Company / Analytics

Analytics, 15 April 2020

Airbnb IPO 2020: to be or not to be?

For many businesses and investors, 2020 was going to be a good year. Until the COVID-19 arrived. Though some observers had forecasted a recession in 2020, they didn’t think it will be caused by a global health pandemic.

Airbnb was supposed to be the most wanted IPO of the year, but the current crisis has resulted in many losses for the company and presents a doubt on whether the IPO will happen at all.

Airbnb operates mostly as part of, or together with the BEACH industries - booking, entertainment, airlines, cruises, and hotels. The BEACH industries account for hundreds of millions of jobs around the world and underwrite many global business activities, such as that of Airbnb. The measures put in place across the world to control the spread of COVID-19 such as travel restrictions have greatly affected these industries and in turn Airbnb’s main revenue stream. The company has already seen cancellations in listings across the world, even as it still mulls listing.

The most recent booking cancellations data indicate that Airbnb bookings in Beijing dropped by 96% from January to March, according to data from vacation rental market research firm AirDNA. If the Beijing data is indicative of the impact of the virus on Airbnb’s business in just one market, it’s a window into the effects on other markets since the infection epicentre shifted from China and the current state of the world due to that shift.

In the middle of all this, Airbnb is currently raising $1 billion through a combination of debt and equity from about 20 investment firms, led by Silver Lake and Sixth Street Partners, to cushion itself from the immediate impacts of the coronavirus. This comes just a week after it reeled in $1 billion in fresh capital. The investments have been raised by issuing first-lien debt, which has priority on its assets in case of a default, according to Bloomberg. These are likely to have an impact on its planned IPO.

There is also confusion surrounding Airbnb’s valuation. Airbnb was founded in 2008 and had previously raised $4.6 billion and initially had a valuation of $35 billion, which was making it the most highly valued pre-IPO unicorn. The company recently lowered its internal valuation to $26 billion, a drop from its previous valuation of $31 billion.

Even before the current crisis emerged, Airbnb was already struggling and losing money. In the first nine months of 2019 it reportedly lost $322 million compared with a $200 million profit during the same period in 2018, according to its February 2020 report. In addition, while its revenues increased to $1.65 billion in the third quarter, which is $400 million higher from the previous year, business costs also grew faster.

The data reveals that the company’s costs keep increasing even as it experiences growth, which could give a pause to investors concerned about start-ups without clear paths to profitability. For instance, the company spent $150 million investment to improve the safety of its platform and increase overhead expenses and sales and marketing costs. In terms of cash reserves, the company has about $3 billion on hand.

In response to booking cancellations related to the coronavirus and complains from hosts, Airbnb has set aside $260 million to reimburse hosts for cancelled reservations through a “Superhost relief fund”, it launched to assist hosts in managing the economic impacts of COVID-19. The company said its co-founders contributed $9 million of their personal money to the fund while employees donated $1 million.

But complaints still abound from both hosts and guests and these are likely to affect Airbnb’s reputation and performance even in the post-COVID-19 environment. With the current crisis and declines in bookings, Airbnb’s planned IPO could be extended to the last quarter of 2020, if it happens at all. But even this is an optimistic forecast that depends on when restrictions for controlling COVID-19 are lifted, which will vary across the world.

Moreover, how the company recovers or plans to recover from the current crisis is not clear apart from the recent investment raising. And that presents a concern among investors worried about the company’s profitability, even though Airbnb CEO Brian Chesky predicts business will bounce back after the pandemic, comparing the coronavirus crisis to Hurricane Maria in Puerto Rico (the number of listings in Puerto Rico increased from 7,700 to 12,000 after the Hurricane). But comparing the current crisis to Hurricane Maria can be interpreted as poor judgement. First, Puerto Rico as a whole is still recovering from the impacts of the hurricane, and second, the world as a whole is dealing with coronavirus, not just a single island or country.

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