Airbnb IPO : Should you invest?

Markets across the globe have been on a strong rally this year and this has increased interest of Indian investors in international investing, especially in the US markets. The opportunity to invest in unique/disruptive businesses which don’t have an equivalent in India as well as the annual 3-4 per cent depreciation of the rupee against the dollar, which adds to the returns, are factors which motivate global investing.

One of the pioneers of the sharing economy – Airbnb (ABNB), will list in Nasdaq on December 10. According to recent SEC filings, ABNB is offering 51.5 million of Class A shares (which have one vote per share), at maximum price of $60 per share. Of this, 50 million will be offered by the company, and the additional share offering of around 1.5 million, by existing shareholders. The price range fixed is $56-60. The offering values the company at market cap of around $36 billion and Enterprise Value of around $34 billion.

At the time of publishing this, unconfirmed reports note that company will be pricing its IPO at $68, higher than the expected range, which would further increase its market cap to a little over $40 billion.

It is important for retail investors in India to note that they cannot yet participate in IPOs in the US market. The stock will be offered to certain institutional investors/underwriters as part of the IPO process and they will be then offering the shares for sale on listing. Thus, the first shot you can have at buying the stock is upon its listing at Nasdaq on December 10. You can buy US stocks through investment firms such as Vested Finance, Stockal and WInvesta that provide a global investment platform and also through few Indian brokerages such as ICICI Direct, Axis Securities, Motilal Oswal Financial Services and Kotak Securities who facilitate such overseas investments through their tie-ups with US brokers.

The Business

ABNB is a global marketplace, where hosts offer stays and experiences on its platform. It is a peer to peer business model that has disrupted the global hotels and bookings industry like what UBER did to transportation. As on September 30, 2020, it had over 4 million hosts globally offering active listing of 5.6 million. About 3.6 per cent of paid trips globally was via Airbnb in 2019.

Its key advantage over traditional hotel chains are peer to peer business model and the variety of offerings. It earns its revenue by taking a share of the bookings value – around 3 per cent from the hosts and 14 per cent from the guests. What is unique about its model is that the pricing is entirely determined by the hosts. The company is geographically well diversified with 63 per cent of its revenue from outside the US. While its revenues from countries like India, for instance, are currently miniscule relative to its overall business, it sees a huge growth opportunity that it plans to tap with future investments in emerging markets. There were unconfirmed reports last year that it had taken a stake in OYO, however, the company’s IPO filing mentions OYO as a competitor.

ABNB pioneered and continues to lead a sharing economy theme that is structural and irreversible. The market opportunity is still in early stages of disruption and growth. The industry size is upwards of a trillion dollars and the company has a huge market to tap as it gains market share. While its business has been impacted due to Covid and made the company push back on some of its aggressive investment plans, it has managed the downturn relatively better than OTA (Online Travel Agencies) and hotel competitors. This, it has achieved by controlling costs and by tapping customer preference to stay in private and remote places, given the Covid scare. The negative impact to its business from the pandemic will continue well into next year; however, this can be viewed as temporary and not structural.

The company’s execution track record is impressive with a 3-year revenue CAGR till CY ( calendar year) 2019 at a stellar 42 per cent. It has also managed positive adjusted EBITDA (a key metric tracked by Wall Street for tech companies in high growth space) in 2017 and 2018. While it reported losses on the same metric in 2019, its past performance gives confidence that it has a path to profitability and that puts it in a better place vs UBER and LYFT. It is gaining share from the OTA competitors and has a thematic play working in its favour for the next decade.

When compared with sharing economy peers, the company has consistently reported better gross margins and adjusted EBITDA margins and is showing a more reliable path to profitability, which is where investor focus is shifting now, after ‘growth at any cost’ over the last decade.

What should investors do?

While the original IPO pricing o f $44-50 determined last week appeared reasonable, the recent over 20 per cent revised pricing makes it expensive given that while the company has shown path to profitability in the past, it has shown so without consistency. At 7.75 times CY21 enterprise value/sales (around 8.75 times at the unconfirmed pricing of $68), it is getting software as a service (SaaS) company multiples which is undeserving. This is because, software as a service companies have better competitive moat with their core technology. Given potential reward of outsized returns if it grows with consistent profitability, and risk of under performance if profitability is delayed or elusive due to execution issues or more competitive intensity, anywhere between 5 and 6 times EV/sales is a reasonable price to enter the stock. That would be a price of between $40-50/share.

Investors are advised to not chase a surge priced listing and wait for the lean season when it might be available at fair value or discount, either driven by company specific execution issues or a broader market correction. Most of the prominent social media and sharing economy stocks – Facebook, Snap, Uber, Lyft have all corrected 40-50 per cent within 2-3 quarters of their listing on execution issues that came to fore in their quarterly results.

Both Lyft and Uber corrected to as low as 2.5 next twelve months enterprise value/sales within few months after listing on weak metrics and this was during the time when broader markets were booming. History is not in favour of chasing this IPO at any price upon listing.

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