Airbnb filed for an initial public offering on August 19, 2020, after a tumultuous second and third quarter in which the company had its hands full dealing with the fallout of the COVID-19 pandemic, including laying off 25% of employees.
The company deciding to go public this year might come as a surprise to many, given that travel is among the hardest-hit sectors of the economy. Airbnb, while not on the public markets, saw its valuation drop from $31 billion (as of its prior funding round in September of 2017) to $18 billion, as part of a $1 billion financing deal in April 2020.
Perhaps unexpectedly, short-term rental bookings started a sharp rebound in June, significantly outperforming the weaker rebounds in hotel bookings and airline travel. Suddenly Airbnb went from being a beleaguered travel name to having a product that was in high demand.
Short-term rentals began to be seen as a coronavirus-proof alternative to traditional lodging which allowed customers to escape lockdowns and get out while still adhering to social distancing and controlling who they would interact with. Airbnb saw bookings surge, especially in rural areas, giving Airbnb’s management the confidence to make the move to go public.
Airbnb during the COVID-19 crisis
The number of properties listed on Airbnb has been growing consistently for the last three years. As of August 2020, Airbnb had 5.8 million active listings (listings that have received at least one booking in the last 365 days), and while listing growth has been slowing, there has been no discernible reduction in listings on the platform in response to the coronavirus.
The number of nights booked by guests on Airbnb took a big hit in March of this year as the virus reached Europe and North America. In August, bookings were down 41.3% compared to the same month in 2019, despite a significant rebound beginning in June that was strongest in the United States.
With the rebound in bookings, Airbnb saw revenues rebound too. After Q2 revenue at only 28% of 2019 levels, Q3 is on course to bounce to around 74% of 2019 levels, which would represent a dramatic comeback for the company.
Note that Q3 2020 revenues in the chart above include July and August revenues only.
Historically, Europe and North America have been the two most important regions for Airbnb in terms of revenue generated, with Asia Pacific and Latin America making up the balance and holding the most potential for growth.
The bulk of the rebound in Airbnb’s revenues in Q3 2020 is coming from North America, with Europe also recovering, but to a lesser extent.
The rebound in North America, and more specifically the United States, is also reflected in bookings made for future dates, with bookings made for the rest of 2020 now at close to levels seen for the same period in 2019.
European underperformance is also reflected in the future bookings data, which shows bookings made for the rest of 2020 still lagging 2019 levels by a significant margin. Much of this is attributable to the slower reopening taking place in most countries in Europe, and lingering travel restrictions due to a fear of a second wave of infections.
Airbnb and hotels
Airbnb has been looking at departing from its original premise of being a platform for short-term rentals towards offering hotel rooms, too.
However, the number of hotel rooms on the platform is still relatively small and contributes a negligible amount to the company’s bottom line. STR estimates global hotel room supply of around 17.5 million rooms, while Airbnb currently only has 81,000 listings self-identified as hotel rooms.
Airbnb may look to increase the rate at which it’s adding these hotel rooms as a way of driving growth, which could potentially threaten the core business of the online travel agencies.
Risks facing Airbnb
Airbnb’s main competitors in the short-term rental space are Vrbo and Booking.com. Both of these competing platforms form part of a larger online travel agency brand (with Vrbo being owned by Expedia). One potential advantage this provides is that being part of a large online travel agency allows significant cross-selling of vacation rental stays and other products to huge user bases. This could potentially limit Airbnb’s growth possibilities longer term.
Another significant risk facing Airbnb is increasing regulation. Short-term rentals have been blamed by local governments and the media for exacerbating the housing affordability crisis, gentrifying neighborhoods, increasing public disturbances (although Airbnb recently capped occupancy at 16 guests to combat this) and disobeying local and state short-term rental regulations.
Valuation/future of lodging
Airbnb’s private valuation dropped from $31 billion (as of it’s last funding round in September of 2017) to $18 billion as part of a $1 billion financing deal announced in April 2020. With Airbnb’s bookings rebounding considerably since then, it makes sense to aim for a more aggressive valuation. At AllTheRooms, we expect a valuation north of $30 billion. While trailing 12-month revenues might imply otherwise, the growth story around Airbnb will probably allow them to aim much higher.
We see COVID-19 as having accelerated a trend that was already in place - a secular shift from hotels being the default accommodation choice towards short-term rentals. COVID-19 has accelerated this trend in a number of ways. Firstly, short-term rentals allow social distancing. Secondly, short-term rentals are the easier option when looking to stay in rural areas to escape lockdowns as hotels tend to be concentrated in urban areas. Thirdly, business travel and events travel were a significant revenue driver for hotels, and both of these segments were massively hit by COVID-19 as companies and event organizers face huge liability risk.
Thinking longer-term, short-term rentals are heavily favored by younger demographics, and they will increasingly make up a larger and larger amount of discretionary travel spend.
The IPO itself will allow Airbnb to scale back up their marketing spend after significant cuts at the start of the virus, allowing them to focus on further product developments and more cross-selling of services, similar to their move to offer experiences.