Airbnb IPO Houses a Host of Problems
Airbnb (NSDQ: ABNB) on Thursday became the latest “unicorn” to go public. A unicorn is a privately held startup company valued at more than one billion dollars. After raising the price several times due to high demand, ABNB went public at $68 per share.
At that price, the company is valued at $47 billion. Not bad for a business that was in serious financial trouble nine months ago. At that time, the rapidly escalating coronavirus pandemic forced vacationers to cancel their travel plans.
I know, because I was one of them. I had reserved an Airbnb property in New York City to participate in the TD 5 Boro Bike Tour scheduled for May. That event was canceled, so Airbnb gave me a credit for my deposit to use in the future.
That’s fine with me. It’s only a matter of time until I am able to take a vacation. When I do, I’ll probably use up my credit with Airbnb. But it didn’t do the property owner any good. He lost a sale. Fortunately, the federal government included rental property owners in its emergency financial relief package to help them remain solvent.
Airbnb had to provide extensive data on its financial condition to go public. However, there isn’t nearly as much information available about how the individual property owners are faring.
I can’t help but wonder how they will hold up if the current spike in COVID-19 persists further into next year than expected. Will the federal government once again bail them out or will they be on their own this time?
That is a critical point for investors to consider. Airbnb’s business model is dependent on its hosts to provide properties for its customers to rent. Without them, the entire business goes down the drain.
In the Form S-1 registered with the Securities and Exchange Commission (SEC), Airbnb reveals that April bookings this year were only 28% of last year’s total. That figure improved to 81% in July but has dropped a couple of percentage points each month since then.
That is why the Risk Factors Summary section of the document includes these disclosures:
- The COVID-19 pandemic and the impact of actions to mitigate the COVID-19 pandemic have materially adversely impacted and will continue to materially adversely impact our business, results of operation, and financial condition.
- Our revenue growth rate has slowed, and we expect it to continue to slow in the future.
- Our Adjusted EBITDA and Free Cash Flow have been declining, and this trend could continue.
- We have incurred net losses in each year since inception, and we may not be able to achieve profitability.
The purpose of these disclosures is to warn potential shareholders of potential risks. That makes it difficult to sue the company if future performance does not live up to expectations.
Approximately half of the net proceeds from the IPO will be used “to satisfy the anticipated tax withholding and remittance obligations related to the settlement of our outstanding restricted stock units in connection with this offering.” In other words, none of that money will go towards the company’s operations.
As for the other half of the money raised, Airbnb only says that “We will have broad discretion in the way that we use the net proceeds of this offering.” Keep in mind, this is a business that lost $674 million in 2019 and another $698 million over the first nine months of 2020, so it may want to hang on to some of that cash.
Mad About Dash
Apparently, none of that matters much to the eager investors that snapped up shares of ABNB during its first day of trading. That day, ABNB started trading at $146, more than twice its IPO price.
Perhaps investors were motivated by the overwhelming response to the IPO for DoorDash (NYSE: DASH) the day before. DASH soared more than 80% above its IPO price of $102 within the first three hours of trading.
There is a big difference in the risk factors confronting DoorDash than Airbnb. DoorDash is dependent on its army of delivery people using their personal vehicles to pick up food at restaurants to deliver to customers at home.
However, the home food delivery business is likely to thrive if the coronavirus pandemic takes longer than expected to dissipate. Also, it is considerably less likely that a significant number of those vehicles might end up being repossessed if there is a decline in DoorDash business for those drivers. Investors need to think hard about how each company’s business model might be affected by possible scenarios in the months to come.
In fact, as 2020 winds to a close, the Investing Daily team has been giving a lot of thought to the risks and opportunities of 2021. As an investor, you need guidance from experienced analysts. Which is exactly why we’ve put together our first ever Profits Mastermind Roundtable.
During this private event, each of Investing Daily’s chief investment strategists (including me) is interviewed by our editorial director. We’ll reveal our top profit opportunities which could arise from a Biden presidency; “must-own” stocks for 2021; our most contrarian, “shoot-for-the-moon” stock pick; and much more.