Timing is one of the most important things in an investment. Firstly traders have to find the right moment to either buy or sell a stock. On the other side, companies have to decide when to go public paying attention to the various financial and not only aspects of the market. For instance, Aramco conducted the IPO and raised about $25.6 billion selling 3 billion shares just a few months before the oil futures went negative – the most dramatic fall on record.
Airbnb is no exception. Despite the Covid-19, we are somewhere in the middle of the IPO boom. Most of the companies that went public this in some sense gained from coronavirus driven trends. We can take a look at the markets now to understand it better: despite the political uncertainty, the second wave of Covid-19 and lockdowns indices are at all-time highs, and we all know why – low interest rates which make the stock market more interesting.
But a question should be asked, should I invest in Airbnb (ABNB stock)?
Airbnb was founded back in 2008 and was called AirBed & Breakfast so that it means the company has worked for about 12 years. Airbnb as a project started when two designers who had space to share hosted three travellers who were looking for a place to stay, and today there are millions of hosts who are happy to open the doors to the visitors. However, Covid-19 made a bad joke. As the CEO of Airbnb, Brian Chesky said in an interview on CNBC “It took us 12 years to build Airbnb, and we lost almost everything in four to six weeks.”
Because of the restrictions all over the world, Airbnb’s valuation dropped by almost 50%, from $35 billion to $18 billion, in a matter of months, for sure it should be said that not only Airbnb took the hit – the whole hotel industry suffered hard. Yet, Airbnb does not own any land or physical hotel which means it does not need hundreds of people to maintain them clean and of course did not need to get into loans not to close the doors forever.
But things are still not so good. For nine months ended two months ago, Airbnb had 146.9 million “Nights and Experiences” booked – about 41% decrease compared to the prior-year period. In the Q2 the decrease was even more significant – about 67%, and improved in the Q3 with a drop of only 28% from the prior-year period.
In terms of Cash Flow, for the nine months ended September 30, 2020, Free Cash Flow was $520.1 million, compared to $319.8 million in the prior-year period. In the Q3 of 2020, Free Cash Flow was $328 million, compared to $78.4 million the previous year, reflecting the increase in accrued expenses and other liabilities.
Some more numbers indicating the recovery:
2020’s plunge in revenues included an 18% year-over-year decline during the Q3. Nevertheless, Airbnb managed to show a profit of about $219 million, which is outstanding taking into consideration other technology IPOs.
Also, the Q3 was even better, as it might seem. During the 2nd quarter, sales grew by 72% to $335 million, net loss plunged 94% to $576 million.
Now we are getting closer to the conclusion (and it’s always your chose to be or not to be). Let’s underline some crucial moments.
For the bullish price action:
- The Marketplace: as for September 30, 2020, Airbnb reported 7.4 million available listings, ⅔ of them are considered very active listings. And those are not just numbers, Airbnb’s marketplace has strong network effects, which means – the more people use it, the more powerful, intelligent and useful its platform becomes. Several leading online carriers share this trait, including Facebook (FB), Alibaba (BABA), and eBay (EBAY).
- The experience: the platform’s service provides a more engaging experience than a typical hotel room. This is well described in S-1 (the required registration paperwork for U.S.-based companies looking to go public): “Instead of travelling like tourists and feeling like outsiders, guests on Airbnb can stay in neighbourhoods where people live, have authentic experiences, live like locals, and spend time with locals in approximately 100,000 cities around the world.”
- Economic improvement: Any advances in the fight against COVID-19, in particular potential vaccines from companies such as Pfizer (PFE) and BioNTech (BNTX), Moderna (MRNA) and others, are expected to be a boon to the entire travel industry, including Airbnb.
- Organic Reach: The company says 91% of all traffic to Airbnb goes through direct or unpaid channels for the first nine months of 2020.
For bearish price action:
- Legal uncertainty: While home rentals have become the norm in large part thanks to Airbnb, from a legal point of view, is’s still not a settled area. And the powerful lobby of the hotel industry is pushing hard to get municipalities to pass strict rules prohibiting such rental services.
- Competition: Airbnb must compete with online platforms such as Booking Holdings (BKNG), Expedia (EXPE), and Trip.com. It even faces competition from search engines and metasearch sites including Google, Baidu (BIDU), TripAdvisor (TRIP), and Trivago (TRVG), that control massive amounts of web traffic. There are competitors similar to Airbnb, such as Expedia’s Vrbo and HomeAway. And, of course, you have to deal with the entire hotel industry.
- Risks to hosts and guests: Hosts and guests alike take on multiple risks in these rental deals. Airbnb acknowledges that “there have been shootings, deaths, and other criminal or violent acts at properties booked on our platform,” as well as “sexual assault against hosts, guests, and third parties” and “hidden cameras in properties”. The growth of such problems can deter hosts from continuing to interact with the platform. In many cases, hosts have filed claims for compensation for a number of violations committed against them and their homes. “These claims subject us to potentially significant liability and increase our operating costs and could materially adversely affect our business,” the company writes.
Finally. What to expect and when?
The stock was priced on Dec 9 at $69 per share, however, doubled at the opening with the initial price of $146 per share giving the company a market cap of about $86.5 billion, more than double the valuation expected a day before. Airbnb past the market cap of the rivals: Booking which has a valuation of about $86 billion, and Expedia which has $18 billion.
