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In weaker post-WeWork IPO market, uncertainty for Airbnb

Airbnb Inc.'s hopes for a strong public-market debut are in danger after the debacle surrounding WeWork Cos. Inc.'s IPO, regardless of the relative strength of the vacation rental pioneer's business, market observers say.

WeWork's aborted offering and spiraling valuation, combined with the recent share-price weakness of fellow unicorns Uber Technologies Inc. and Lyft Inc., has contributed to a shaky IPO market — though that could change before Airbnb goes public. The company is said to be targeting a first-quarter 2020 debut, possibly through a direct listing rather than a traditional underwritten offering.

Morgan Stanley and Goldman Sachs Group Inc., which advised Spotify Technology SA and Slack Technologies Inc. in their direct listings, are reportedly advising Airbnb. Goldman Sachs also advised WeWork on its postponed IPO, along with JPMorgan Chase & Co.

As Airbnb prepares to go public, observers say its strong market share in an established business is a mark in the company's favor. Two publicly traded peers — Expedia Group Inc. and Booking Holdings Inc. — are already making money in the space. The company claimed roughly 36% of the online "alternative accommodations" market in 2018, compared to 26% for Booking, which operates Booking.com, and 17% for Expedia, which owns Vrbo.com among other sites, Morningstar senior equity analyst Dan Wasiolek wrote in a note.

The Information, a digital news site, reported Oct. 17 that Airbnb recorded an $18.7 million operating profit for 2018, before the impact of interest and taxes, but posted a $306 million operating loss in the first quarter of 2019 — more than double its loss in the 2018 first quarter. First quarters are typically slow for online travel businesses, and an Airbnb representative called 2019 a "big investment year" for the company, the publication reported.

Yet after the recent months' precedents, Airbnb's operations may not be foremost in investors' minds. Uber is down 30.2% compared to its May 9 IPO, and its ride-hailing peer Lyft is down 43.2% since its own March 28 offering. Slack has fallen 13.2% since its direct listing on June 20, while Spotify, which listed directly on April 3, 2018, is down 28.3% since that date.

"If you look at it and say it's all about the business model, then you would say Airbnb has nothing to worry about," said Kathleen Smith, a principal at Renaissance Capital, provider of institutional research and IPO ETFs. "But if you look at it with more dimensions, then you would think otherwise. And the dimension I would add is valuation."

Airbnb's Series F funding round in March 2017 gave the company a post-money valuation of $31 billion.

If Airbnb were to go public today, "they would need a significant haircut to anything they sought in terms of valuation from two or three months ago," said Josef Schuster, founder of the IPO-oriented index provider IPOX Schuster LLC.

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Smith and Schuster both said massive amounts of private capital, some of it flowing through pre-IPO trading marketplaces, have inflated private companies' valuations in recent years, with companies facing a reckoning of late when they have encountered skeptical public-market investors. Another unicorn, the food delivery company Postmates Inc., reportedly delayed its planned IPO in October, and Schuster said positions in the company of $20 million or more are available at "significant" discounts in the pre-IPO market.

"This is all out there, and it's definitely going to affect the Airbnb listing as well," Schuster said. "Even though Airbnb is a unique company, and they make money, and so forth. But they're not unaffected by what's happening in some of these recent deals."

Beyond the most visible tech companies, Smith noted that SmileDirectClub Inc., a company that makes dental aligners, is down roughly 60.3% from its Sept. 11 IPO price, while another recently debuted company, Vir Biotechnology Inc., has fallen 31.4% from its Oct. 10 offering.

"Investors have been worried about overpaying for growth," Smith said in an interview. "Could we be in a liquidity crisis? Hopefully not, but I think we have a small one happening in the IPO market. Couldn't get WeWork done; other deals are dropping. Investors are basically boycotting high-risk IPOs."

Path to growth

Airbnb's operations appear to position it as a strong player among online travel-booking sites, Morningstar's Wasiolek said in an interview. While details about the company's profitability are hard to find because it is still private, Airbnb appears to be showing revenue growth of roughly 40% per year, with high marks in global customer awareness and a lower reliance on indirect distribution channels than either Expedia or Booking Holdings, he said.

In one hint of potential trouble, The Information reported that while the company's revenue grew by 31% year over year in the first quarter, expenses grew by 47%, driven by a 58% increase in sales and marketing spending. Companies often increase their marketing efforts ahead of public-market debuts, and if Airbnb opts to forgo a traditional underwritten offering, which typically brings attention from Wall Street analysts, observers say investor outreach will be even more critical.

In a move to diversify its revenue, the company has taken small steps to grow into hotel bookings, with moves that include the acquisition of HotelTonight, an online travel agency focused on last-minute bookings for boutique and independent properties.

Airbnb and its peers also see promising growth opportunities in offering bookings for "experiences," including tours and attractions. Morningstar expects online "experience" bookings industrywide to grow by 16.3% annually through 2023 — well above the expected 9.3% growth rate for the online travel industry as a whole — and believes that the combined market share of travel sites TripAdvisor, Booking Holdings, Expedia and Airbnb could grow to the low-20% level, from single digits in 2018.

Growth in areas other than home rentals could help Airbnb cope with the threat of new government regulations, which Wasiolek said have taken a bite out of its growth. According to Morningstar data, the company's bookings grew by 89% year over year in 2016, but after several key cities moved to restrict short-term rentals, growth fell to roughly 50% in 2017 and 2018 and just over 40% in 2019 so far.

Still, while local regulations have hurt home-rental players, Wasiolek said they are unlikely to be fatal.

"Maybe five, 10 years from now you have this industry, due to regulation and some maturation, that ends up growing in line with the online travel industry," he said. "That's OK. It's still a niche."

Downsides of direct listings

Though it's unclear what valuation Airbnb might seek when it goes public, Expedia and Booking's profitability and their transparent earnings multiples could add some "sanity" to the calculations, Smith said. And while public-market investors are generally skeptical of new offerings at the moment, she added, "lower prices work miracles when it comes to that."

The question is whether Airbnb's private-market investors will be open to accepting lower valuations if public-market demand remains weak. Smith said the recent vogue for direct listings stems from venture capitalists' desire to maximize returns, but she noted that the Slack and Spotify offerings weakened significantly after relatively strong debuts.

Besides Airbnb, several other large technology companies are waiting in the wings to go public, including Stripe Inc., with a roughly $35 billion last-round valuation; Bitmain Technologies Ltd., with a $15 billion valuation; DoorDash Inc., at $12 billion; and Robinhood Markets Inc. at $7.6 billion, according to Renaissance Capital's data.

Venture capital investors seeking to get their money out in a public listing will have to reckon with public-market investors, and they may be pinning too many hopes on the novelty of the direct listing process, Smith argued.

"They're very clouded by the anxiety about getting liquidity," she said. "There's so much pressure. And instead of blaming themselves for overpaying for something, they're saying, 'Oh, the market's broken in the IPO world, and I'm going to create another one.'"

Whatever mechanism companies such as Airbnb use, she said, "they're not going to solve it by putting together a formula that doesn't make the buy-side happy."

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