Airbnb – Hardest times.

An equity raise will be brutal. 

• I have very little doubt that Airbnb will survive this crisis but there is very little visibility in terms of how much value the market will put on its operations the next time it has a market event.
• Airbnb is in a very tough spot as not only it is a travel company, but it is also part of the sharing economy which has collapsed and the degree to which it will recover is very uncertain.
• Until this virus is fully under control, which basically means a functional vaccine available in billions of doses, asset sharing is not going to be popular.
• Expectations of a vaccine are 18-24 months at best which will be followed by a period while industry works out to ramp up production.
• One of the biggest problems with treating wounded combatants during World War II was not that antibiotics did not exist it was that no one had figured out how to make them in big enough volume to meet demand.
• Consequently, I think that ride volumes at Uber, Lyft, DiDi, Grab and so on may have already peaked and the same is probably true for Airbnb for some time to come.
• This could be further exacerbated by the truly dire economic signals being produced around the world that indicate that a global recession is on the way which may last for a while.
• In this environment, the multiple of earnings that investors are willing to pay in return for investing in companies tends to fall.
• With highly valued companies this creates a double whammy on the valuation of the company as not only are the earnings lower (due to recession) but the multiple paid for those earnings also falls.
• For example, in recent years, the earnings multiple for Apple has risen along with its earnings which together have produced such excellent returns.
• However, if the earnings multiple returns to 10x PER from around 20x PER where it is now, the share price would halve, even with no change in earnings produced.
• Companies like Airbnb will feel this impact even more acutely, as their multiples are far higher with further to fall and their outlook has just collapsed.
• Hence I suspect that Airbnb’s valuation 35% cut to $26bn from $40bn at the end of 2019 (based on secondary private transactions) may not be enough.
• The best-case scenario is that Airbnb has enough money to tough it out, but I don’t think that this is the case given as Airbnb appears to already be looking for ways to raise money.
• In this environment, debt would be a good option, but with liquidity so hard to come by at the moment, this would be cripplingly expensive.
• I am also pretty certain that if its bankers can find a way to deny extending its $1bn credit line, they will as the banks are also feeling the scarcity of cash.
• The priority for Airbnb is to survive this period as overall I am pretty optimistic about its long-term outlook once the virus has been properly dealt with.
• This is because Airbnb has already demonstrated that it can make money and it remains unopposed in its space.
• Hence, when travellers are comfortable sharing assets once again, most of its business should come back and growth should resume.
• Therefore, if the company is forced to raise money by selling equity, this should be given very careful consideration because it will have to come at a bargain valuation.
• I think this bargain valuation may be well below the $26bn the company is currently shooting for.