Airbnb’s profits (or lack of) has sparked great interest ahead of its much anticipated IPO. Airbnb had losses in 2019, but they have been largely a result of technology investments meant to shore up its infrastructure, which is long overdue for an upgrade, according to The Information, ahead of the IPO. This near-term profit hit is not indicative of the underlying health of its business, which is still growing at a steady double-digit rate.
The Wall Street Journal reported that revenues grew by 32% for the first nine months of 2019 to $3.7 billion. In the third quarter revenues were up 30% to $1.65 billion compared to a year ago, and up by $400 million from the second quarter of 2019.
Airbnb had a loss of $322 million for the first nine months of 2019 compared to $200 million in profits for the same period in 2018. This is largely due to investments to upgrade technology and expansion into verticals like Experiences.
Profits in the third quarter declined by 29.4% to $266 million. Although profits were down year-over-year, the company was profitable in the third quarter after significant losses in the first half of 2019, with losses in the first and second quarter of $306 million and $100 million, respectively.
One reason for the return of profits could be that Airbnb had already accounted for most of the expenses related to technology upgrades. We expect profits will be under pressure near term as the company addresses security and safety issues. Airbnb is expected to spend about $100 million to verify over 7 million listings following recent safety incidents at Airbnb properties.
It is hard to assess how much investment Airbnb needs for regulatory and safety issues. This is an area that is most disconcerting for investors and will be watched closely.
Speculations about Airbnb’s IPO prospects have been rampant after other money-losing sharing economy companies like Uber and Lyft have performed below expectations and the WeWork IPO never materialized. Unlike WeWork, Airbnb has shown that it can be profitable, generating $18 million in profits in 2018; and its losses were not nearly as large as Uber’s $8.5 billion in 2019. Furthermore, Airbnb has $3 billion of cash, so they are not exactly cash strapped.
Given the current public market climate, we expect valuation will come under greater scrutiny and pressure. According to the WSJ report, Airbnb received an internal valuation recently that was much lower than the $31 billion valuation from its last funding in 2017.
The report added that any listing would likely not be until the third quarter or later as the company may want to wait until the concerns from the coronavirus subside.
Airbnb announced Monday that it had suspended bookings in Beijing until Feb 29 [Update: Airbnb has extended that to May]. Airbnb has been expanding into second and third-tiered cities in China. Unlike the U.S. and many European countries, China has been receptive to short-term rentals. The China Daily noted:
China currently has more than 50 million vacant homes, and 67 percent of the Airbnb users chose to become hosts to gain extra income, the report said. Airbnb China’s rural listing supply covers more than 1,400 county-level administrative regions in the country.
Last year, the State Council released an action plan for 2018-20 to further stimulate domestic consumption. The plan emphasized that market access should be relaxed in several service-related fields like tourism, and efforts be made to boost the development of short-term rental services like rental apartments and guesthouses.