Airbnb IPO: Halal? A Good Buy?
- Airbnb's THI Halalness rating is comfortable.
- Airbnb's business fundamentals and financials should allow it to weather the current pandemic and perhaps come out even stronger.
- Airbnb is a great company to own if you can get your shares at a good price.
Airbnb is an online marketplace that enables people to rent out their homes to other people looking for a place to stay. Instead of traveling like tourists and feeling like outsiders, guests on Airbnb can stay in neighborhoods where people live, have authentic experiences, live like locals, and spend time with locals in approximately 100,000 cities around the world. Today, there are more than 4 million hosts on the Airbnb website offering everything from a private room in their home to luxury villas, from one night to several months at a time. In their 13 years, Airbnb hosts have welcomed more than 825 million guest arrivals and have cumulatively earned more than $110 billion. Airbnb is going public soon (probably early December) and because The Halal Investors likes to give its readership an edge, we analyzed their halalness and investment prospects so that you will be prepared when it eventually goes public.
Airbnb’s Halalness Rating
How Airbnb Makes Money
Airbnb doesn’t actually own any properties, it simply collects a commission from all the bookings that are done on its site. I see nothing inherently wrong with either the bookings done through the Airbnb site or the commissions Airbnb collects from these bookings. Airbnb is basically enabling people to be in the mini-hotel business which I think is perfectly fine.
The company also offers a service called:
Airbnb Experiences: Renters can take part in activities like cooking classes, tours, and adventures.
There are activities booked through Airbnb Experiences that involve wine and alcohol tasting which are haram to profit from.
It's impossible to say how many Airbnb Experiences involve alcohol but it's safe to say they are a minority of listed experiences which itself represents a minority of overall Airbnb revenue.
Accordingly, I am comfortable with how Airbnb earns its money from a halalness perspective.
Airbnb was hit hard by the recent pandemic. When people aren’t traveling, they aren’t booking places to stay, and Airbnb isn’t making any money. As a result, Airbnb has had to raise a lot of debt to secure itself financially. Specifically, Airbnb raised around $1 billion in debt twice, with a ~10% interest rate in April of 2020. This has substantially impacted Airbnb’s relationship with interest which I have summarized in the following table.
Airbnb's relationship with interest
You can see with regards to interest income, it has been rather steady over the years for Airbnb at between 1 and 2% of Total Revenue. As for Interest Expense, it was virtually zero up until 2020 when it had to take out debt and interest expense jumped to around 3.5% of total expense. I do not think Airbnb’s interest expense implies a reliance on interest. I am further encouraged by Airbnb’s low use of interest pre-pandemic and I expect it to return to these low levels after the pandemic.
Airbnb has had a positive impact on the lives of millions of hosts that were able to monetize their properties in a way that was previously impossible. On the other hand, Airbnb has allowed travelers to experience different parts of the world in a unique way and hopefully enhanced understanding of different cultures in the process. Allah SWT says in the generous Quran:
“O people, indeed We have created you from male and female and made you peoples and tribes so that you may get to know one another. Indeed, the most noble among you in the sight of Allah are the most pious. Indeed, Allah is All-Knowing and Acquainted.”
-The Holy Quran - Chapter (49) Surat Al-Hujurat
I think Airbnb can potentially be a tool for people to do this getting to know one another that Allah SWT encourages.
As can be expected when you have a business that allows strangers to open their homes to other strangers, there have been some scandals associated with Airbnb. For example, in October of 2019 five people were shot and killed at a “party house” in Orinda, California that had been rented via Airbnb. As part of its response, Airbnb announced a global ban on all parties and events at Airbnb listings, including a cap on occupancy at 16. Another Airbnb scandal included houses that didn’t really exist being listed for rental on Airbnb's website. Airbnb responded by announcing: “it will begin the process of verifying all 7 million listings on its platform. By December 15, 2020, each home and host will be verified by Airbnb for “accuracy of the listing (including accuracy of photos, addresses, and listing details) and quality standards (including cleanliness, safety, and basic home amenities),” according to a statement released to the press. I think Airbnb’s management has responded relatively well to these scandals and attempted to solve the root causes of the problems that arose. From everything I mentioned, I’m rating Airbnb as comfortable to invest in from a halalness perspective.
Airbnb as an investment
I think the recent pandemic will help Airbnb long-term not hurt it. The reason I think this is twofold:
During the pandemic, while people remain cognizant of social distancing, home rentals will likely be viewed as safer than hotels on account that homes have less human traffic than hotels and require fewer human interactions when you stay there.
As individuals and companies get more acclimated to remote work, longer duration trips become more feasible. Home rentals are more affordable for someone looking to stay more than a few days than hotels are. I’ve actually considered whether I should go to someplace I’ve always wanted to experience and work from there for a month since all I need to work is an internet connection.
If you look at the numbers, they corroborate my thoughts on Airbnb’s advantages. For the first nine months of 2020, Airbnb’s gross bookings were down 39% year-over-year compared with 63% for Booking Holdings and 65% for Expedia. Even with the third-quarter revenue decline, the period was Airbnb’s second-biggest ever, behind only the same quarter from 2019. And because the company slashed its sales and marketing costs by 74%, Airbnb turned a profit in the quarter of $219 million. In terms of their financial health, Airbnb’s free cash flow was positive from 2016 to 2019. The 2020 pandemic turned free cash flow negative to the tune of half a billion dollars in the first nine months of 2020. However, Airbnb has more than enough cash to get through the pandemic, around $4.5 billion to be exact.
In 2019 when revenue was around $5 billion dollars, Airbnb was valued at $31 billion (~6 times sales).
In March, some investors bought Airbnb shares at an $18 billion valuation after travel ground to a halt.
I expect travel to return to normal by 2022. At which point I expect Airbnb to post revenue numbers just as good if not better than their 2019 numbers. Given the size of the market, and Airbnb’s privileged position as its leader, I think it is plausible if not probable that Airbnb will be able to generate $10 to $15 billion in revenue annually at some point in the next 3 to 5 years. Assuming the same 6 times sales valuation it got before the pandemic; such revenue would command a $60 to $90 billion dollar valuation. Accordingly, if Airbnb goes public at a $30 billion dollar valuation or below, given my 3-year time horizon, I’ll probably pick up a few shares for myself. Bottom line, Airbnb is a great company to own if you can get in at a good price. Disclaimer: The author is not associated with Airbnb in any way, has no stake in the company and this article is not personalized financial advice.
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