The Airbnb IPO has been a long time coming, however the timing of the pandemic did prompt a lot of speculation that it might be delayed until next year, once the travel sector had begun to show evidence of a recovery.
It was therefore a little surprising when the announcement was made of a listing this month, and it was even more surprising at the stampede we saw when it came out of the traps on its first day of trading yesterday. A first day closing price of $144.71 is an absolutely phenomenal gain from an initial pricing of $44-$50 a share, raising the question as to whether the IPO was priced too low when the listing was made. At the current Airbnb share price, investors would appear to value Airbnb at a vertigo-inducing $86.4bn. This speaks to a market that has clearly lost all sense of perspective.
Airbnb share price soars despite finances
This compares to hotel chain Marriott International, which has a market cap of $42bn, or Intercontinental Hotels, who own Holiday Inn and Crowne Plaza, which has a market cap of just over $10bn or £8.7bn. This sort of valuation almost beggar’s belief, and even more so when you look at Airbnb’s finances. With revenues in 2019 of $4.8bn, the company is unlikely to make anywhere near close to that this year, and will probably struggle to get near to that in 2021. Compare that to the annual revenues of Marriott in 2019 which came in at $20.9bn, and while true that hotel chains have huge levels of fixed costs in terms of real estate and staff, unlike Airbnb, this valuation is still quite extraordinary.
The company was running at a loss even before the pandemic struck, losing $674m, in 2019 and is on course to lose even more this year, despite a Q3 profit, which largely came about as a result of huge cuts to its marketing budget. Year to date Airbnb is already nursing losses of $697m on revenues of $2.52bn, however in its most recent quarter the company has managed to turn a profit of $219m, on revenues of $1.34bn. This was a significant increase in revenues from the $334m in Q2, and was only slightly smaller than the same quarter a year ago, when the company turned over $1.64bn.
Loss in the first half of this year were still high, coming in at $916m but the return to profit in Q3 does suggest that the potential for a return to some form of normality, though judging by previous year’s performance, Q3 does tend to be the quarter where the company tends to perform better. In 2018 and 2019 Airbnb's revenue for Q3 that was comfortably ahead of the other quarters, by a significant amount.
Is the Airbnb valuation realistic?
As things stand the company is unlikely to turn a profit this year, and while it has plenty of cash to play with it, is remarkable that anyone thinks that this sort of valuation is realistic in these uncertain times. We already know that profitability is not top of the list when it comes to investors looking to buy in, especially given the risks the business model is likely to face in the years ahead, even without the pandemic.
Already this week it has been reported that the UK treasury is looking to target the likes of Uber and Airbnb in a review of its VAT policy to bolster government revenues. It is unlikely that the UK will be alone in this, with the EU also looking to regulate and tax the business model more effectively in order to remove the competitive advantage it enjoys over the traditional hotel sector.
Time will tell whether the current valuation of Airbnb is sustainable, but it isn't realistic, and unless the business can display anything like a level of long-term profitability, the froth could well come off quite quickly.