In this episode of Industry Focus: Tech, Dylan Lewis chats with Motley Fool contributor Jason Hall about a business whose name defines the online vacation rental marketplace — Airbnb. They talk about the company’s financials, which it recently reported in preparation of going public. They talk about the vacation rental marketplace in general and Airbnb’s competition in the space. Discover the origin story, what gives it an edge in the marketplace, the investment opportunity, and more.
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This video was recorded on November 13, 2020.
Dylan Lewis: It’s Friday, November 13th, and we’re talking about Airbnb. I’m your host Dylan Lewis, and I’m joined by Fool.com’s Jason Hall. Jason, how are you doing?
Jason Hall: Fantastic. This is going to be a fun one. It’s funny, right? How many of your Industry Focus colleagues and you got into, just almost — I mean, I think if you guys were in the office, there actually might have been fisticuffs over this.
Lewis: [laughs] You know, to let people in a little bit behind the scenes, yeah, there were some active Slacks going back-and-forth about exactly where this one falls. You know, it’s a tech company, they operate in the consumer goods space. I could see a lot of different claims being laid to this one. What I will say, Jason, is that I know Emily Flippen was pretty into covering this one, when the news hit, I happened to be in a position to talk about it, but I’ll throw it out there, she talked DoorDash, which I would argue could be a tech company.
Hall: With me, actually.
Lewis: Yeah. So, you’re the neutral party here, everyone else is [laughs] trying to lay claim to things. And you’re just like, if you want to talk about it, I’m happy to talk about it with you. [laughs]
Hall: [laughs] I’m just soaking up all the goodness here, and it’s so unfair, but I’m going to roll with it.
Lewis: Yeah, you know, Jason, we do S-1 shows all the time and I think they’re fun in general, because it’s a first look at a business, we really get to dive into everything that they’re disclosing, and that’s fantastic. But it’s particularly fun for a company that we know so well; and in my case, I’ve used plenty. So, I think, probably most of our audience is going to be familiar with Airbnb, but we should do a quick little rundown on who they are and what they do. For folks that are unfamiliar, it is an online vacation rental marketplace. And folks who have a property can make it available for short-term rentals. Typically, short-term rental nature, usually weekend trips or multi-week vacations. They can be used for longer trips as well, though it’s a bit less common.
And some quick history on the business, it was founded in 2008 by roommates and former classmates Brian Chesky and Joe Gebbia. And it started out as AirBedandBreakfast.com. It was their answer to the absurd accommodation shortage in San Francisco. Fun fact, Jason, if you go to AirBedandBreakfast.com, it takes you to Airbnb, they still have that URL.
Hall: Of course it does, it makes sense. Absolutely, it makes sense. And here’s the funny thing about, I think it’s interesting, because it was an airbed. They were literally renting out airbeds and their apartment for people that were coming for a conference. I think they rented airbeds to three or four different people in their little two-bedroom apartment in the Bay Area. And now what the business has become today is like the law of unintended consequences, right? This is not a business of [laughs] people renting out airbeds in their living room and in their dining room, this is a completely different business model.
Lewis: This reminds me a little bit of the “necessity is the mother of invention” quote, where, [laughs] you know, this is perhaps a problem that is very unique to very specific markets, and San Francisco, obviously, being one of them, where people are willing to accept very barebones accommodations because things are so expensive there, it’s in so high demand. [laughs] They’ve grown far beyond their origins here, but I think that they tapped into something and then realized very quickly that there’s probably a more refined version of this that scales really well. And as it turns out, it is a pretty viable business. I am a customer, and I think the value prop here is one that you recognize as well, Jason.
Hall: Oh, no doubt about it. I’m also a customer. As a matter of fact, I’m married and we have a young child, and we almost exclusively use Airbnb for leisure travel, just because it’s easier, right? It’s nice to have some privacy when you have a young kid, because with a hotel, you don’t know who’s going to be next to you and how late they’re going to be up and how much noise they are going to be making, even if they’re watching the TV, you can hear. It’s nice to have the kitchen there to throw some cereal in a bowl for the kid, that sort of thing.
And actually, we started using Airbnb years and years ago, before having kids. We have some close friends that — I’m in Southern California now — we have some close friends that we met here, they actually ended up moving to the D.C. area. And within a year or so of their moving, we decided we would start planning a trip every year together. And we always travel around the July 4th weekend, the July 4th holiday. And we go for a week. And we started doing international travel. We went to Peru. We went to Iceland, and we’ve done a few other things too, and we always did Airbnb, every single time. And it just worked out incredible.
Lewis: Yeah, I think just to use my hometown and, kind of, The Fool’s hometown of D.C., as an example for why it’s so compelling as a customer. You look at a map of D.C., and most of the stuff is downtown. You know, you have the museums, you have the archives, you have access to the mall and, obviously, the White House and all these things. And that’s where all the hotels are. Unfortunately, you have the restaurants that are down there, you have some parks down there, but it’s not a very vibrant late-night scene. And I know personally, you know when I travel, I like to be somewhere that feels a little bit more like where I’d live if I was in that city, and just be able to kind of explore it in what feels like a little bit more of an organic way.
And so, for D.C. that tends to be Mount Pleasant, Columbia Heights, and those types of neighborhoods where I live. And so, there aren’t really a lot of hotels around there. If that’s the vibe [laughs] you’re going for, you need an Airbnb. And I think that they managed to scratch that itch really well. I think what they also offer a lot of people is just flexibility on how they’re traveling, to your point, about having a kid with you and just being able to easily throw meals together, and have a full kitchen where you’re staying. You know, I know people that do family reunions and they get a big Airbnb, they do a barbecue, they have a big yard, all those kinds of stuff. I think it just gives you a little bit more wiggle room with a lot of the things that you might want with travel but often have to sacrifice.
And I mean, that’s really valuable to people, and on the flipside, if you’re a property owner or you have a lease that allows you to do it, to be able to say, yeah, I’m not going to be here for two months, I’m traveling for work. You know, it’s nice for people who have properties to be able to make some extra money. It’s kind of a nice little win-win. It has created [laughs] a little bit of a side market where people are intentionally buying places and then basically exclusively using them as Airbnbs, which creates some housing supply issues and some regulatory issues that we might touch on later. But I think, by and large, when this is used the right way, it’s a really wonderful solution for a lot of people.
Hall: Yeah, it is, and we’ll touch on a little bit more, but it’s created an entire cottage industry, really, of companies, businesses that exclusively buy properties in all kinds of different areas, and that’s all they do, is operate these Airbnbs.
Lewis: Yeah. And I think in a perfect world, you know, I like to stay in someone’s house, but at the same time, it’s nice to stay at a location where, you know, if my friends are going to be nearby, we can easily be half-a-block away, not have to worry quite so much about finding hotels and all of that stuff.
Clearly, Jason, you and I are not alone in thinking that [laughs] this is a good concept. And you know, you don’t get a start with a B. unicorn valuation without getting a couple fans along the way. This company, prior to early 2020, was growing like crazy. You look at their results for the full-year for 2019, some of the key metrics that they look at their gross booking value, kind of, similar to what we look at for a lot of these payments companies, you know, with what they process, up 29% year-over-year to $38 billion; that is a very big number.
Hall: Yeah, that’s enormous, right? And obviously, what they get is a smaller percentage of that, but that’s the amount of money that people are willing to go to their platform and spend, [laughs] and that’s telling. And just, I think, for some context here, Marriott International did about $14 billion in revenue last year. So, again, revenue doesn’t exactly translate to this, but Marriott is a big hotel operator, so they collect the vast majority of those revenues that come in as bookings, so context. This is a great, big business.
Lewis: It is. And I think their full-year revenue for 2018 was about $4.8 billion, which actually puts [laughs] them ahead of Hilton in annual revenue, which is hard to believe because this is a company that is still pretty early on in its growth stage. But it has a concept that works, and I think it’s created such a market around it that it’s been able to enjoy a lot of growth along the way, because the rest of that market is just trying to catch up. There are competitors, however, I think that they operate in, kind of, a slightly different space than the hotels. They’re catering to different customers. So, really, a lot of their main competition is going to be people in this rental market, this kind of more specified house rental market and vacation rental market, like the VRBOs [Vacation Rentals by Owner] of the world.
Lewis: Putting some more numbers to the business. That $4.8 billion in revenue basically tracks year-over-year in terms of growth with that annual gross booking value. There are going to be some slight puts-and-takes there, but by and large those numbers are going to trend together. So, up 30% year-over-year. Operating loss of about $500 million on that. Total loss of $674 million. And we’re focusing, [laughs] Jason, on the 2019 full-year numbers, because I think, in some ways, the company kind of gets a Mulligan in 2020. You know, they were thrown such a [laughs] difficult and, really, business model-bending series of events, as a lot of companies were in 2020, that it’s kind of hard to get a really good sense of what’s going on with this business if you’re looking at anything from the past six months.
Hall: Yeah, I agree. But in some ways, I think it’s obviously still going to be worth taking a look at the numbers, because I think in some ways, Airbnb may have been more resilient than more traditional, again, we’re going to comp it to hotels in a lot of ways, because that’s kind of the obvious comp, and it’s clearly taking business from that market, but I think in ways it’s been more resilient than a lot of hotels.
Lewis: Yeah. So, I know some listeners are going to be there being like, why are you talking 2019? We’ll get to 2020 too, we’ll talk about it, but I think just to kind of give you —
Hall: It’s a better baseline.
Lewis: It is. It gives you a better sense of, like, when things are generally going OK, you know, what are we seeing here? And I mentioned that loss, just kind of a sense of where the money is going, the cost of revenue about $1.1 billion, which means that if you put some quick math to it, the gross margins for this company are about 75%, which is darn high and [laughs] can create a very compelling investment opportunity very quickly. However, those margins are getting eaten up, because they are spending heavily in operations, product development, and general administration. All of that together winds up being somewhere in, like, the $2 billion-something range. But really, Jason, the biggie here is sales and marketing, that’s $1.6 billion on its own. I’m guessing that’s not going anywhere anytime soon.
Hall: I would expect not. Again, the bottom-line is, with a business like this, you want to see them spending on these sorts of things, because they’re establishing dominance, they’re building a market presence, so that the network effect of their scale is attractive to all the stakeholders. And at some point, what you just want to see is that the cash flows, the acceleration of cash flows, becomes bigger than the acceleration of spending on this, that’s kind of the strategic thing that you want to be looking at. But, no, it’s going to get bigger.
Lewis: Yeah. And it’s early innings in the space that they’re into, I think that this is very much a market that’s in landgrab mode, and so for them, to be the first choice for customers who still haven’t come online to doing vacation rentals and are maybe still hotel-stayers, to be able to say, like, we’re the one for you, ignore Vrbo, [laughs] you know, ignore some of those competitors out there, because that’s valuable customer acquisition. And if you can become the definitive, the default for them, that’s going to pay off long-term.
We should talk a little bit about what we’ve seen so far, and I said it before, but COVID-19 really threw the numbers for this business out of whack. We look at the first nine months ended September 30th, 2020, Jason, revenue was $2.5 billion, down from $3.7 billion in the same period a year ago. That is a pretty significant haircut.
Hall: It is. And I mean, the bottom-line is that, that’s what happens when you lose basically two months entirely, just you know, if you look it’s interesting, you start looking at some of the data in the S-1 where they talk about their bookings and you see negative numbers, because they had so many bookings that they had more cancellations than bookings they got in that same period. I mean, [laughs] the meter literally ran backwards for 2.5 months.
Lewis: Yeah. And it’s nice to see that they were able to survive it. They did have to make some pretty dramatic changes, and they wound up having to trim costs pretty dramatically. So, I think they laid off about 25% of the global workforce. They weren’t producing salaries that executives were receiving. The sales and marketing budget took a dip; I imagine, as things return, that that’s going to go right back up. But they also issued some debt financing to make sure that they were in a relatively good position from an operating standpoint, which thankfully, they were in a position to do. You see a much higher debt burden on the books for them now than you might have back in 2019; and I think it’s because they wanted to make sure that they had access to cash.
Hall: That’s, I guess, one of the reasons that they’re really looking to try to do an IPO relatively soon, as they want to make sure that their balance sheet is as bolstered as possible. Because again, as much as the spending on sales and marketing is happening, when you have to cut 25% of your workforce and you are a tech company, and you’re building out an infrastructure, that makes it harder to grow. Now, it’s going to be even harder to replace the staff that you lost, right? So, it’s really important that they make sure they have as much capital accessible as possible.
And my understanding is that the debt that they took on, I think, all of it is convertible. So, I think at some point that that debt is most likely going to get turned into shares down the road. So, it’s one of the things investors need to be aware of. As we start getting more pricing and that sort of thing, as we get closer to an IPO, what is the impact of that debt on the future — what’s the word I’m looking for here?
Lewis: Shareholders? [laughs] I mean, really, like, it’s a dilution thing, right?
Hall: “Dilution,” that’s the word, yeah, exactly. So, you have to be aware of it, right?
Lewis: Yeah. And then so, I mean, if you look at the books and you can, kind of, look at this debt a little bit differently, depending on how you’re playing out the first 12 months or so of them being a public a trading company, but my count in the S-1, $3 billion in cash and long-term debt of about $1.8 billion; a hefty amount of convertible notes in there, TBD on how that actually turns out. But even at that point, Jason, that’s a net cash position, they’re going to be in a spot where they can pretty comfortably weather some uncertainty for a while.
And I think what’s kind of interesting is to look at some of the commentary that we’ve seen from management about how COVID has affected usage on their platform. One of the things that really stuck out to me was, they have seen bookings within 200 miles of users go from about a third to half of their overall bookings. And what they’re seeing more and more of is people [laughs] just getting out for short periods of time, you know, and maybe not even going very far, but just kind of needing a change of scenery.
Hall: Well, anecdotally, I can tell you we’ve done that twice, and we’ll do it one more time before the end of the year. We have a couple of family groups that are kind of part of our cluster, I guess, you could describe it. Our kids are in day care together, so we really have exactly the same risk profiles already. And we rented a house, a gigantic huge place that had a full playground, and a big pool and all this stuff. And I think it cost each family a couple of hundred bucks a night and we did it for a four-day weekend back in, like, May. And it was just a great way to get away, and look at different walls, right, and let the kids get out and stretch out, play. And then we did a little trip to the mountains, a couple of — maybe two months ago. It was a smaller thing and it was just our family, but same thing, you know, these were all driving distance away.
And we plan to do something for New Years as well, just our family. So, yeah, I think, it’s like we’ve seen with a lot of other parts of the economy, where people that are still earning money and still working have a lot more disposable income right now that they’re not using to go out to eat every Friday night with friends, they’re not taking that big family vacation to Hawaii or the Bahamas or whatever. So, there’s that extra disposable income, and right now Airbnb is in a great position to be a beneficiary from that.
Lewis: Yeah, and that’s kind of an interesting take on a trend that they were already benefiting from, because, you know, you rewind the clock to February of 2020, and the narrative, for the most part when it came to consumer spending is that people are spending more on experiences, were moving a little bit away from spending on things. And I think Airbnb, in particular, because they offer remote locations, exotic locales, interesting spaces, also really benefits from this kind of social media-fication of everything. And you know, it’s much more fun, I think, to be in a spot that is kind of Instagram-able, whether that’s your MO or not, than to be in a hotel. And for them, to be able to offer unique experiences that feel a little bit more curated, feel more local, you know, craft is such a big part of what we’re going for these days, they’re already benefiting from that. And then you put people who are still making money in a position where, frankly, a lot of those purchases otherwise aren’t really happening. You aren’t really going out to eat nearly as much, you’re probably not buying as much because you’re very keenly aware, if you’re like me, of all the stuff you already have in your house and you’re trying to work through that rather than clutter things up. So, I think they’re fairly well-positioned, given what a massive shock this was to their business.
Hall: Yeah, there’s no doubt about that. And again, I think it’s one of those things where, you know, you think about, like, the Lowe’s and Home Depots of the world, that have gotten this big benefit of people doing home improvement projects and things that could have near-term implications, for maybe their business won’t be as great when we do go back to normal, I don’t think that’s the same for Airbnb, I think maybe to the contrary maybe more like e-commerce, where a lot of people have used e-commerce that weren’t planning to ever user e-commerce, and they’re going to keep using e-commerce. I think, maybe Airbnb might be the same thing, people that, still, they were loyal to Hilton, because they got their Hilton Rewards, right? Maybe they decided, I don’t feel comfortable in a hotel, but we need a weekend getaway, so we’re going to go and we’re going to rent a house somewhere, and they did it through Airbnb, and they had a great experience. And so, now [laughs] they’re Airbnb customers.
So, I think that that’s what we’re going to see, is that it’s just — because again, this is such a young industry, it’s not mature, and they’re still in that landgrab phase. Yeah, I think it’s a really, really interesting time right now.
Lewis: Yeah, I think that the timing of this is really interesting with where this industry is, Jason. Because Airbnb, in a lot of ways, had a pretty big lead here. And there’s Vrbo, and we can talk about them a little bit, but they’re owned by HomeAway, which is then bought by Expedia. So, if you’re interested, there’s a publicly investable player in the space already, but you know …
Hall: But it’s not a pureplay, right? [laughs] And there’s plenty of other problems worse we could talk about with the Expedia business. I can say this, just real quickly on it, I was originally pretty loyal to Vrbo when Airbnb was really just kind of getting a little bit of a critical mass, just because Vrbo was the one that was there. And they were started in Europe, a little bigger in Europe, and became a little more available in the States, mainly because there were a couple of areas that we were doing family gatherings and we needed a big space, and there were things on Vrbo.
But within a year, I just stopped even looking at [laughs] Vrbo and just shifted to Airbnb, because of availability everywhere, and it just became easier.
Lewis: Yeah, I think that’s right, and they benefit a little bit from that Kleenex effect or the Google effect, I’ve seen it called too. Where it’s like, when you think of this category, you don’t think of Vrbo, you think of Airbnb. And they’ve really been able to cement themselves as the consumer brand in this space. What I’m curious about with the timing of this is, you know, they’re like, I said before, still kind of in landgrab mode, there are a lot of people that aren’t using these, still using hotels and are customers to be won, so to speak. You know, does this put them in a spot where they lose a little bit of that first-mover edge because the industry has been halted, and it gives some of the other players a little time to catch up?
Hall: You know, I don’t know if that’s going to be the case, just because the playing field is pretty leveled right now in that regard, everybody is affected similarly. And I think simply the fact that they do have such a — not a first-mover, but a most-mover advantage, because they’re the pureplay and this is where all the resources are focused right now. And if you think about other companies that are trying to get into it, a lot of them are doing it defensively, because [laughs] they’re trying to protect their entrenched interests in the short-term stay, which — I mean, that’s the big market, right, the long-term addressable market is pretty small, this is the short-term market really where this is focused. I really think that they still come out of this as, if not the winner, I think they are probably going to be “the” winner, they’re certainly “a” winner, because they have the resources, they have that, like you said, the Kleenex effect, it’s not just the name that people looking for a place think of, it’s the name that people that are thinking about it as a source of income and they own a property or thinking about investing a property, it’s the name that comes to mind for them as well.
Lewis: Yeah. And I think that this is probably a winner take a good chunk market, [laughs] but I think there are probably a couple of winners here. And one of the main reasons is, you know, this is definitely an industry that benefits from network effects, but there isn’t any exclusivity to those network effects, which is kind of hard. And so, for the likes of Airbnb, like, you can list on there, but then you can also list on Vrbo. And so, yes, those platforms benefit from there being more consumers and more property owners, but there’s nothing to keep people from operating in both spaces. And in that sense, it does feel a little bit like Uber and Lyft and some of the rideshare market dynamics, where, yes, you’ve built out this wonderful network, but now [laughs] we’re in a spot where other people can also benefit from this wonderful network that you’ve created.
Hall: Yeah, I think so. I think maybe another way to think about it is, like, Visa and MasterCard. You have Visa that is much larger, if you think about it, in the consumer space, for consumer spending than MasterCard, but you have two companies that have done extremely well. And, yeah, there’s more friction, you have to go to the bank and get one or get the other, actually just go online, [laughs] you don’t actually have to go to the bank anymore, but at some point you end up with a Visa and a MasterCard both in your wallet. And to a certain extent, the one that you use is just the one that you use. I mean, there may have been a reason that you started out that way, but at some point, it just becomes, [laughs] that’s where the momentum is.
And I think that’s most likely what we’re going to see. And we could see, like, some incentive wars at some point, and that’s what — like, I use my Costco Visa a lot, because I get a lot of rewards there. But then when I shop at Amazon, I use my Amazon Visa, because I get rewards there. So, at some point, we could see something like that happen, right, where there’s loyalty programs and that sort of thing that kind of drive the market, but I think at this point there’s just such, they have such a head start and there’s so much mindshare with the brand that it’s going to be tough for anybody to really meaningfully catch up, because again, nobody else is really pure playing this in the same way that Airbnb is.
Lewis: One of the other, kind of, main topics that I think we need to hit as we’re kind of running through some of the existential questions facing this business is, you know, how does the regulatory picture come together in this space? You know, this is a gig economy company in a lot of ways but it faces a very different set of regulatory risks than the likes of Uber and Lyft. You know, it’s not a labor-based thing that’s going to dramatically affect their costs, it’s like a local municipality thing, and it’s much more regionalized.
Hall: And it costs the company more money to figure it out. You go on Airbnb’s website and you look at Ventura County, which is where I live, just outside of L.A., we actually border L.A. County, you won’t find an Airbnb. They can’t do them here; our local regulations don’t allow for it. You know, that’s a perfect example. And, I mean, California alone has dozens of counties, and within those dozens of counties you have a couple of thousand municipalities that can individually have different laws.
And I think one of the things that you’ve seen, and this is interesting, that I learned earlier this year when we booked a place, the place we booked was in Fullerton, California, which is kind of down near — sort of, close to Disneyland, in that area. And when that individual property owner, they marketed that space as a great place for, like, a big family reunion that’s also close to theme parks, [laughs] obviously, Disneyland is not getting a lot of traffic, so they kind of rebranded how they were doing it, but what I found was that the City of Fullerton actually had no way to regulate that industry, there was not a single written piece of city code for them to be able to use to regulate it. So, they literally couldn’t do anything about it. Their City Council was going to be meeting the week after our stay, and it was the No. 1 thing [laughs] on their agenda to identify.
So, it’s been that wild west, right, because a lot of places haven’t regulated it, because there was no reason to. But that’s changing. So, that is a big risk factor that’s industrywide.
Lewis: Yeah. And I think it winds up showing up in a bunch of different ways. I’ve seen some municipalities put rules on who can offer Airbnbs and they’re only allowing it if it’s owner-occupied and it’s part of the home, or it’s a unit within a home that’s owner-occupied. And a really big part of that is the fact that — we were talking about it before, there are these cottage industry businesses that have bought up a bunch of spaces or have entered long-term leases and operate them as Airbnbs, and while that’s really great for travelers, if you live in that city what it does is it artificially raises the price of property and puts people that may already be price-squeezed out of neighborhoods, even more so in that position.
And so, I think it’s a really challenging thing, because we have all these local municipalities, all these jurisdictions, that are handling it slightly differently. And the net effect is, it might be that less properties are available on Airbnb.
Hall: I may be one of the most hypocritical people on the planet when it comes to it. You know, I describe myself as exclusive Airbnb user for leisure travel, yet I also recognize there is this enormous — you know, I’m a little older than you, Dylan, but I think for people your age and a little bit younger that are really looking to try to get into houses, millennials, like this is the time that millennials are buying houses. And affordable housing is a generational problem, there is not enough affordable housing, and it’s compounded as these things tend to work out, in some of Airbnbs most interesting, compelling markets. Think about places like Austin, you think about the Bay Area, housing is already incredibly expensive there, those are also the places that you see this cottage industry having formed, of these businesses that buy a bunch of condos in the nicest areas and in the most appealing areas. And so, they immediately soak up more of that residential supply that’s already in high demand, and they’re exclusively for these short-term Airbnb rentals. So, it’s really interesting how this is going to play out; we’ll see what happens, but it’s interesting.
Lewis: Yeah. And if you’re thinking about the risk that all of these individual markets pose to Airbnb as a business, it is worth looking at the revenue diversification. Because they do say that, you know, they operate in, like, 100,000 cities, none of those cities are responsible for more than 2.5% of their revenue, so they are spread out wide. I think that the danger for them comes more in someone finding something that’s very restrictive and seeing that it works exactly the way that they’re planning on having it work, and then other [laughs] cities just saying, well, that looks pretty good, I think we’re going to use that same policy. My hunch is that won’t happen anytime soon, because the lag on seeing the effects of policy alone will take a while. And really, you know, what we’re seeing here with most of the stuff is, we have an innovative idea, we see people use it in this really great way, we see a marketplace emerge that kind of changes the way that everyone thought the rules of engagement worked, and now we need to kind of step in and start putting some rules down. And there’s always going to be a bit of a timeline there, there’s always going to be some time between the idea happening and us figuring out exactly what the best execution of this thing is for all parties.
Hall: Yeah, that’s the key. And it is good that they’re so diversified. And to your point, I don’t think it’s likely that a lot of municipalities are going to go backwards, where they’ve already become entrenched. It’s really, really hard to go the other way once those things get established. There is one other risk factor I wanted to point out that I read that it’s just worth knowing about. The company is calling out a tax liability risk that could cost the company more than $1 billion in taxes going back to 2013, that could be — it’s still working through the details on that right now, but it could have to cough up more than a $1 billion in its liquidity to cover past tax expenses. So, that’s substantial, so that’s one of those things you got to kind of be thinking about.
Lewis: Yeah, particularly for a business of this size. I mean, I think even with an IPO, what we’re talking about in terms of capital being raised here, is in the low single-digit billions. So, talking about that net cash position before, they’re going to get some more, but that would be a significant hit to their net cash position. And they’re not like, you know, a Facebook or Google [Alphabet] that could take a fine and [laughs] then cover it basically with a quarter’s profits, this would be a sizable thing for them to have to deal with.
Hall: Yeah, it could be, and another thing that’s worth understanding too, is that a lot of their cash, because they’ve grown so much overseas, almost $1.5 billion of their cash is overseas. So, any domestic expenses that their domestic capital doesn’t cover, they would have to repatriate that money and there’s more tax implications that come along with that. So, there’s complexity, kind of, in their overall financial situation and nuance that’s worth at least understanding.
Lewis: Jason, we obviously don’t know valuation yet, and we won’t until shares are available and we see something priced, but how do you look at this business? I mean, is this something that you’re watching that is going on the watchlist that you are eager to buy shares of, like, totally ignoring, how are you feeling about it?
Hall: You know, I am really, really interested. Again, personally I use the business and I love it. And if there’s a business that I use and love and that is growing at a very high rate and is proven to be very disruptive, it’s very interesting; it is very, very interesting. The reality of those that, you know, even a great investment is a dumb investment at the wrong price, so that’s the thing that I’m watching most closely.
I can tell you this, I can tell you somebody that is very interested in this IPO that I’ve been hearing about constantly for six months, that’s our colleague Nick Sciple. Like, I think he might go all-in on Airbnb.
Lewis: You know, I love that, because, for folks that don’t know Nick well, I think Nick defaults to skepticism.
Hall: He does.
Lewis: And so, when Nick gets excited about something, I immediately pay attention.
Hall: Turns on the lights, really does. Yup.
Lewis: [laughs] Yeah. I think for me, Jason, what’s really appealing about this is its marketplace. We saw that high gross margin figure. And so, at scale, and bringing some of those expenses down, this could be a very profitable business at some point. There’s a lot to like there. I think that the valuation exercise is [laughs] going to be really interesting for them, given how totally out-of-whack their financials have been in 2020. And you know, I mean, there’s no certainty about when we’ll get back to a period where they’re more or less at cruising altitude and starting to get back into some serious growth. And I think that that’s a major question mark for the business.
So, I mean, if you’re watching this company, you’re interested in this company and you think that you might be wanting to scoop up some shares early, we say this a lot with IPOs, but I think it’s particularly true here with all the uncertainty ahead of this business, it’s worth taking a very small position to start.
Hall: I agree. And that’s most likely what I’ll do pretty close to the IPO, is get some skin in the game. But if I could say this, the two metrics I’m going to be paying the most attention to, and it’s to your point, are gross margins and revenue growth, because if it can hold those kinds of gross margins and continue to deliver double-digit revenue growth, it’s more like a SaaS stock, it’s more like a cloud stock, because you see all of the spending into developing that infrastructure to get to critical mass, and then those big losses, and it feels like overnight all of a sudden it starts pumping out these massive amounts of free cash flow. It’s just incredible how these businesses, when they scale, how they do this. And I think that’s what this could potentially be.
Lewis: Yeah. I think during some of its more recent private valuation rounds, we’ve seen a valuation somewhere in the mid-$30 billion for this company. You know that would put them, based on some of their recent sales figures, at 7X sales. We’re obviously going to see them probably priced well above that, but we’re not getting into absurd land in valuation as a multiple of sales, even if it winds up going at quite a premium, based on that gross profit number.
Hall: Just for some context, Hilton Worldwide Holdings is worth about $29 billion, and Marriott International is worth about $39 billion, so that’s kind of where it puts it. And yeah, I don’t think that’s necessarily an extreme stretch considering how early it is in its business and how much it could continue to scale up.
Lewis: Yeah. I think the viability of that really hinges on, OK, what does growth return to when we’re back to normal? You know, is it in the 20s, if so, like, it deserves a premium valuation. If they’re struggling to bring people in and it winds up being in the teens or low single-digits, then I think that that valuation comes under a lot more pressure.
Hall: Yeah. And that’s something we won’t know for two years.
Lewis: [laughs] Yeah. No, I mean, it’s the ultimate waiting game debut. And I think some people are probably, honestly, kind of curious that they’re even going public. And I wonder how much of that is cash needs and how much of it, frankly, it’s just they were going to do it anyway, so they figured we’re in a position where we can, we might as well.
Hall: I don’t think it’s about time to do it, I think it’s smart. I mean, you think about the amount of cash that the Fed has pumped into the economy, you think about where interest rates are, there’s a lot of interest in stocks and this is going to fall right in the sweet spot of the information economy. I think it’s smart to do it now.
Lewis: Well, Jason, hopefully we’ll be able to come back together again and [laughs] talk through some details once we have some firmer details on this issuance and on this stock, but until then, great talking with you, thank you so much for joining me on today’s show.
Hall: This was fun. Thanks, Dylan.
Lewis: Listeners, that’s going to do it for this episode of Industry Focus, if you have any questions or you want to reach out and say “Hey!” shoot us an email over at [email protected] or you can tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or wherever you get your podcasts.
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