The newest stock market unicorn to announce its IPO plans is Airbnb. The short-term rental company, which has exploded in popularity over the past few years, announced that it may seek to file for its initial public offering next year.
Its most recent fundraising round resulted in a valuation of $35 billion.
Airbnb said that it generated $1 billion of revenue in Q2 but hasn’t said anything about its results from last year. The most recent information the market has is that 2017 revenue was $2.5 billion, an increase of about 50% over the prior year.
If Airbnb is able to keep up that same rate of growth, we would expect revenue for 2018 to be about $3.7 billion.
That same growth rate would imply $5.5 billion in revenue for 2019, but that seems to be somewhat optimistic if Q2 only generated $1 billion.
More importantly, Airbnb said it actually generated $93 million of profit on its $2.5 billion in revenue for 2017. Hold the phone and stop the presses! A unicorn IPO that is actually making a profit? This is big news.
Virtually every unicorn IPO that has gone public in the past couple of years has not even come close to making a profit.
Most famously, Uber Technologies and Lyft have reported gigantic losses. Beyond Meat saw its IPO explode all the way up to $200 per share, despite the fact that it lost millions of dollars in the past 12 months.
So let’s rejigger the numbers for Airbnb and see if we can figure out what the financials might look like.
Let’s assume 40% revenue growth in 2018 and then 30% revenue growth for 2019. That would take Airbnb’s 2019 revenue to about $4.4 billion.
If it maintains net margins of 3.6%, as it had in 2017, that would imply net income of about $160 million for 2019.
A $35 billion valuation would thus imply a P/E ratio of well over 200. That still seems like an insane valuation to me, but who am I to tell the market what a unicorn valuation should be?
This doesn’t change the fact that if Airbnb does, in fact, report a profit somewhere around my estimate, it is still a refreshing change of pace for unicorn IPOs.
Airbnb is likely to make for a much better investment than its ridesharing peers.
What we’ve seen from Uber and Lyft thus far are money-losing models that are the partial result of an ongoing price war. The companies are each effectively subsidizing rides, and that is not a winning long-term model.
In addition, Uber and Lyft are now facing increasing regulatory problems. For years they have skated by municipal and state legislation and regulation. Or, more precisely, they have ignored restrictions.
New York never had the intestinal fortitude to lay down the law on rideshare companies, which resulted in a devastating blow to the taxi industry and chronic traffic overcrowding in Manhattan.
All of that additional competition flooding into the city has also driven rideshare driving net income into the ground.
The economics of the short-term rental industry are quite different.
For starters, with limited exceptions, the regulatory environment is actually quite similar to what the rideshare companies have experienced up until now. That is, only selected municipalities have tried to or affected abandon on Airbnb.
Barcelona, Paris, and Santa Monica are some of the cities that have really cracked down on the company. Santa Monica, just a stone’s throw from where I live, is a highly desirable city right by the ocean.
The city effectively crushed Airbnb out of the market by instituting regulations that made it virtually impossible for tenants to rent out their living spaces.
Airbnb is a logistically easier business to run than rideshare, and a lot of the expenses that rideshare companies must deal with aren’t present in short-term rentals.
The demand environment is also vastly different. Rideshare is effectively a commodity, so prices are generally uniform and will fall over time, reducing commission revenue for Uber and Lyft.
With short-term rentals, there are tons of different homes to choose from in any given location. They are definitely not commodities, and people are able to choose what they want to rent and pay for it accordingly.
Greater selection means greater dynamism in pricing as well as there being supply available at virtually any price point.
People looking for high-end rentals in prime locations can find them and pay accordingly, while those seeking no-frills rentals may not only be able to find a price point that suits them but possible values based on location.
While Airbnb has had its share of regulatory battles, it has not suffered nearly as many public relations nightmares as Uber and Lyft have.
Setting aside all of the bad press that Uber, in particular, has received over the past two years, virtually every story involving the success of rideshare also involves stories about the death of the taxi industry and the drivers involved.
With Airbnb, the only damaged parties are hotels. It’s a lot more difficult for the general public to feel bad about hotels losing a portion of their business than cabdrivers losing their life savings and ability to earn a living.
That’s not to say there isn’t regulatory unfairness going on in the short-term rental sector.
Just as rideshare flouted regulations that taxi and livery drivers had to adhere to, Airbnb and other short-term rental companies flout regulations that hotels are required to adhere to. It’s simply not a level playing field.
To that end, while the Airbnb IPO seems to be more attractive than most because the company actually makes money, the ultimate risk lies in regulatory pushback. So far, the hotel industry has not been successful in crushing Airbnb, which you think would happen considering how regulations are indeed being flouted.
The problem is that politicians tend to have no backbone, and they don’t want to experience backlash and vitriol from the general public who are angry at having their cheaper vacation rentals taken away from them.
In addition, the politicians worry that those same consumers would not spend money into their local economy if those cheaper options didn’t exist.
We’ll have to wait and see what Airbnb’s financial statements look like, but at the moment, it looks to be the most attractive of the unicorn IPOs, which isn’t necessarily saying much.