Airbnb’s Going Public, but Why Now?

On August 19, 2020, Airbnb submitted confidential paperwork to the US Securities and Exchange Commission for an initial public offering. Why now?

Airbnb (Airbed & Breakfast) officially launched in March 2008 with two bookings for that year’s SXSW festival in Austin, Texas. Today, there are over seven million Airbnb listings worldwide (including five thousand castles) spread across 100 thousand cities and counting.  

They reached a valuation of $31 billion in late 2016, when they also struck a profit for the first time. According to an article by CNBC, they generated $1 billion in revenue in the third quarter of 2017. Airbnb is part of the great spearhead leading the way to the ‘sharing economy’, hell-bent on eliminating the competitive advantages enjoyed by the traditional incumbents of the 20th century economy. What Uber is to a $50 taxi fare; what Etsy is to a piece of new jewelry worth $500; Airbnb is to a $250 per night hotel. None of these companies own inventory, but they instead provide digital marketplaces for regular people to enlist their belongings.

Pure, positive disruption…which has now ground to a halt given COVID-19. Airbnb laid off nearly 25% of their workforce, raised $2 billion in debt and equity, and had their valuation slashed down to $18 billion. Lockdown orders took their toll and the company posted a Q1 2020 $341 million EBITDA loss (earnings before interest, taxes, depreciation and amortisation) and another $400 million loss in Q2 2020.

But see the forest, not the trees. Airbnb struck the right cord before, and they will do it again. In June 2020, hosts in rural parts of the USA earned over $200 million, a 25% jump over last year, with surges in: North Dakota, South Dakota, Oklahoma, Arkansas, Iowa, Wisconsin and West Virginia, according to AllTheRooms Analytics.

Mountain resort area Gatlingburg / Pigeon Forge in Tennessee recorded a tremendous jump of 1,294% in hotel occupancy after comparing the week of June 21 to mid-March, according to a report jointly made by data providers STR and AirDNA. Private, short-term rentals of studios or one-bedroom apartments rose by 92%. This number would have risen further if the 2020 population was higher than 10,512 and more private rentals were ready to become available. The same is true for beach vacation hotspot Gulf Shores in Alabama (2020 population: 13,109), which recorded 1,139% and 175% respectively.

Which all bodes extremely well for Airbnb, whose inventory can rise at a moment’s notice. Also, we must remember they recorded close to $4 billion in revenue in Q2 2019 with a well-diversified stream of 36% from North America, 39% from Europe and 17% from Asia-Pacific. Airbnb is agile because their primary product is not real estate, but connecting would-be landlords to would-be renters.

Hotel mavericks such as Hilton, Marriott and IHG are in a precarious position, however. Hilton for example recorded 22.3% overall occupancy in Q2 2020 with RevPAR (revenue per available room) spiraling down by 81.0% from Q2 2019 to $21.7. At the same time they owe $10.6 billion in long-term debt as of June 30, 2020. Their high-end, short-term brand Waldorf Astoria recorded just 6.6% occupancy while budget-focused, extended stay Homewood Suites, 40.6%.

Their business models lack private accommodation options and rely on paid advertising of discounts to generate traffic. They also have disproportionate amounts of luxury offerings, especially in urban areas. Airbnb on the other hand grows organically through their strong brand image and word-of-mouth advertising. In a 2015 survey by the Pew Research Center, 34% of Americans have heard of the private accommodation market.

Online travel agency Expedia experienced a 90% drop in gross bookings from Q2 2019 to Q2 2020, from $28.3 billion to $2.7 billion, alleviated a bit by growth of their Airbnb-like arm, Vrbo. Unlike Airbnb however, and as a striking weakness, Vrbo (‘Vacation Rentals By Owner’) only lists whole homes. There are about two million available, 29% of Airbnb’s seven million listings. noted that alternative (private) accommodations represented about 40% of all of their new bookings globally in Q2 2020.

Thus there is a theoretical path to great success for Airbnb, but there is also a potential Achilles Heel. A New York Times article suggested that Airbnb is going public now because they have to, not because they want to. Early employees were rewarded with incentive stock options which start expiring in November 2020 and cannot be extended per IRS rules. If the company doesn’t go to market, these options expire worthless. At best, the feeling must be tense over at Airbnb today, particularly when we know that billionaire venture capitalist Chamath Palihapitiya once strongly scolded CEO Brian Chesky (and indirectly the two other founders) in 2011 for cashing out $21 million for themselves in dividends. Airbnb has made efforts to significantly improve employee benefits, but they still want to cash out themselves…nine years later.

Coronavirus decimated the travel industry, with hotels seeing the worst occupancy rates since the global financial crisis, but it paved the way for alternative accommodations to succeed in the long run. Hotels seem like sinking ships, and private homes the timely rescue boats. Airbnb may well rule this industry through market share as social distancing shifts consumer preferences strongly towards more exclusive stays, at the expense of small rooms in behemoth-like buildings. We eagerly await the opportunity to review Airbnb’s prospectus and make an informed investment decision.

For further reading on the latest thinking from our investment team see or contact us directly at [email protected].