Airbnb files for an IPO at a time when travel demand has been slammed by coronavirus concerns.
As Airbnb is not public, we do not actively cover the stock. However, Dan Wasiolek, Morningstar’s senior equity analyst, has been observing the business and makes some key observations.
Airbnb’s network strength is evident in its leading position in the roughly $150 billion global alternative accommodation booking market. To illustrate, in 2019, we estimate over half of vacation rental bookings occurred online, with Airbnb garnering around 40% share compared with the estimated mid-20% and mid-teen shares at Booking and Vrbo (owned by Expedia), respectively. Although we expect vacation rentals to remain Airbnb’s core market for the foreseeable future, we believe its high awareness (strong direct bookings and mobile app usage worldwide) can aid its vertical extension into boutique hotels, experiences, and transportation, thereby supporting its network advantage.
That said, Booking and Expedia networks also include traditional hotels (around a $600 billion booking market), affording a more complete offering, to which Airbnb’s communal culture does not adhere. Also, Airbnb’s core vacation rental space faces potential coding and listing regulatory headwinds, which could challenge the company’s network advantage.
Here are 4 key takeaways from Airbnb’s IPO filing.
- Airbnb hosts a network advantage, as we have long believed.
- Airbnb has seen a stronger recovery in travel demand versus the industry, aided by domestic road trips, as has been our expectation since the early days of the pandemic.
- Airbnb’s liquidity profile appears to be strong enough that solvency is a very low risk.
- Airbnb is generating losses, as it wisely builds out its network to compete with narrow-moat peers (Booking Holdings Inc and Expedia Group Inc).
Airbnb’s filing offers support that it possesses a powerful network. This is witnessed by the 5.6 million active alternative accommodation and experience listings (which we believe is near Booking Holdings' tally).
This robust supply offering, in turn, generates strong user traffic, with 54 million active bookers in 2019, up 30% from 2018’s level. As a result, Airbnb’s network booked an industry-leading 327 million alternative accommodation room nights and experiences in 2019 (we calculate around 20% of Booking’s 844 million room nights were from alternative listings in 2019, while more nascent experiences metrics were not provided).
Airbnb’s lodging presence has benefited from the travel recovery being led by road over air trips. This is shown in its third-quarter mid-teens gross bookings domestic growth versus the low-60% drop for international. Also, the firm’s liquidity profile appears stout. As of September 30, Airbnb held $4.5 billion in cash after a year-to-date free cash flow loss of $520 million. We believe its cash provides enough liquidity at anaemic demand levels for a few years.
Finally, Airbnb generated net losses during 2017-19 (versus positive 32% 2019 net margin at Booking), as it invested in its network, which we believe is the correct strategy. This investment was highlighted by product development expense, which was 20% of 2019 sales, while Airbnb spent a healthy 34% of sales on marketing last year, near the 33% expensed at Booking.
