The Coronavirus has caused Airbnb to delay their public offering into Q3 ’20, based upon reports from the Wall Street Journal and discussions with insiders and people close to the company. Adit Ventures wanted to share what we’ve learned, thus far, in this rapidly evolving situation, a “Black Swan” inherently unknowable & by definition highly unpredictable, like the virus itself. Just as Airbnb delayed a potential IPO, when former CFO Lawrence Tosi resigned in early ’18, we believe this is a temporary setback, not a fundamental shift in the global economy. Nor is it a long-term secular trend, whereby people will not travel again. Frankly, we see media attention bordering upon paranoia at present, as a Carnival cruise ship, with no known cases on board, being refused entry from 5 ports around the world. Adit discussed the possibility that this expected direct listing might slip from Memorial Day timing to Labor Day on recent client conference calls, which appears to be the case, based upon the evidence today.
History tells us, based upon the SARS pandemic in ’03 and others, the illnesses ran their courses within a relatively short period of time. While we recognize this illness is different, there is no reason to believe it will become a global epidemic. The Chinese government is acting swiftly by containing the spread within its borders by quarantining over 50 million of its citizens. Moreover, countries around the world have mobilized their public health and airport, border and security systems to act prudently in checking all citizens who have recently traveled to high-risk areas. Flight bans, medical procedures & other measures show their joint resolve. Global cooperation like this hasn’t been seen since WWII.
Central banks also have taken notice, with the PBOC injecting massive liquidity into the banking system. They have also pledged $10B in resources to combat the virus, in an unprecedented offensive to maintain economic growth in the world’s 2nd largest economy. Globally, everyone wants to assist, with complete cooperation from central banks all over the world. The Federal Reserve, while not changing rates in its latest meeting, did speak to the issue in its statement by acknowledging the “Risks to the downside” from the illness. In addition, the Fed “Stands Ready” to provide liquidity, should that be deemed the right thing to do. Behind the scenes, governments of every nation, in conjunction with public health officials, seek to do everything possible to keep public confidence. To this end, Adit notes the number of new cases week over week, is the lowest announced since the crisis began. Also, news is out that a firm in Melbourne has replicated the virus, which is a first crucial step in creating a vaccine to end the crisis.
Economic costs may be significant to companies across many industries. Airlines, autos, energy, lodging, manufacturing and retail shares have already seen a sell off, even as the markets hit record highs. On the other hand, select drug and medical product shares have been trading higher on the news of a vaccine and sales of masks, for example. The equity market’s collective wisdom, with indices hitting new highs, is telling us that most investors, like Adit, do not see Corona killing the bull market. The world will not end due to Coronavirus.
Basic economic fundamental strength & following long-term societal trends is a basic tenet of how Adit invests. We believe Airbnb’s historical profitability, the continued building of its brand, and global economic growth results in a strong company. Business travelers continue to seek ways to improve cost efficiency & develop a sense of community, both characteristics typical of Airbnb experience. The travel business remains in a growth mode, despite China’s woes.
Adit sees the strategic moves Airbnb has made: being proactive in canceling the Chinese reservations to its customers, assisting the government in stopping the spread of the disease, communicating to the public, all definitively show the quality of their management team, its ethos and common-sense, direct approach to managing expectations as a public company. An ethical, long-term approach is a welcome change from those companies who have less than transparent announcements & in management of their businesses. We believe management with a short-term mentality is a loser’s game, just as is timing the market.
Airbnb seeks to be a trusted service provider, and remain a leading global brand, over the long term, as seen by its 10-year deal in Olympic sponsorship, beginning with the Tokyo Olympics this coming summer. The company has made material investments in safety and security by verifying its lessees, and lessors, to an extent no other major player in the space can. It chose to sacrifice short-term profits in order to be a good corporate citizen, to protect its customers and all its constituents. Adit salutes their courage, admires the integrity of senior management & respects their culture for believing in doing the right thing.
Growth companies always seek to strike a balance between investing in growth, by funding new initiatives, and seeking profits, by managing expenses and retaining earnings. Airbnb has made several strategic investments over the past several years, Luxury Retreats in ’17, for example, which worked out very well for their penetration of various market segments. Last year saw the acquisition of Hotels Tonight and an investment in OYO hotels. While Hotels Tonight will be accretive near-term, the OYO deal will likely take longer to provide returns to the company, especially after this Coronavirus. Let’s look at the deal in ’23 once the crisis is passed, and the hotel business returns to normalized levels of occupancy. Profit numbers slowed in ’19 due to these factors, not a business slowdown. Yes, a virus slows ’20 travel in China, but this too shall pass.
Furthermore, we know the company has experienced robust growth over the past several years. In fact, Q3 ’19 revenues were approximately $1.65B, fully $400mm ahead of ’18 results, and above internal projections. Our forecast is $5B in revenues for ’19, $7B for ’20, and $10B in ‘21. We believe it is not hard to see the Company growing over the next 5 years to over $20B in annual revenues and being valued at $100B. While near-term, the outlook is less certain, the exemplary qualities exhibited by Airbnb’s management team warrant recognition. Adit is proud to be a shareholder and will be sending a copy of this letter to the C-suite as a Valentines note, thanking them for being good people. Adit Ventures remains highly confident the company, with $3B of cash on its robust balance sheetxii, unique culture & business model, will see continued growth. Recent surveys see its market share of the $1 Trillion annual spending in the market for experiences and other services increasing. Please contact us for data at www.aditventures.com.
While the only guaranty in life is death & taxes, Adit is certain the Coronavirus will ultimately be contained, and in time, a vaccine will be developed. While we regret the loss of life, illnesses are a part of world. The flu has killed twenty times the amount of people Corona has, this season alone, and yet the economy goes on. People will feed their families, do their jobs and go on vacation with their friends. Our counsel is get a flu shot, wash your hands often, eat fresh fruits & vegetables, and let’s celebrate a world where people in positions of influence and power actually do the right thing. These are the types of companies Adit wants to own shares in. With all the current talk about “Impact investing”, saving lives & preventing the spread of illness should be congratulated. ESG is a key element in Adit’s 10-step discipline, akin to keeping customers healthy when they rent a place on Airbnb. This is clearly the definition of a positive “Experience” by any person’s measure.
Happy Valentine’s Day Airbnb & Brian Chesky - you rock!
Eric Munson & Team Adit
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