Airbnb – Perfect storm

No IPO but no chapter 11 either.

• The perfect storm of a large ramp in spending just as the Coronavirus kills its bookings are going to prevent any IPO this year, but Airbnb is a proper company and should comfortably survive this shock.
• Data from Airdna (see here) is showing a severe decline in weekly Airbnb revenue and in cities where the Coronavirus is most prevalent, this revenue is quickly trending to zero.
• Bookings have also declined materially in Asian cities and the expectation that Europe and the USA will quickly follow.
• This adds up to a revenue implosion for Airbnb and it could not have come at a worse time.
• This is because, at the end of 2018, the company made the decision to invest for growth resulting in a 58% YoY increase in sales and marketing ($367m), 51% YoY increase in product development and a 30% YoY increase in general and administrative expenses in Q1 19.
• This is why in Q4 19, losses ballooned 92% YoY to $276.4m from $143.7m in Q4 2018.
• These investments were made in the anticipation that growth would continue to be strong but in H1 2020 at least, the reverse is going to be true and there is going to be a very sharp but short contraction.
• In Q4 2019, revenues were $1.1bn up 32% YoY but given the indicators, I think that this number could more than halve in Q1 and Q2 2020.
• Given the size of the fixed costs of the company, this could take losses up to $500m or more quite easily.
• There are two factors in Airbnb’s favour that should be considered:
  • First, History: Up to the end of 2018, Airbnb had, over its history, generated more cash than it had lost.
  • This can be seen in its balance sheet where at the end of 2018, there was more cash available than the company has cumulatively raised over its history.
  • The company has been profitable on an EBITDA (roughly equivalent to operating cash flow) basis in 2017 and 2018 explaining the cash balance of greater than $2bn at the end of 2019.
  • This means that Airbnb has substantial resources to fall back on in this very difficult time and can probably withstand a year or more of really dreadful performance before it runs out of money.
  • Second, competition: Airbnb is unopposed in its space.
  • This is critical because it means that there is no one breathing down its neck forcing it to cut its prices.
  • Instead, this will be governed by lessors and lessees and whether or not they are happy to swallow any increases in price that Airbnb decides to make.
  • This is a very different scenario to Uber and Lyft who are constantly at each other’s throats and WeWork whose clients can up and leave with plenty of other options to choose from.
• The net result is the Airbnb should batten down the hatches and cut every discretionary expense that it can in order to weather out this brutal storm.
• I suspect that quite a lot of its losses are due to stock compensation which is non-cash meaning that its actual cash drain is significantly less than the operating losses would indicate.
• Hence, I think that Airbnb will be able to ride out this storm and will emerge relatively unscathed and ready to resume business as normal as the travellers come back.
• However, this also means that there will be no IPO this year.
• In the more risk-averse environment that is likely to persist once this crisis has passed, it will need a longer track record of showing that the 2019 investments are bearing fruit before the IPO will be successfully placed.
• Hence I see the IPO coming in 2021 or 2022 which in this environment will surprise no one.
• Airbnb is no WeWork and if there are panicky investors trying to exit at any price in the private markets, there may be good deals to be had for long-term investors not facing liquidity shortfalls.