Airbnb (NASDAQ:ABNB), the leading home-sharing operator, pulled off one of this year’s top IPOs. Shares jumped 113% over the initial offering price, giving ABNB stock a valuation of more than $100 billion.
Keep in mind that the initial price range for the deal was at $44 to $50, and opened at $68. The stock closed after its first day at $144.71.
Of course, this was not the only high-profile IPO for this week. There were also big-time offerings from DoorDash (NYSE:DASH) and C3.ai (NYSE:AI). No doubt, next year we will see other major tech unicorns hit the markets.
So then, let’s take a closer look at the Airbnb IPO and why it has ginned up so much interest from Wall Street.
Brian Chesky and Joe Gebbia were not hot-shot computer programmers. They were instead very creative designers. Back in 2007, they were not even looking at creating a tech start-up. Rather, they wanted to find a way to be able to keep paying for their San Francisco apartment.
What to do? Well, Chesky and Gebbia put together a simple website (at AirBedandBreakfast.com) to rent airbeds in their apartment. It was really a wacky idea. But the interesting thing was three designers, who were in town for a conference, took up the offer. They were Airbnb’s first hosts. And so started one of the most successful online businesses.
But to make Airbnb durable, there was quite a bit of heavy lifting. The company had to put together a sophisticated rating system to engender trust as well as a solid payments platform and easy ability to browse listings. The design skills of Chesky and Gebbia proved useful in terms of creating an immersive experience for users.
Fast-forward to today: Airbnb is a powerhouse. Just consider the following metrics:
- More than 4 million hosts
- Availability in over 220 countries and regions
- Since inception, hosts have earned over $110 billion
- About 5.6 million active listings
With the massive scale, the word Airbnb has become how people describe the home-sharing experience. As a result, there has been significant free marketing. Roughly 91% of all traffic to the site comes through organic channels, like searches on Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google search engine.
Another key advantage for Airbnb is the network effects. This means that the platform gets more powerful as the number of people who use it increases. This is why systems like Facebook (NASDAQ:FB), Alibaba (NYSE:BABA) and Microsoft’s (NASDAQ:MSFT) LinkedIn have become so valuable. They are incredibly powerful moats.
In the early days of the Covid-19 pandemic, Airbnb’s business got hit particularly hard. During the second quarter, revenues dropped by a grueling 72% to $335 million.
But Airbnb took swift action. Management raised $2 billion to shore up the balance sheet. There were also cutbacks in the headcount of about 25% and steep reductions in marketing and sales expenses. The company was able to quickly refocus the business on local stays.
As a result, Airbnb’s business recovered much quicker compared to other online travel operators. By the third quarter, the drop in revenues came to a 18% on a year-over-year basis and there was even a profit of $219 million.
Bottom Line On the Airbnb IPO
Now the company has some major risks. For example, Airbnb faces a myriad of legal challenges from local governments. Let’s face it, the hotel industry has been aggressive with its lobbying efforts. There are also ongoing issues with the liabilities of guests, which have involved shootings, fatalities and other criminal activities.
But for the most part, Airbnb has done a fairly good job in dealing with these problems. And again, the company has big advantages in terms of its brand, platform and financial position.
Next year, there should be a spike in growth for tourism as the vaccines from companies from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) will be aggressively rolled out. And yes, Airbnb will be a big beneficiary.
But despite all this, I think investors should still be cautious. The valuation does look stretched, as does the rest of the market for high growth plays. In other words, when it comes to a stock like Airbnb, it should be for that part of your portfolio reserved for high-risk investments.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.