AirBNB S-1: Risks Section Analysis - Part 1
Hi everyone! 👋
So I’m dissecting the AirBNB 10K. Normally I don’t do this as thoroughly for IPOs (or for most companies in general), but AirBNB pre-pandemic had strong revenues and seemed like a good candidate to buy and hold. Also I think it’s just challenging oneself to have the mental discipline to analyze your investment as thoroughly as possible. If you follow my tweet’s you’ll notice that I’ve been generally disappointed by what I’ve found. That being said I still feel the business has long term value.
To save you all some time and energy, I’m going to breakdown some of the key risk factors and commentary from management in the S-1. I’m not going to do it all in one article, because the commentary is over 40 pages long. Including the opening comments, offering and financials, I’m at about page 66 and stopping for a break.
This is part 1 of my breakdown of the Risks Section for the AirBNB S1. Hope you enjoy. The format lists the stated risk in bold and italics. Any commentary that I’m quoting from management is in normal letters. My commentary is in block quotes and italicized.
Risk Factors
Risks Related to Our Business
The COVID-19 pandemic and the impact of actions to mitigate the COVID-19 pandemic have materially adversely impacted and will continue to materially adversely impact our business, results of operations, and financial condition.
Most of our employees and third-party vendors and service providers are working remotely, and it is possible that widespread remote work arrangements could have a materially negative impact on host and guest satisfaction resulting from potential delays or slower than usual response times in receiving assistance from our customer support organization.
How are other tech companies finding that work from home improves efficiencies, yet a platform like AirBNB is finding that it decreases customer response time? The reduction in head count should have been offset by the reduction in volume. I think the real issue here is that AirBNB needs to do better at implementing WFA. Especially since they have 20 global offices. This is a massive commercial footprint for such a young company. I’m imaging in some parts of the world they have employees who are not able to do WFA. Going forward they may need to address that by requiring all of their employees have the ability to stay connected. 👎
‘Certain of our offerings and certain regions in which we operate result in listings with lower service fees and will require significant additional investments from us, which could have a materially negative impact on our overall operating margins as these offerings and regions increase in size over time relative to other areas in which we operate. For example, seats for Airbnb Experiences are generally booked at lower prices than nights booked for stays. In addition, we have changed, and may in the future reduce, our service fees for strategic or competitive reasons.’
If these are non profitable businesses, then are they really worth being in? A common theme that runs through these risk factors is management trying to do too much. 👎
During the quarter in which this offering is completed, we will begin recording stock-based compensation expense for these RSUs with a liquidity-based vesting condition. If this offering had occurred on September 30, 2020, we would have recognized $2.7 billion of cumulative stock-based compensation expense related to RSUs for which the service-based vesting condition was satisfied or partially satisfied, and the remaining unrecognized stock-based compensation expense relating to these RSUs would have been $0.8 billion as of September 30, 2020. At the time of the offering, we expect to recognize stock-based compensation expense of approximately $ UNKNOWN for which the service-based vesting condition was satisfied or partially satisfied as of UNKNOWN and for which we expect the liquidity-based vesting condition to be satisfied in connection with this offering.
Working backwards, word on the street is that the company is seeking a valuation about 30% higher than their last fundraise. If this is the case I would assume that total stock based compensation could then rise to over 3.5B which will definitely be recognized over 4 years after the liquidity event condition (IPO) and over 1B which could be recognized in the future. 👎
Our Adjusted EBITDA and Free Cash Flow have been declining, and this trend could continue.
We had Adjusted EBITDA of $60.0 million, $170.6 million, $(253.3) million, and $(230.2) million for the years ended December 31, 2017, 2018, and 2019 and for the nine months ended September 30, 2020, respectively. Our Free Cash Flow was $151.0 million, $504.9 million, $97.3 million, and $(520.1) million for the years ended December 31, 2017, 2018, and 2019 and for the nine months ended September 30, 2020, respectively. Our Adjusted EBITDA and Free Cash Flow declined in 2019, as a result of our decision to make 2019 a year in which we made significant investments in new product and growth initiatives, including in China, and to improve our technical infrastructure.
China is certainly an important market, and of all the growth initiatives they probably should have prioritized China sooner. 🤷♂️
Our revenue growth rate has slowed, and we expect it to continue to slow in the future.
We have experienced significant revenue growth in the past; however, our revenue growth has slowed in recent periods and there is no assurance that historic growth rates will return. Our year-over-year growth rate in revenue decreased in 2019 as compared to 2018 and also decreased in 2018 as compared to 2017. In the first nine months of 2020, as a result of the COVID-19 pandemic, our revenue decreased significantly compared to the first nine months of 2019. Our future revenue growth depends on the growth of supply and demand for listings on our platform, and our business is affected by general economic and business conditions worldwide as well as trends in the global travel and hospitality industries. In addition, we believe that our revenue growth depends upon a number of factors, including:
Revenue growth rate did slow…but I don’t look at the growth rate as it punishes you for getting bigger. I look at new new revenue growth. Actual new revenues grew by nearly 63M when looking at Revenue Growth from 2017-2018 (Growth of 1.09B) and 2018-2019 (Growth of 1.15B) 👍
If we fail to retain existing hosts or add new hosts, or if hosts fail to provide high-quality stays and experiences, our business, results of operations, and financial condition would be materially adversely affected.
Nothing said in this section is surprising. The commentary in this section centered around local governments and HOA restrictions on AirBNBs. I see this as mostly due to the knuckleheads who want to rent someone’s place out for a kegger. I think AirBNB has handled this challenge admirably and I think with Video Doorbells most hosts can get a good idea if a party is being thrown at their place. I assume AirBNB bans anyone for life who violates a homeowners no-party policy, so I think this risk will subside is overblown. If people won’t wear a mask to save their life, they darn sure won’t let someone tell them how they can or can’t use their house. 👍
If we fail to retain existing guests or add new guests, our business, results of operations, and financial condition would be materially adversely affected.
Any further and continued decline or disruption in the travel and hospitality industries or economic downturn would materially adversely affect our business, results of operations, and financial condition.
Duh
The business and industry in which we participate are highly competitive, and we may be unable to compete successfully with our current or future competitors.
We operate in a highly competitive environment and we face significant competition in attracting hosts and guests…..
Skipping over stuff that’s not really saying anything important
We believe that our competitors include:
Online travel agencies (“OTAs”), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com); Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity); Trip.com Group (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner); Meituan Dianping; Fliggy (a subsidiary of Alibaba) Despegar; MakeMyTrip; and other regional OTAs;
VRBO and Homeaway. Sure but let’s be honest nobody says I’m going to get a VRBO for the weekend. Ok so maybe there is that one guy, but still. As for the rest of these…Meh.
Internet search engines, such as Google, including its travel search products; Baidu; and other regional search engines;
Didn’t even know Google had a home share search.
Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, and Craigslist;
Booking a room via Craigslist? That sounds like a horror film waiting to happen.
Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels;
These are certainly legitimate competitors. However most of these have been hit even harder by the pandemic than AirBNB and I expect with the reduced business travel that hotels will be shuttering left and right post pandemic.
Chinese short-term rental competitors, such as Tujia, Meituan B&B, and Xiaozhu; and
AirBNB should have been in this space earlier
Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.
Still not sure I understand why AirBNB went into experiences, but I don’t think anyone is going to AirBNB for experiences. Nor do I think they will shop around for their experiences. It’s kind of like the car dealership asking if you want the premium sound package. It’s an upsell and some people will bite.
We also face increasing competition from search engines including Google. How Google presents travel search results, and its promotion of its own travel meta-search services, such as Google Travel and Google Vacation Rental Ads, or similar actions from other search engines, and their practices concerning search rankings, could decrease our search traffic, increase traffic acquisition costs, and/or disintermediate our platform. These parties can also offer their own comprehensive travel planning and booking tools, or refer leads directly to suppliers, other favored partners, or themselves, which could also disintermediate our platform. In addition, if Google or Apple use their own mobile operating systems or app distribution channels to favor their own or other preferred travel service offerings, or impose policies that effectively disallow us to continue our full product offerings in those channels, it could materially adversely affect our ability to engage with hosts and guests who access our platform via mobile apps or search.
In other words, if you buy AirBNB, consider Google as a hedge. I personally am not concerned about competition to the business. I’m sure you will have some people who will shop around. However I think long term if AirBNB executes well, they will keep a kings share of the market.
Laws, regulations, and rules that affect the short-term rental and home sharing business have limited and may continue to limit the ability or willingness of hosts to share their spaces over our platform and expose our hosts or us to significant penalties, which have had and could continue to have a material adverse effect on our business, results of operations, and financial condition.
I look at this much the same way I look at the ride share debates. No regulator is going to risk the wrath of the masses by taking this away. It would go over as once again big businesses buying off the politicians to squash little people around the world from having a fighting chance.
We are subject to a wide variety of complex, evolving, and sometimes inconsistent and ambiguous laws and regulations that may adversely impact our operations and discourage hosts and guests from using our platform, and that could cause us to incur significant liabilities including fines and criminal penalties, which could have a material adverse effect on our business, results of operations, and financial condition.
We are subject to regulatory inquiries, litigation, and other disputes, which have materially adversely affected and could materially adversely affect our business, results of operations, and financial condition.
We could face liability for information or content on or accessible through our platform.
Home sharing may not achieve global acceptance.
Maintaining and enhancing our brand and reputation is critical to our growth, and negative publicity could damage our brand and thereby harm our ability to compete effectively, and could materially adversely affect our business, results of operations, and financial condition.
Host, guest, or third-party actions that are criminal, violent, inappropriate, or dangerous, or fraudulent activity, may undermine the safety or the perception of safety of our platform and our ability to attract and retain hosts and guests and materially adversely affect our reputation, business, results of operations, and financial condition.
While most of these are risks common to any business, and particularly hotels and tourism, being the new player in the game brings more attention to AirBNB. They’ve done a pretty good job at it. I don’t see any of these as being business crippling risks. Unless AirBNB was encouraging some of the behaviors listed in this section, which they clearly won’t be, I don’t think they will be held responsible. One caveat to this, if they aren’t strict on banning bad guests and hosts from the platform. If they allow bad guests/hosts to remain on the platform knowingly then yes they could be held liable for the actions of these persons.
Measures that we are taking to improve the trust and safety of our platform may cause us to incur significant expenditures and may not be successful.
We have taken and continue to take measures to improve the trust and safety on our platform, combat fraudulent activities and other misconduct and improve community trust, such as requiring identity and other information from hosts and guests, attempting to confirm the location of listings, removing suspected fraudulent listings or listings repeatedly reported by guests to be significantly not as described, and removing hosts and guests who fail to comply with our policies. These measures are long-term investments in our business and the trust and safety of our community; however, some of these measures increase friction on our platform by increasing the number of steps required to list or book, which reduces host and guest activity on our platform, and could materially adversely affect our business, results of operations, and financial condition. Implementing the trust and safety initiatives we have announced, which include, among other things, limited verification of hosts and listings, restrictions on “party” houses, manual screening of high-risk reservations, restrictions on certain types of bookings, and our neighbor hotline, or other initiatives, has caused and will continue to cause us to incur significant ongoing expenses and may result in fewer listings and bookings or reduced host and guest retention, which could materially adversely affect our business, results of operations, and financial condition.
These are right steps that the business needs to take and is taking. Good for them.👍
We rely on traffic to our platform to grow revenue, and if we are unable to drive traffic cost-effectively, it would materially adversely affect our business, results of operations, and financial condition.
Makes sense
Our debt obligations contain restrictions that impact our business and expose us to risks that could materially adversely affect our liquidity and financial condition. If we require additional funding to support our business, this additional funding may not be available on reasonable terms, or at all.
We have outstanding long-term indebtedness with a principal amount of $1,997.5 million as of September 30, 2020. The agreements governing our indebtedness (our “Credit Agreements”) contain various covenants that are operative so long as our Credit Agreements remain outstanding.
This is another situation where I think management did a poor job. They have had plenty of chances to go public, and they have chosen not too. Likely because they wanted to insure themselves a bigger payday long term. They should have went public years ago. Then they would have had capital and could have done a secondary share offering and possibly a convertible debt offering as opposed to taking on a 2B dollar loan. Maybe they still would have taken on some debt, but they left money on the table by waiting too long to go public. 👎
Our substantial level of indebtedness could materially adversely affect our financial condition.
If we are unable to manage the risks presented by our business model internationally, our business, results of operations, and financial condition would be materially adversely affected.
We are a global platform with hosts in more than 220 countries and regions and approximately 100,000 cities, and a global guest community. As of September 30, 2020, we had offices in 24 cities and had approximately 2,390 employees located internationally. For the year ended December 31, 2019 and the nine months ended September 30, 2020, 63% and 53% of our revenue, respectively, was generated from listings outside of the United States. We expect to continue to make investments to expand our international operations. Managing a global organization is difficult, time consuming, and expensive, and requires significant management attention and careful prioritization, and any international expansion efforts that we may undertake may not be successful.
I’m trilingual. One of my favorite Spanish saying is ‘el que mucho abarca poco aprieta.’ In English, he who holds much, squeezes little. AirBNB is right — Managing a global company operating in 220 countries and numerous languages is extremely difficult. While it speaks to the demand for the platform, realistically they may have to restructure at some point and focus on establishing a profitable model for the share of those 220 countries that generate the most revenue. I think management is trying to do too much, too fast.
We track certain operational metrics, which are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and materially adversely affect our stock price, business, results of operations, and financial condition.
Our efforts to create new offerings and initiatives are costly, and if we are unable to successfully pursue such offerings and initiatives, we may fail to grow, and our business, results of operations, and financial condition would be materially adversely affected.
If we fail to comply with federal, state, and foreign laws relating to privacy and data protection, we may face potentially significant liability, negative publicity, an erosion of trust, and increased regulation could materially adversely affect our business, results of operations, and financial condition.
If we fail to prevent data security breaches, there may be damage to our brand and reputation, material financial penalties, and legal liability, along with a decline in use of our platform, which would materially adversely affect our business, results of operations, and financial condition.
Our platform is highly complex, and any undetected errors could materially adversely affect our business, results of operations, and financial condition.
System capacity constraints, system or operational failures, or denial-of-service or other attacks could materially adversely affect our business, results of operations, and financial condition.
These are all self-explanatory.
Uncertainty in the application of taxes to our hosts, guests, or platform could increase our tax liabilities and may discourage hosts and guests from conducting business on our platform.
The application of indirect taxes, such as lodging taxes, hotel, sales and use tax, privilege taxes, excise taxes, VAT, goods and services tax, harmonized sales taxes, business tax, and gross receipt taxes (together, “indirect taxes”) to e-commerce activities such as ours and to our hosts or guests is a complex and evolving issue. Some of such tax laws or regulations hold us responsible for the reporting, collection, and payment of such taxes, and such laws could be applied to us for transactions conducted in the past as well as transactions in the future. Many of the statutes and regulations that impose these taxes were established before the adoption and growth of the Internet and e-commerce.
Certainly can see why this would be an issue for everyday mom and pops. Eventually I think this will get worked out. Again I believe pressure will mount on regulators to do what’s right for citizens not for corporations.
So that’s it for part 1. What’s my take up until now? I wouldn’t be as concerned over regulation outside of tax issues for hosts, but I think those issues are solvable. Also not overly concerned about competition from other platforms. My bigger concerns center around management. I get the impression that management is rushing into new markets and new offerings, at the expense of their balance sheet. I think the problem I see here is that some of these markets and offerings may never turn profitable and will suck away at investor dollars. I’m not sure whether current management is prudent enough with spending to accept this reality.
While multiple streams of revenue are important, the truly great businesses find those only after perfecting their initial product. Apple didn’t focus on watch or services until perfecting the iPhone. Google didn’t become an ad monster until they perfected search. PayPal perfected it’s online payments platform before doing Venmo. I think AirBNB would do much better by focusing their energy on their house sharing platform. I don’t know if being in 220 countries is sustainable. They’d probably do just as well if they were in 120 countries from a profit prospective.
Maybe I’ll see something later on in the filing that will change my mind. I’ll be digging it to over the next weeks and sharing my comments. If you like this article, subscribe for free. And remember sharing is caring. So share it with a friend.