Introduction to IPOs: Airbnb IPO in the midst of COVID | Lee Jie Yi
In this article today, we will be looking at Airbnb as a case study to introduce concepts relating to IPO, and on basic fundamental analysis to determine a company’s growth potential.
Amidst the backdrop and immense uncertainty faced by the travel industry following the outbreak of COVID-19 in early 2020, online holiday rental company Airbnb’s CEO Brian Chesky took everyone by surprise with his announcement of an IPO in December 2020. This unusual practice caught the attention of many, as companies typically avoid going public during economic slumps or pandemics when market confidence is low.
IPO or Initial Public Offering: the process by which a private company goes public by selling its stocks to the general public for the first time
Photo Credits: Financial Times
This unusuality, however, did not deter investors’ appetite for yet another tech IPO. Tech IPOs had been extremely hot last year, with many notable tech companies’ opening prices skyrocketing far beyond their IPO price:
Investors’ Appetite: investors’ willingness to bear greater risks in the expectation of generating higher potential profit
Opening price: Price at which shares begin to trade in the open market
Despite the pandemic, Airbnb was no different. Shares opened at $146 – 115% higher than the actual IPO price of $68 (Noonan, 2020).
Why is that so?
In our humble opinion, this phenomenon can be attributed to two reasons. While it could possibly signal investor’s confidence towards a recovery to the “normal” life in near time, it could also possibly be yet another market buzz that investors are hastily chasing.
Nevertheless, it was good news for Airbnb. With an opening market capitalization of about $102 billion, up by 467% from $18 billion last April (Reuters, 2020), the successful IPO has helped to bring in the much needed capital for recovery and long-term growth during this uncertain time.
Airbnb’s future prospect seems reasonably positive to us, at least in the short-term. Its revenue growth rate is poised to remain in the high double-digits (40%) – well above that of competitors Expedia and Booking Holdings (12%) (Trefis, 2021). This high, stable growth coupled with recent cost-cutting measures (i.e staff layoffs) atop an already asset-light model with low fixed costs seem to point towards a profitable future. However, with low barriers to entry in a peer-to-peer market with low fixed costs, we believe the challenge lies in how it can continue to upkeep its competitive edge (i.e its strong brand name synonymous with short-term home rentals) relative to both new and existing competitors. Airbnb also has to continuously adapt to new restrictions imposed by authorities amidst increasing complains and safety concerns, but so far, it seems to be coping just fine.
What do you think?
Revenue growth rate: change in company’s sales revenue over a given period of time (typically a year)
References:
Trefis (2021, February 15). Why Airbnb Stock’s Rally Isn’t Justified. Forbes. https://www.forbes.com/sites/greatspeculations/2021/02/15/why-airbnb-stocks-rally-isnt-justified/?sh=56d574001f32
Noonan K. (2020, December 20). Why I Didn’t Go All In On the Airbnb IPO. https://www.fool.com/investing/2020/12/20/why-i-didnt-go-all-in-on-the-airbnb-ipo/
Reuters. (2020, December 11). Airbnb Valuation Surges Past US$100 billion in Biggest US IPO of 2020. The Straits Times. https://www.straitstimes.com/business/companies-markets/airbnb-valuation-surges-past-us100-billion-in-biggest-us-ipo-of-2020