Airbnb (ABNB)

Airbnb (ABNB)

Summary:  Overpriced

Score:  6/20

MOS:  1%

Share Price:  $172

Sticker Price:  $174

Is Airbnb stock a good buy?

Airbnb is a company that operates an online marketplace for lodging, vacation rentals, and tourism. They were founded in 2008 and are headquartered in San Francisco, CA.

Airbnb is a fee based business model. Guests are charged a fee of 14% or less and Hosts are charged a fee of 3% or less.

Here is a highly level timeline overview on Airbnb.

  • In 2007 founders Brian Chesky and Joe Gebbia came up with the idea of putting an air mattress in their living room and turning it into a bed and breakfast.
  • In 2008, Nathan Blecharczyk, Chesky’s former roommate, joined as the Chief Technology Officer of the new venture, which they named AirBed & Breakfast.
  • They had their first customers in town in the summer of 2008, during the Industrial Design Conference held by Industrial Designers Society of America, where travelers had difficulties finding lodging in San Francisco. 
  • As they attempted to raise funds, Chesky, Gebbia, and Blecharczyk created special-edition cereals labeled “Obama O’s” and “Cap’n McCains”, based on presidential candidates Barack Obama and John McCain. This creative marketing strategy caught the attention of Y Combinator who made the first investment in the company of $20,000.
  • By March of 2009 the website had 10,000 users and 2,500 listings.
  • In March of 2009 they changed the name to Airbnb.com.
  • In April of 2009 they raised $600K in a seed round from Sequoia Capital and Youniversity Ventures.
  • In November of 2010 they raised $2.7M in a Series A round from Greylock Partners and Sequoia Capital.
  • In July of 2011 they raised $112M in a Series B round from Andreessen Horowitz, Digital Sky Technologies, General Catalyst Partners, Ashton Kutcher, and Guy Oseary.
  • In 2012, they expanded offices to Pairs, Milan, Barcelona Copenhagen, Moscow, and São Paulo.
  • By October of 2013 they served 9,000,000 guests.
  • In April of 2014 they raised an additional $450M by TPG Capital, Andreesen Horowitz, Sequoia Capital, Dragoneer Investment Group, T. Rowe Price, Sean Grusd, and Sherpa Capital. At this time Airbnb was valued at $10B. 
  • In June of 2015, they raised $1.5B in a Series E round.
  • In March 2020, during the Covid-19 pandemic, bookings dropped by nearly 96% in some cities.
  • In April of 2020, they raised $1B from private equity firms Silver Lake and Sixth Street Partners at an $18B valuation.
  • In May of 2020, they laid off 1,900 employees, about 25% of its workforce due to Covid-19.
  • In December of 2020 the company went public, raising another $3.5B.
  • After all the fund raising rounds, the original owners Chesky, Gebbia, and Blecharczyk each own about 13% of the company.
  • Today Airbnb serves 220 countries and regions, has over 100K listings, has served over 1B guests, has 4M hosts, and the average annual revenue generated by each host is about $9.6K per year.

The reason we’re focusing on Airbnb is because they are a recent IPO. IPOs may seem like great buying opportunities but in most cases IPOs are risky investments.

Let’s break down a few examples.

Airbnb (ABNB) went public in December of 2020 at a share price of $147. By February of 2021 the stock went to $216, a 46% gain, but by May of 2021 the stock went to $132, a 38% drop. Today the stock is at $172, a 17% increase since the IPO. A 17% gain in a year is still relatively good but I’m sure most investors expected this stock to go much higher than $216. Today the stock is Overpriced.

Lemonade (LMND) went public in July of 2020 at a share price of $68. By January of 2021 the stock went to $183, a 169% gain, but the stock has slowly slid back down to its current price of $64, a 5% drop since it’s IPO. Today the stock is Overpriced.

GoHealth (GOCO) went public in November of 2016 at a share price of $71. By February of 2017, the share price went to $92, a 29% gain. Soon after the stock went to $0 and today it sits at $5. Today the stock is Overpriced.

Lyft (LYFT) went public in March of 2019 at a share price of $78. By March of 2020 the stock went to $16, a 78% drop. Now the share price is at $52, a 33% drop from the IPO. Today the stock is Overpriced.

Uber (UBER) went public in May of 2019 at a share price of $41. Over the next few months the stock went down to $18, a 56% drop. The stock has slowly increased back up to its current price of $46, a 12% increase since the IPO. Today the stock is Overpriced.

SmileDirectClub (SDC) went public September of 2019 at a share price of $16. Within a few months the share price went to $8, a 50% drop, and a few months later the share price went to $4, a 75% drop since the IPO. Now the share price sits at $6. Today the stock is Overpriced.

So what is the common theme we’re seeing?

If you look at the historical charts in Tykr, you’ll see that most stocks start out as Overpriced and remain Overpriced. Why is this?

The reason why most stocks file for IPO is they are looking to raise funds. As retail investors, we don’t always see what’s going on behind the scenes but the reality is most businesses that file for IPO have run out of ways to raise funds. 

I wrote an article on IPOs here but I’ll quickly summarize.

With most IPOs, bank lending has slowed down or completely stopped, venture capitalists have lost interest, and even private equity laughs them out the door. So how do businesses like this raise more capital? The simple answer is to go public. Unfortunately, most retail investors don’t know the difference between a good business or a bad business. A lot of retail investors believe they can “get in early” and make big bucks when in reality, large institutions won’t even pay attention to these stocks and the share price will remain flat or decline.

If you’ve seen the movie, The Wolf of Wall Street, you may remember Leo DiCaprio’s character calling these stocks complete garbage, except he didn’t use the word “garbage.”

What happens is, when a stock goes public there may be a short duration where the share price increases but as quarterly and annual statements are released, the truth is revealed. These financial statements will typically show declining revenues, net income, and EPS. All of which are red flags that cause large institutions to sell off the stock. As large institutions start selling, it creates a domino effect where retail investors follow. As you can see, of all the companies listed above, they all went public as Overpriced and remained Overpriced.

As quoted by Warren Buffett, “Only when the tide goes out do you discover who’s been swimming naked.” 

What he means in this quote is when the true financials are revealed, we understand which businesses are performing well and which ones aren’t.

As stated in this article from cnbc.com, most IPOs lose money for investors after 5 years. More than 60% of the 7,000 companies that went public from 1975 through 2011 had negative absolute returns. Let that sink in. Over half of the businesses that go public are now at a lower price than their IPO price.

This article from cnbc.com provides an excellent perspective on IPOs. As quoted by Douglas Boneparth, president of Bone Fide Wealth in New York, “You’d want to be careful that you’re not chasing a story or hype. Don’t let excitement get in the way of making sure the investment you’re making is a smart one.”

This article from abcnews.go.com states that after six months most IPOs deliver disappointing results.

Now there are some circumstances when an IPO can perform well. Here is a perfect example.

Zoom (ZM) went public in April of 2019 at a share price of $62. The share price remained flat until January of 2021 where the stock changed from Watch to On Sale in Tykr. That’s when the stock started taking off. By March of 2020, the stock went to $159, a 156% gain. By October of 2020 the stock went to $568, an 816% gain since the IPO. Today the stock is at $255 and remains On Sale. This stock remained relatively unchanged for 9 months before it reached On Sale status in Tykr. This can seem like an eternity for most investors but in this case, patience has paid off big! On top of that, Zoom has proven to be a profitable business early in its public life. This is very rare.

If you are going to invest in an IPO, you need to make sure you have a strong understanding of the 4M’s (MOS, Meaning, Moat, and Management). Here is an article that talks about the 4M’s and how to use them. Keep in mind, you might not always get access to historical data which means you’ll have to skip the MOS and place higher emphasis on the Meaning, Moat, and Management. 

In many cases, new IPOs won’t be found in Tykr. This article explains why but here is a quick summary. Tykr requires 3 years of historical data to run an analysis but 5 years is ideal. Most companies that go public, don’t reveal data 3 years back. This means we’ll have to wait for more quarterly statements to be released.

Here some news specific to Airbnb.

In February of 2020, just before Covid-19 severely disrupted this business, this article from vox.com stated that Airbnb has struggled to turn a profit. They’ve had to raise extensive capital to enhance the safety for both hosts and guests, they’ve had to enhance their tech, and they’ve needed to spend a lot more than expected on marketing and advertising. This article also talks about host and guest issues including racism, prostitution, and gun violence. In summary, Airbnb has faced a lot of unexpected challenges due to factors out of their control.

This article from cnn.com in September of 2021 includes an interview with CEO Brian Chesky. He talks about Airbnb having to make a pivot. Instead of guests staying 1, 2, or 3 nights, the shift is moving to longer term stays such as 1, 2 , or 3 months. People are looking to get away and relocate temporarily and that’s where Airbnb can help. Covid-19 has allowed more people to work remotely which means they can work from anywhere with an internet connection. This means people are packing a suitcase or two along with their laptop and setting up a remote work location in a new part of the world. 

This article from cnbc.com talks about Airbnbs fundraising arm providing temporary housing to an additional 20,000 Afghan refugees, bringing the total number up to 40,000. The company said the refugee stays are being funded by contributions to Airbnb.org from Airbnb and Airbnb co-founder and CEO Brian Chesky, as well as donors to the Airbnb.org Refugee Fund. In addition to stays funded by Airbnb.org, the company said 5,000 hosts have offered to provide free and discounted stays to Afghan refugees so far.

Now let’s take a look at the 4 M’s of Airbnb.

MOS: The financials are a major red flag. A score of 6/20 shows the financials of this business are weak. In the Airbnb backstory, I highlighted the multiple rounds of fundraising including single rounds where over a billion dollars were raised. This can be a red flag because a healthy business will be able to fund operations with revenue, not continuous rounds of venture capital. Raising funds can be good as it should be used to accelerate the business but there are other times where funds are raised to keep a business afloat. In this case, we’re leaning more towards the ladder.

Meaning: The business model shift to support longer term stays such as 1, 2, or 3 months is smart. It also creates more sustainable income. When you have guests staying 1, 2, or 3 days, as a host you don’t always have back to back occupancy. You might have a guest stay 1 or 2 days, then you’ll have an occupancy for 2 – 5 days, then another guest staying 1 or 2 days, and the cycle repeats. With longer stays, you don’t have revenue gaps. This may work out well in the long run.

Moat: Hotels are the obvious threat to Airbnb. If people are staying a week or less in a city, the prices are competitive between hotels and Airbnb. But when it comes to longer term stays such as multiple months, that’s where hosts are offering discounts to incentivize extended occupancy. This creates a win for the host, guest, and Airbnb.

Management: Resilient is the word that comes to mind. Chesky, Gebbia, and Blecharczyk have certainly faced a lot of challenges building this business through good times and bad. The recent pivot to long-term stays is smart and their motivation to help Afghan refugees is fantastic. They are certainly making some great choices to keep this business alive.

 

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2017:  $2.5B

2018:  $3.6B

2019:  $4.8B

2020:  $3.3B

Revenue has declined. Primarily due to the disruption caused by Covid-19.

 

Net Income (Found on the Income Statement)

2017: -$70M

2018:  -$16M

2019:  -$674M

2020:  -$4.5B

Net Income has significantly declined in 2020. This is a big red flag for investors.

 

EPS (Found on the Income Statement)

2017:  -.13

2018:  -.07

2019:  -2.59

2020:  -16.12

EPS has also significantly declined. Another major red flag.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $151M

2018:  $504M

2019:  $97M

2020:  -$667M

Free Cash Flow has significantly declined.

 

Total Assets (Found on the Balance Sheet)

2018:  $6.6B

2019:  $8.3B

2020:  $10.4B

Total Assets have increased which is a positive sign.

 

Total Liabilities (Found on the Balance Sheet)

2018:  $7.1B

2019:  $9.1B

2020:  $7.5B

Total Liabilities have declined due to the layoffs. In other words, payroll has been reduced.

 

Total Debt (Found on the Balance Sheet)

2018:  $0

2019:  $419M

2020:  $2.3B

Total Debt has significantly increased which is a red flag.

 

Total Equity (Found on the Balance Sheet)

2018:  -$517M

2019:  -$807M

2020:  $2.9B

Total Equity has significantly increased which is a great sign. This is probably the best metric on the business and a contributing reason why the stock is not 0/20.

 

Overall, the purpose of this article is to give a better perspective of recent IPOs. As mentioned, most IPOs are risky investments and Airbnb falls in this category. Their financials are too weak to consider investing in this stock. However, it’s great to see they are pivoting to longer term rental options and making an admirable move to helping Afghan refugees. At this time, this stock may be worth placing on your watchlist. It could be years before they reach On Sale status in Tykr but if they do, that may be a good time to invest.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.