns, this recovery will remain short-lived until there is a more permanent solution to the pandemic.

A major red flag should be the warning, listed in the filing under risk factors, that the company may not be able to achieve profitability – a similar phrasing was present in Lyft’s IPO filing, a company that has since struggled with languishing performance and stock price.

Risk Factors Summary

Our business is subject to a number of risks and uncertainties of which you should be aware before making a decision to invest in our Class A common stock. These risks are more fully described in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

  • The COVID-19 pandemic and the impact of actions to mitigate the COVID-19 pandemic have materially adversely impacted and will continue to materially adversely impact our business, results of operations, and financial condition.
  • We have incurred net losses in each year since inception, and we may not be able to achieve profitability. We incurred net losses of $70.0 million, $16.9 million, $674.3 million, and $696.9 million for the years ended December 31, 2017, 2018, and 2019, and nine months ended September 30, 2020, respectively. Our accumulated deficit was $1.4 billion and $2.1 billion as of December 31, 2019 and September 30, 2020, respectively.
  • Our Adjusted EBITDA and Free Cash Flow have been declining, and this trend could continue.
  • Our revenue growth rate has slowed, and we expect it to continue to slow in the future.
Airbnb, Inc. S-1 filing

Ultimately, Airbnb’s biggest asset – its lack of fixed costs as it does not own the properties listed on the platform, nor does it sublease as WeWork did – may prove to be its biggest weakness. Each time a host is renting apartments on competing platforms like Booking, Airbnb is loosing potential business – and Airbnb has no leverage to prevent hosts from doing so. It has little leverage against tightening local regulations, which may also reduce supply in key cities and further impact its diminishing growth. I think the hopes behind this IPO are not in line with the business performance, and Airbnb will become another struggling unicorn on the stock market.

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