What is the most anticipated IPO of 2020? Airbnb of course! This company has forever changed the tourism industry, some say for the better and others say for the worse. Airbnb has had a whirlwind year, as the coronavirus pandemic has slowed down or stopped most businesses, particularly those in the tourism sector. But the stock market has rebounded despite all that, which presented an opportunity for Airbnb to finally go public. Now you might be wondering how to buy Airbnb stock. Should I buy Airbnb stock?
In today's article we’re going to break down the pros and cons of investing in Airbnb’s stock when it goes public. To answer that question, we’ll first determine where Airbnb stands in today’s economy. After that we should figure out if the IPO is the right time for us to get in on the action, or if we’re better off investing at a later date. We’ll tell you everything you need to know about Airbnb, which will inform your investing strategy even after the IPO. Since technical performance will only be available once Airbnb goes public, we’ll have to rely on fundamentals for this breakdown. Toward the very end, I’ll tell you how to buy Airbnb stock step-by-step. So keep reading!
Let’s first understand where Airbnb stands and how it makes money.
A Brief History of Airbnb
Airbnb was founded in 2008 by Brian Chesky, Nathan Blecharczyk and Joe Gebbia. You know how they say necessity is the mother of all invention? Well Airbnb is a shining example of this. At the time, Brian Chesky was just a broke design student who needed to make money fast to afford his $1,200 a month San Francisco apartment.
After noticing that hotels were sold out for a local design conference, he and Joe had the idea to offer attendees a cheap place to sleep and make some money while they’re at it. They didn’t even have proper beds, just inflatable ones, which is where the name came from. After experiencing the high of their first booking, they were hooked. With this proof of concept, the later company secured funding from the likes of Y Combinator Sequoia Capital and Youniversity Venture, using that capital to aggressively expand and open international offices worldwide.
Realizing that they could further disrupt the trillion dollar global tourism industry, Airbnb broadened their offering beyond air beds into full-on properties and tourist experiences. Since 2011, Airbnb started buying up location-and payment-based companies left and right. A few notable examples are:
- Accoleo and CrashPadder: German and London-based rival marketplaces respectively.
- NabeWise: A city guide.
- Concur: A business expense reporter.
- Vamo: A city trip planner.
- Luxury Retreats: A premium vacation home marketplace, bought for an estimated $200–$300 million.
Airbnb plans to compete with luxury hotels on two fronts, with: 1. Beyond by Airbnb, a listing of luxury vacation rentals, and 2. A line of condos, with hotel-like amenities such as 24-hour concierge and valet parking. With millions of guests and hundreds of thousands of properties listed, Airbnb seemed unstoppable. That is, until 2020 brought the Airbnb juggernaut to a grinding halt. We’ll continue to explore present and future threats to Airbnb later on. But first, how does Airbnb actually make money?
Airbnb’s Business Model
It used to be the case that a rental company had to raise enough capital to buy or construct property that they could then charge tenants to occupy. Well not anymore.
Airbnb is part of a new breed of companies that exploit a concept called the sharing economy. In their case, this means that they don’t create products to sell to consumers, but instead provide an online marketplace that connects people that have property (hosts) to people that are looking for property (guests) through a simple user interface.
This enables hosts to earn money from a property they are not at all or only partially using. This also enables guests to book (oftentimes) cheaper, at-home-feeling rentals that give them an authentic local experience. This as opposed to booking more expensive, one-size-fits all hotels. And even though both parties are transacting directly, Airbnb takes a percentage of every booking fee for the convenience they provide.
Airbnb either charges a fee to both hosts (3%) and guests (14.2%), or only charges hosts (14-16%). The latter option depends on whether the host is a hotel, the country their listings are in and their cancellation policy (Strict charges more).
The Airbnb Effect
Any company who disrupts a trillion dollar industry is bound to receive criticism.
The “Airbnb Effect” refers to the impact (oftentimes unintended consequences) that Airbnb’s radical business model has on the tourism industry and cities it operates in. These range from housing discrimination and fraudulent listings to increased housing prices. There’s two sides to this debate.
Some people think that instead of bashing Airbnb, hotels should discard their old business models and offer travel experiences that appeal to diverse lifestyles and tastes (e.g. different price points, room decorations, local experiences etc). But in all fairness hotels do come with amenities such as restaurants and gymnasiums, plus around-the-clock service general safety precautions, which are advantages that most short-term rentals cannot afford to implement.
There are others who believe that Airbnb causes more harm than good, and that it should be disbanded or heavily regulated. Chief among these complaints is Airbnb’s unintended effect on housing affordability in the places they operate. Airbnb’s increased use and popularity incentivizes some landlords to avoid long-term rental altogether. Rather than charging a fixed rate for a given rental period, they can spice up their place and charge more for a steady supply of short-term stays. This causes other property owners to follow suit and soon enough housing units and entire neighborhoods are left unaffordable to the local citizens. This is one of the main drivers behind local governments regulating Airbnb.
Airbnb’s Biggest Threats
Despite hotel associations lobbying to kill Airbnb since its inception, they have continued to succeed thus far. But given the Airbnb Effect and Covid-19’s surprise attack, Airbnb faces many threats to its continued success, namely:
Hotels are finally starting to wise up, adapting their business models to more closely resemble that of Airbnb’s. Hotels like The Redbury, Accor and even Marriott are developing or already offering affordable stay in big cities, designing their rooms to feel more like homes and partnering with tourist experience companies.
Short-term Rental Regulation
In 2015 San Francisco almost reduced the number of days landlords can rent out their properties to 75 days instead of 90. The proposal was ultimately rejected in their hometown, but the same doesn’t hold true for other cities and countries. New York, for instance, has a minimum rental period of 30 days. Other cities like Chicago and Boston also increased regulations by policing rental frequency, requiring licenses, taxing short-term rentals etc. All this to discourage too many residents from becoming hosts.
The Covid-19 pandemic brought the worldwide economy to a grinding halt. Unlike many of its fellow tech unicorns, Airbnb was hit hard. Many tech giants only grew bigger because they mostly deal in software, which we’ve grown even more dependent on to connect with each other while maintaining social distance. Airbnb, on the other hand, deals in physical goods despite not owning any of it.
As countries closed their borders, bookings were cancelled en masse while hosts were left with mortgages. Some successful hosts even took on debt to buy more rental properties, with the expectation that Airbnb bookings would keep coming through. While the outbreak still isn’t over, there has been progress in vaccine development. Hopefully we find a cure, borders are opened, and we’re allowed to travel again. But what if another pandemic strikes in the near future? Airbnb would have to downsize all over again or worse.
Why Is Airbnb Going Public Anyway?
Airbnb had already planned to go public before the pandemic struck. And while on the surface it doesn’t seem ideal for them to IPO during the same year as the worst stock market crash in history, there’s two simple reasons why they probably decided to go through with it.
Airbnb used to have policies that allowed hosts to charge for cancellations. But in response to the widespread cancellation of bookings due to the pandemic, Airbnb lifted this policy and let guests cancel their reservations for a full refund. This naturally pissed off hosts that are stuck paying for their properties.
To win back some brand trust, Airbnb announced that they would pay hosts whose bookings were cancelled due to COVID-19, a quarter of their cancellation charge. Which is better than nothing, but still didn’t sit right with some. One of Airbnb’s possible motivations behind their IPO is to safeguard themselves against history repeating itself, where people aren’t able to travel and they can’t make money from bookings. If they have enough cash laying around, they’ll be able to weather any upcoming storm.
Airbnb is in a unique position because unlike other sharing economy apps (e.g. Uber), it doesn’t have a huge competitor, yet. As mentioned earlier when we overviewed Airbnb’s threats, the competition is closing in. The barrier to entry for creating an Airbnb clone is low. So the best thing they have going for them is network effects.
Since their platform has the most listings and brand name recognition, new users will try them out first and existing users won’t easily switch over because they already invested so much time personalizing their in-app experience. Airbnb can pour their new IPO funds into creating more awareness, winning over more users and recovering the number of bookings as soon as travel restrictions are lifted.
What Is Airbnb’s Stock Worth?
Each source cites a different figure, but Airbnb has been valued anywhere from $30 to $38 billion, and will price its stock between $56 to $60 a share. That makes Airbnb the second most valuable player in the online travel industry by a huge margin, surpassed only by Booking.com’s $80-$85 billion valuation. In an interesting pre-IPO move, Airbnb has split their stock shares in half, which also decreased the cost per share. It’s speculated that Airbnb shareholders approved the split to encourage more retail investors to participate in the IPO. And since apps like Robinhood even allow retail investors to buy fractional shares, the barrier to investing in Airbnb is as low as can be.
Is Airbnb Overvalued?
There’s an argument to be made that Airbnb isn’t worth over $30 billion. It comes down to these 4 simple reasons:
- Regulation: Airbnb’s might soon be regulated to a degree that doesn’t make short-term rentals worth it anymore.
- Competition: Hotels and other online travel agencies are catching on. With a model that is easy to replicate, what else is going to retain customers beyond brand recognition?
- Security: Fraudulent Airbnb listings, property damage, scams and more negative effects, where security for guests and hosts can’t be automated. If these incidents continue to happen, then the Airbnb brand name might be tarnished beyond repair.
- Diversification: Airbnb has diversified into many other travel related services, but as the pandemic has shown, even travel is expendable. How will Airbnb survive without bookings?
Airbnb Stock vs Rental
There’s more than one way to invest in Airbnb, you can buy Airbnb stock when it IPOs, or you can open your own Airbnb rental. The difference between the two comes down to active versus passive income generation. Investing in the stock would be passive. But passive doesn’t mean without risk. The Airbnb stock might plummet since we don’t know how the pandemic will play out yet. Renting would be an active investment where you would have to:
- Complying with housing regulations in your country, which means getting the necessary licenses, knowing the minimum rental period and number of days per year you can rent for, paying the required taxes.
- Prepare the property for rental through cleaning, repair, painting, furnishing etc.
- List and market your property for regular bookings.
- Maintain or upgrade the property to book it for the same or a higher rate.
If Airbnb survives and even thrives, your rental will pay you dividends just like owning some of their stock would. What’s to stop you from doing both even? While stock prices fluctuate daily, a rental will generate monthly income and appreciate in value. A two-pronged approach would include holding the Airbnb stock for long-term and generating Airbnb rental income in the short-term. Just make sure you don’t take on a debt you can’t pay off if push comes to shove and the tourism industry doesn’t bounce back.
Should You Buy IPO Stock?
Unless you’re planning to hold a stock for the long-term, it’s not usually recommended that retail investors invest on the day of the IPO. Though it has the potential for upside, the chances are not in your favor.
While companies do disclose their finances in their IPO filing, there’s always the risk of private investors having access to certain “inside” information that might negatively affect a brand new stock. So it’s usually better to wait and see how a stock performs over the course of a few months so you can make your own informed decision about whether to go long or short the stock. Not to mention the fact that many private investors sell their stocks shortly after the IPO to lock-in those sweet profits at the expense of the share price.
Airbnb is in a difficult position right now, as it’s not making the money it used to due to reasons outside its control. They lost over $1 billion last year, and $2 billion this year. At the same time, you could argue that their temporarily weakened position also means that their stock is underpriced. And who doesn’t like a good bargain? Having a long-term vision of Airbnb as a market leader is the only reason to buy its stock on the heels of its IPO. That and being comfortable with a position that could end up in the red for the short-term.
How to Buy Airbnb’s IPO
You’ll have to wait for Airbnb to go public first. But once it does, buying Airbnb stock is relatively straightforward. Here’s how:
- Open a brokerage account, we recommend eToro for its 0% commission on stocks.
- Fund your brokerage account.
- Search for Airbnb by its ticker symbol: ABNB.
- Buy Airbnb stock! These can be full or fractional shares.
So that's it for today's article. Hopefully you learned something new about Airbnb and investing in IPOs. Do you think Airbnb’s IPO stock price will defy all expectations and surge? Or will it underperform like its sharing economy counterpart Uber? Let me know what you think in the comments below.