2019 looks set to be the year of the ‘sharing economy’ IPO. Barring rapidly deteriorating market conditions forcing a temporary delay, ride hailing apps Uber and Lyft will have gone public by the time spring turns to summer.
Airbnb, the crowd-sourced temporary accommodation platform that has disrupted the traditional hotel industry in the same way as Uber and Lyft the taxi industry, is of course the third. Airbnb’s 2019 IPO is a little less certain than the other two but having installed a new CFO last year, it is believed that the company plans to go public sometime around June and investors are hopeful that proves to be the case.
With a decade having passed since the international financial crisis laid waste to the global economy, it is symbolic that the first wave of the innovative technology-centric business models that rose out of the ashes will now take the next step in their evolution towards becoming international business powerhouses. And unlike Uber, Lyft and many of the other technology IPOs of recent times, Airbnb is a company that actually makes a profit. The company’s 2018 ebitda was $100 million.
There are rumours that Airbnb might choose to replicate Spotify’s alternative IPO approach and choose a direct listing. Most IPOs are either not open to the general public at all or set aside just a small percentage of all the shares to be sold for retail investors. The rest are sold in bulk to institutional investors by whichever investment bank is running the IPO.
It’s a lot less trouble selling millions to hundreds of millions of dollars, pounds or euros-worth of shares to a much smaller group of investors than it is to sell hundreds and thousands-worth to thousands of small investors. The plus is helping to foster customer loyalty by encouraging your grassroots user base to become shareholders and, hopefully, take advantage of a share price upswing once they start trading freely on the stock exchange. A direct IPO listing refers to the latter – opening the IPO to the general public, marketing it to your user base and setting the minimum value of shares that can be bought much lower.
As well as already making a profit, Airbnb is still growing very quickly. The third quarter of 2018 represented a record 3 months of sales and 150% growth on the revenues generated over the same three months a year earlier.
However, it is not all plain sailing for the platform that allows private accommodation owners to rent out rooms and whole properties to travellers as an alternative to hotel or hostel accommodation. Margins are much thinner than at traditional hotel groups.
The Financial Times estimates (Airbnb is a privately owned company so does not publish full accounts) that 2018’s $100 million ebitda was eked out of turnover of around $3.5 billion. That equates to a margin of just 3%. Hilton had similar annual revenue but margins of around 47% meant it recorded a profit of around $1.6 billion. Of course, Airbnb’s advantage is that it has no fixed costs associated with the upkeep of its properties, as it doesn’t own them. So, unlike traditional hotel chains, there is little risk of the company falling to a loss if the economy hits a rough patch.
The other threat to Airbnb’s business model is regulatory clampdowns. Some cities and countries have moved to limit the growth in the number of properties listed on Airbnb in an effort to help protect the local hotel industry. Tax authorities, particularly in Europe, have also begun to chase those who offer their properties on Airbnb amid suspicions much of the cash generated is not declared as income. This is having an impact. In the U.S., average supply growth in cities that have introduced legislation to control Airbnb offers was 10% compared to 30% in cities still taking a more laissez faire approach. However, it is still growth, suggesting that the company can cope with a stricter regulatory regime.
These hurdles are considered manageable and are not deterring investor interest in a potential 2019 IPO. Airbnb’s most recent valuation was $31 billion but an IPO valuation would be expected to make a significant leap on that and could approach the rumoured $100 billion target Uber is said to be aiming for with its own IPO. If they go ahead, the two 2019 sharing economy IPOs would be the first ‘mega’ tech IPOs since Facebook in 2012 and Alibaba in 2014.Risk Warning:
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