Airbnb (ABNB) intends to raise $2.44 billion from the sale of its Class A stock in an IPO, according to an amended registration statement.

San Francisco, California-based Airbnb was founded to develop a two-sided marketplace between property hosts and consumer guests to provide lodging and related services on a temporary basis worldwide.

Management is headed by co-founder, CEO and Head of Community Brian Chesky, who previously earned a Bachelor of Fine Arts in Industrial Design from the Rhode Island School of Design.

Below is a brief overview video of Airbnb:

Source: Airbnb

The website aggregates supply and demand globally, provides hosts with pricing tools, scheduling capabilities, insurance coverages, and payment facilitation services.

Airbnb has received at least $3.98 billion from investors including Sequoia Capital, Founders Fund, Silver Lake, Sixth Street, DST Global, Greystar Real Estate, and Accel.

The firm seeks to obtain new hosts as they are the core of supply providers to its platform.

Hosts learn about the firm through word of mouth and online media. 90% of the firm's visitors come through organic search engine traffic or direct, so Airbnb has proven to be adept at avoiding the high and increasing acquisition costs associated with paid online marketing.

Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have fluctuated.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, swung to negative (2.2x) in the most recent reporting period, due to a drop in revenue stemming from the Covid-19 pandemic.

According to a 2020 market research report by IBISWorld, the global market for hotels & resort stays grew at an estimated 0.8% from 2015 to 2020.

As the global economy has reacted to the onset of the Covid-19 virus, the hotel & resort industry has contracted.

However, the industry continues to shift investment toward emerging economies as those regions improve their tourism infrastructures.

Also, as the world begins to move past the negative effects of the Covid-19 pandemic with improved treatment, herd immunity and vaccines, pent up demand for travel will likely return, proving growth to the industry perhaps as soon as 2021.

Major competitive or other industry participants include:

Airbnb’s recent financial results can be summarized as follows:

  • Contracting topline revenue due to Covid-19 pandemic effects
  • Reduced gross profit and gross margin
  • Increased operating losses
  • A swing to cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

airbnbpl

Source: Company registration statement

As of September 30, 2020, Airbnb had $4.5 billion in cash and $6.9 billion in total liabilities.

Free cash flow during the twelve months ended September 30, 2020, was negative ($687 million).

ABNB intends to sell 50 million shares of Class A stock and selling shareholders will sell 1.9 million shares at a proposed midpoint price of $47.00 per share for gross proceeds of approximately $2.44 billion, not including the sale of customary underwriter options.

There are four classes of stock:

  • Class A common stock: public investors, one vote per share
  • Class B common stock: co-founders and some existing investors, 20 votes per share
  • Class C common stock: not yet issued, possibly held for strategic investor, if any
  • Class H common stock: stock for the Airbnb Host Endowment entity, no votes. The company has funded the Endowment with 9.2 million Class H shares and co-founder Chesky has pledged $100 million for this entity to benefit Hosts on the platform on an annual basis.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $25.3 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 8.7%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

We currently intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time.

We intend to use a portion of the net proceeds we receive from this offering to satisfy the anticipated tax withholding and remittance obligations of approximately $1.2 billion related to the settlement of our outstanding RSUs in connection with this offering, based on 56.5 million RSUs outstanding for which the service-based vesting condition has been satisfied as of November 25, 2020...

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Co-leads Morgan Stanley and Goldman Sachs, plus numerous other major investment banking firms.

Commentary

Airbnb is seeking public investment some 12 years after it was founded, a longer than usual time for a startup to stay private.

The company’s financials show the negative effects of the Covid-19 pandemic as consumers have cut back on travel in 2020.

Sales and Marketing expenses as a percentage of total revenue have continued dropping but the firm’s Sales and Marketing efficiency rate has swung into negative territory as revenues have dropped.

The market opportunity for disrupting the traditional hotel industry with a peer-to-peer marketplace is large, although over the short term the industry has seen contraction due to the pandemic.

Morgan Stanley is one of the co-lead underwriters and IPOs led by the firm over the last 12-month period have generated an average return of 68.7% since their IPO. Goldman Sachs, the other co-lead, has produced IPO returns of 71.4%. These are top-tier performances for all major underwriters during the period.

As a comparable-based valuation, Airbnb management is asking IPO investors to pay an Enterprise Value / Revenue multiple of 7x.

For what is essentially an ‘asset-light’ software company, this multiple is reasonable.

I believe the effects of the Covid-19 pandemic will be temporary; the only question is for how long?

My opinion on the IPO is a BUY at up to $47.00 per share as Airbnb is in a class of its own, has significant runway ahead to take more market share from existing hotel operators and temporarily depressed revenue means IPO investors may get the stock at a discount.

BUY

Expected IPO Pricing Date: December 9, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice. Past performance is no guarantee of future results.)

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