Airbnb IPO: A Deep Dive Into a Company That Has Refashioned Travel

Airbnb can be said to be the Uber/Grab of accommodations. We can book homes, hotels, and even interesting online experiences now on the platform. 

(Does a Harry Potter Edinburgh Tour — from the comfort of your home — sound magical to you?)

What’s even more interesting to me, as an investor, is that Airbnb is set to go public. 

It’s perhaps one of the most highly-anticipated initial public offerings (IPOs) in 2020.

Right now, let’s check out details about Airbnb’s IPO and the company in general. 

An Interesting Story About How Airbnb Started

Airbnb was founded in 2008 by Brian Chesky, Nathan Blecharczyk and Joe Gebbia. 

A year before, Brian and Joe, who were friends from a design school, faced a problem of paying rent for their apartment. 

Just then, there was an international design conference coming to town, and every hotel in that area was sold out. 

They saw an opportunity to make money. 

Brian and Joe created a website, AirBedandBreakfast.com, to rent out their airbeds to attendees of the conference. 

Three designers, Michael, Kat, and Amol, took up their offer and became the first guests of Brian and Joe.

When the two co-founders told others what they were doing, they poured cold water on their idea, saying, “Strangers will never stay in each other’s homes.”

However, something magical happened as Brian and Joe hosted their guests. 

Michael, Kat, and Amol truly enjoyed their local experience as they could never have experienced it on their own. 

Brian and Joe felt something special as well — the excitement of sharing a place they loved and seeing their guests form a deep connection to it. 

Brain and Joe thought that there could be more people like their guests. 

That’s when Nate, a software engineer, joined them, and they tackled a bigger design problem: “How to make strangers feel comfortable enough to stay in each other’s homes?”

Trust, was the answer. 

Together, they designed a platform with host and guest profiles, integrated messaging systems, two-way reviews, and secure payments.

And the rest, as they say, is history. 

Over a decade later, over four million hosts have welcomed more than 825 million guests in over 220 countries and regions around the world. 

The hosts have altogether earned US$110 billion. 

Timeline of Airbnb IPO

Airbnb has announced through its SEC Form S-1 that its IPO price will be between US$56 and US$60 per share. This is up from a range of US$44 to US$50 set earlier this month. 

However, according to CNBC, the company sold shares in its IPO at US$68 each, pricing above its range.  

Airbnb’s expected listing is on Thursday on the Nasdaq stock market.

The firm will have four different classes of shares — Class A, Class B, Class C, and Class H. 

Here are more details about the Airbnb IPO: 

Class A is what’s offered under the IPO, and each of this class of share will be entitled to one vote.

Class B common stock held by Airbnb’s founders and each share is entitled to 20 votes. Class H will be set aside for the Host Endowment Fund (more on this later). 

How Does Airbnb Make Money?

Airbnb operates on a global marketplace business model, where hosts offer guests stays and experiences on its platform. 

Airbnb has a metric called gross booking value (GBV), which is the dollar value of bookings on its platform and includes host earnings, service fees, cleaning fees, and taxes, net of cancellations and alterations that occurred during that period. 

Included in GBV is Airbnb’s revenue, which is the service fees, after deduction of incentives and refunds, charged to its customers (both hosts and guests). 

Almost all of Airbnb’s revenue comes from stays booked on the Airbnb platform. 

For stays, host and guest service fees vary depending on factors specific to the booking, such as duration, geography, and host type. 

For experiences, Airbnb only earns a standard host fee.

Below is an example of how Airbnb makes money for a US$100 per night stay: 

For the majority of bookings, Airbnb collects the full amount of GBV at the time of booking. 

For the remainder of bookings, guests choose to pay in two instalments with its Pay Less Upfront program. 

In either case, Airbnb collects its service fees at the time of booking, which contributes to free cash flow before its recognises revenue upon check-in. 

Airbnb’s Competitive Advantage 

Airbnb possesses a business characteristic that would be the envy of many traditional companies. 

Its competitive advantage comes from its network effect. This means that when a new host or guest comes on board its platform, its business becomes more valuable. 

As its network grows, new hosts will join, which in turn will attract even more guests. And off the flywheel goes. 

Any competitor trying to upend Airbnb would have to come in on a global scale and build up a trustworthy community from the ground up. Sounds like an uphill task to me. 

Airbnb takes care of its hosts and guests well, who are important aspects of the community.

For instance, the company has set up a Host Endowment Fund to allow its hosts to share in its business success. I feel this is a heartwarming gesture by Airbnb. 

This is how Airbnb explains the fund (emphases are mine): 

“The goal of the Host Endowment Fund is to support and benefit our host community through a variety of potential programs, initiatives, and grants. We want hosts to share in our success, not merely for a single moment in time, but for as long as Airbnb exists in the world. We intend the Host Endowment Fund to be a long-term investment in the future of our host community, to be shaped by hosts for hosts.”

Airbnb also has an asset-light business, as it doesn’t require the company to make significant investments in fixed assets and physical real estate.

This allows the company to be highly cash-generative (more on that later). 

Another advantage of Airbnb is that most of its guests discover Airbnb organically, with around 91% of all traffic to Airbnb coming through direct or unpaid channels for the first nine months of 2020. This speaks well of Airbnb’s branding. 

Most of the guests are returning ones as well. In 2019, 69% of Airbnb’s revenue was generated by stays from repeat guests, up from 66% in 2018 and 62% in 2017. 

Key Business Metrics for Airbnb

Nights and Experiences Booked

Nights and Experiences Booked is a key measure of the scale of Airbnb’s platform, which in turn drives its financial performance. 

The metric represents the sum of the total number of nights booked for stays and the total number of seats booked for experiences, net of cancellations and alterations that occurred in that period. 

Most all of Airbnb’s bookings to date have come from nights. 

In 2019, Airbnb had 326.9 million Nights and Experiences Booked, a 31% increase year-on-year. But something to note is that growth has been slowing down. 

The growth in Nights and Experiences Booked depends on how well Airbnb can attract new hosts and guests to its platform and how well repeat guests increase their activity on the platform.

In 2020, the Nights and Experiences Booked declined from prior levels due to the COVID-19 pandemic. For the nine months ended 30 September 2020, Airbnb had 146.9 million Nights and Experiences Booked, a 41% fall year-on-year.

Gross Booking Value (GBV)

GBV is a leading indicator of revenue. The entire amount of a booking is reflected in GBV during the quarter in which booking occurs. 

Growth in GBV reflects Airbnb’s ability to attract and retain hosts and guests, and it reflects growth in Nights and Experiences Booked.

For the nine months ended 30 September 2020, Airbnb’s GBV was US$18.0 billion, a 39% decrease year-on-year. 

Cohort Retention

A way to see whether a business is sticky with its consumers is to analyse its retention rate. 

Here’s a table showing the revenue retention rates for hosts whose first guest check-ins happen in a particular year. 

The host retention has been consistently above 88% across cohorts, and this loyal host behaviour bodes well for Airbnb’s platform. 

The size of each host cohort has also grown every year. Airbnb’s 2018 cohort was nearly four times larger than its 2014 cohort.

Moving on, here’s a table showing the revenue retention rates for guests whose first check-ins occur in a particular year. 

Airbnb says that it believes the guest revenue retention of its community is higher than the customer retention of online travel agency distribution platforms in the US, based on available third-party credit card data. 

Financial Highlights of Airbnb 

The table below highlights Airbnb’s key financials:

Airbnb’s revenue has grown 51% on an annualised basis, from US$919 million in 2015 to US$4.8 billion in 2019. The company is still loss-making on a yearly basis as it’s investing for growth. 

For the first nine months of 2020, revenue fell 32% year-on-year to US$2.5 billion due to the pandemic. 

However, in the third quarter of 2020, revenue improved quarter-on-quarter as domestic travel rebounded, surpassing even the 2019 fourth-quarter revenue. Airbnb also posted a net income of US$219.3 million as a result of cost-cutting measures. 

As of 30 September 2020, Airbnb had US$4.5 billion in cash, cash equivalents, and marketable securities, with US$1.8 billion in total debt. 

The strength of Airbnb’s business is shown in its cash-generating ability, with the company being free cash flow positive. 

On the People Behind Airbnb

Post-IPO, the three co-founders will have a 43.8% ownership stake in their company, with Brian (age 39) having the highest stake at 15.3%. 

According to Glassdoor, almost 100% of people who reviewed the company approve of Brian’s leadership. 

How Can Airbnb Grow in the Years Ahead?

Airbnb estimates that its serviceable addressable market (SAM) is US$1.5 trillion, including US$1.2 trillion for short-term stays and US$239 billion for experiences. SAM is generally defined as the market opportunity that is within a firm’s existing core competencies. 

Meanwhile, its total addressable market (TAM) is estimated to be US$3.4 trillion. TAM is the total market opportunity. 

Airbnb believes that its market opportunity can grow over the long term at the rate of travel spending. 

Below is the breakdown of Airbnb’s SAM and TAM: 

At 2019’s revenue of US$4.81 billion, Airbnb barely scratches its market opportunity. 

Bearing in mind that Airbnb makes money only through service fees, there’s lots of potential for the company to monetize other parts of its business. 

What Are Some Risks With Airbnb?

The immediate risk right now is with COVID-19. Even though there is positive vaccine news, we won’t know for sure when international travel will return. An uptick in international travel is important for Airbnb’s growth. 

The slowing revenue growth is another risk to take note off. Airbnb is seen as a growth company, and any prolonged slowdown in revenue is not a good sign. 

Government regulations that do not permit short-term rentals may affect Airbnb’s business. For example, in Singapore, short-term rentals are illegal as a minimum stay of three months is needed for private residential properties. HDB flats cannot be rented out to tourists.

Competition is also rife in the travel space. Some of Airbnb’s competitors include Booking Holdings
(NASDAQ: BKNG), Expedia (NASDAQ: EXPE), Trip.com (NASDAQ: TCOM), Klook, Traveloka, and hotel chains. 

Valuation of Airbnb

At a valuation of US$42 billion and a revenue of US$4.8 billion in 2019, Airbnb is going at a price-to-sales (P/S) ratio of 8.7x. 

In comparison, Booking is trading at a P/S ratio of 5.7x (based on 2019 sales) while Expedia is selling at 1.5 times its 2019 revenue.