No Airbnb IPO in 2019: Are Unicorns Cursed?

In a very brief statement on September 19, Airbnb announced its intention to go public in 2020. The timing of the statement is interesting, as it comes within days of another unicorn, WeWork, shelving its IPO for now. Airbnb IPO news has been making the rounds since 2018. The company was last valued at $31 billion during a secondary share sale in September 2017.

Interestingly, yesterday, fintech startup Stripe announced a $250 million series F funding round led by Andreessen Horowitz and General Catalyst. The round put the startup at a $35 billion valuation. It also put Stripe ahead of Airbnb in terms of valuation.

To date, Airbnb has raised $4.4 billion in private funding. Andreessen Horowitz and Sequoia are some of the company’s key investors. Andreessen Horowitz made a killing from its early investment in another unicorn, Slack (WORK). Sequoia has been an early-stage investor in Snap (SNAP), Microsoft’s (MSFT) Linkedin, and Facebook’s (FB) WhatsApp.

Airbnb: The unique unicorn

Though it’s a disruptor like Uber (UBER), Airbnb is unique in its own right. Unlike Uber, which had to concede some markets to competition, Airbnb enjoys a dominant position in the vacation rental market. The company has over 6 million properties listed on its platform, with over 2 million people staying in Airbnbs on any given night. Airbnb has a presence in over 190 countries, while Uber operates in about 70.

On the funding side, Airbnb has shown prudence. The company hasn’t raised any private funding since March 2017, when it raised $448 million. That’s two and a half years without needing any external funding—rare in the world of large unicorns. Airbnb had $3.5 billion in cash on March 31 this year even without raising any external funds for so long.

Unlike loss-making now-public ex-unicorns that aren’t expected to churn profits for years, Airbnb is already profitable, albeit at an adjusted level. The company reported $9.4 billion in gross bookings in the first quarter of 2019. Projecting Airbnb’s revenue from gross bookings is a Herculean task thanks to its various models and products. But at a service fee of 3%–5%, its bookings could translate to revenue of $280 million–$470 million. Airbnb’s revenue rose over 30% in the first quarter. If this rate of growth continues, its revenue for 2019 may cross $2 billion assuming a 5% service fee on all bookings.

Airbnb isn’t as desperate as some other unicorns

Companies such as Uber and WeWork funded their breakneck growth with private investments. Thus, they had to tap investors’ doors more often. As the pressure from investors to come up with a plan grew, the companies became desperate. With private funding tightening, IPOs were the most desirable way to refill the fast-emptying coffers.

Uber was the poster child of startups slated to go public this year. Just days before its disastrous IPO in May, there were talks of the company’s going public for $90 billion. However, there were big questions about Uber’s path to profitability. Sensing market uneasiness, Uber priced its shares at $45, valuing it at $75 billion. On the first day, its market cap dropped by about $6 billion. Yesterday, its shares closed at $33.8, giving it a market cap of $57 billion.

WeWork’s story is even more interesting. In January this year, the unicorn was valued at $47 billion. Then its key investor, Softbank, pulled the plug on a $16 billion proposed investment. After Uber’s flop IPO, the chatter about WeWork’s astronomical valuation became louder, forcing the company to think about raising debt. With debt funding contingent on its IPO success, WeWork didn’t have many options but to prepare for a public debut. The market’s lackluster response to WeWork’s pitch forced the company to shelve its IPO plans for now. On June 30, WeWork had $2.47 billion in cash and cash equivalents. However, that cash may only last for a couple of quarters—the company burned $2.36 billion in this year’s first half.

Airbnb is insulated from these desperation problems because it has enough cash on its books and a far lower burn rate. It can wait for the right time to go public.

Airbnb and its moat

As I discussed earlier, Airbnb has built a strong moat in the vacation rental segment. It’s also making inroads in the travel experiences segment. Given Airbnb’s more than 6 million listings and high stickiness, no one else comes close in the space. With Millennials choosing experiences over luxury, the market size and Airbnb’s moat are bound to grow.

In contrast, Uber has to compete with local players in most of its markets. Uber competes with Lyft (LYFT) in the US, Ola in India, and local taxis everywhere. Uber had to concede China to Softbank-cousin Didi and Southeast Asia to Singapore’s Grab.

Slack (WORK), which was touted as an email killer, is at risk of getting killed in the competition with Microsoft Teams and Facebook Workplace. Teams, which is three years younger than Slack, surpassed Slack in terms of daily active users in June. Microsoft is also better positioned than Slack to tap high-paying enterprise customers. Facebook recently redesigned Workplace to signal that it’s a serious player. It also has 2.7 billion users across its platforms to market Workplace to.

Although it’s the biggest player in some micromarkets, the troubled WeWork also competes with local and regional players and its European rival, IWG. IWG has a market cap of $4.7 billion, one-tenth of WeWork’s last private valuation despite its being roughly the same size—and profitable.

The scalability advantage

Airbnb has a scalability advantage over other startups such as Uber and WeWork. To continue growing, Uber has to enter new markets, get more drivers to sign up, get more riders, or get riders to travel more (or some combination of all these things). This is a tall order in the current competitive scenario due to its cash burn. Uber also doesn’t have much bargaining power with drivers to get a higher cut.

WeWork needs to increase its occupancy rate or open more spaces to continue growing. The second option is highly capital intensive, and WeWork may not have much money left for that.

On the other hand, Airbnb has the potential to grow sustainably without much friction. If its gross bookings remain the same, Airbnb could earn almost $100 million in additional revenue with just a 1-percentage-point increase in its service fee. With Airbnb’s focus shifting to business travel and experiences, scaling opportunities are plentiful. The company can achieve all of this without spending billions.

Slack’s business model is also not as scalable since the majority of customers don’t pay for it. Moreover, Slack’s model is prone to customer concentration risks.

A not-so-scary valuation

Airbnb’s last private valuation will be about 15x its revenue if the company achieves $2 billion in revenue this year. While this valuation is still high, it’s not as eye-popping as Slack’s. Even after its fall since its public debut, Slack is trading at over 30x its 2019 revenue. WeWork’s $47 billion private valuation is over 15x its annualized revenue for the first half of 2019. While Uber is trading at a lower revenue multiple, it’s expected to see over $3 billion in EBITDA losses this year.

On the other hand, Airbnb is profitable, has built a moat, and has sustainable growth potential. Thus, justifying its valuation could be easier than doing the same for its unicorn peers.

The unicorns that made a killing

Not all unicorns that went public this year had a troubled public debut. Beyond Meat (BYND), the plant-based meat producer, is still trading in multiples of its IPO price. The company gained 163% when it debuted earlier this year. Pinterest (PINS) went public in April with a $19 price tag. Its stock closed at $30.14 yesterday, translating to more than a 50% gain from its IPO price.

Upcoming IPOs

Peloton, a connected fitness equipment maker, is expected to go public on the Nasdaq in the next few weeks with PTON as its ticker. There’s also chatter about trading app Robinhood going public.