Airbnb could run out of cash in one year, even with the $1 billion it just raised, because of how devastating the coronavirus is on its business
- The $1 billion in cash Airbnb announced Monday that it has raised likely won't last the company very long.
- Even before the coronavirus epidemic hit, the travel startup was losing money; thanks to the crisis, its losses and cash burn have likely exploded.
- In a worst-case scenario, it might not have enough cash to last a year, despite the new funding.
- More likely, thanks in part to some cost cuts, it can extend its life beyond that, but not by much, particularly if the crisis and associated economic downturn linger.
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The $1 billion financing that Airbnb said it secured Monday gives it a vital resource as the coronavirus squeezes its business. But even with the 10-figure cash infusion, the company's long-term survival remains in question so long as the pandemic and the associated economic downturn persist.
Indeed, Airbnb could still run out of cash in as little as a year, depending on how hard its revenue is being hit and how much it's able to control its expenses, according to Business Insider's interpretation of some of the company's financial figures which news organizations have previously reported.
The question of just how much cash Airbnb has and how long that stockpile will last the company has become an urgent one because of the coronavirus pandemic. The outbreak has disrupted the travel industry as a whole, as governments around the world have urged or required citizens to stay home to try to limit the spread of the disease. Those steps have halted economic activity throughout the US and in large parts of the world.
It's unclear how long the epidemic will last or when the US or global economy will recover. Worryingly, in the US, there have been massive numbers of layoffs over the last two weeks and a growing number of business closures, both of which could portend an extended economic downturn. So, companies of all kinds and sizes are having to assess whether they have enough cash on hand to see them through the crisis.
Airbnb has experienced a sharp reversal of fortune
That Airbnb should be in a position where its survival is in question represents a sharp change of fortunes for the company. As recently as a few months ago, the company was widely considered one of the standouts among the group of jumbo-sized venture-backed startups. With a proven business model and a past history of profits, Airbnb was gearing up for a widely anticipated initial public offering.
Those plans having almost certainly been shelved, Airbnb turned to private investors for new funding. As part of the deal announced Monday, Airbnb will raise $1 billion from Silver Lake and Sixth Street Partners through a combination of debt and equity financing. The company didn't say exactly how it would use the funds, but said $5 million of it would go into a fund it created to offer grants to its superhosts - property managers who offer popular and highly rated accommodations through its service - to help them pay their mortgages, rent, and utilities.
The San Francisco startup is almost certainly reserving the bulk of the funds to pay its ongoing operating costs. To understand why - and why the company's still in danger of running out of cash - it's helpful to look at Airbnb's finances, to the extent that they are known. As a still-private company, Airbnb does not publicly release its financial statements, and a company representative declined to answer questions about its finances and cash stockpile.
But before the latest funding, Airbnb likely had somewhere between $1 billion and $3 billion in cash on hand. In February, in a story about the company's third-quarter results, The Wall Street Journal reported that Airbnb had $3 billion in cash. Last month, in an article about Airbnb's fourth-quarter results, Bloomberg reported the company had more than $2 billion. However, neither story made clear when Airbnb had the amount of reported cash, whether that amount was current as of the end of the third or fourth quarter, respectively, or as of the date of the articles.
With Monday's cash infusion, Airbnb, at worst, now has less than $3 billion on hand. At best, it likely has somewhere around $4 billion.
No one is travelling, but Airbnb still has lots of expenses
That's a lot of money, but it doesn't amount to even a year's worth of revenue for Airbnb. Last year, the company posted about $4.8 billion in sales, according to figures compiled from The Information, The Journal, and Bloomberg.
That comparison is important, because the company's business - like those of other travel companies - has been pummeled by the pandemic. Some 90% of reservations made through its service with check-dates of between March 18 and April 7 have been cancelled, according to data from AirDNA, an industry research firm. And few new bookings are being made, AirDNA's data indicates.
"They've probably got close to 0 revenues or very, very low revenues," Siegel said.
While Airbnb's revenue has been slashed, it still has ongoing expenses. Among other things, it has thousands of employees, office space in San Francisco, and the costs involved in keeping its online service up and running. Last year, those costs exceeded the company's revenue. All told, the company appears to have had $5.1 billion in expenses for all of 2019, at least on an EBIDTA - earnings before interest, depreciation, taxes, amortization - basis, based Business Insider's back-of-the-envelop analysis of the select financial figures reported in The Information, The Journal, and Bloomberg. That would amount to expenses of about $1.3 billion a quarter.
There's little information available about Airbnb's recent cash burn rate. But EBIDTA is supposed to be a proxy for that, because it excludes certain non-cash charges.
So, if you assume that Airbnb has no revenue right now and it continued to spend at the same rate it did last year, its cash outflow would equal its EBIDTA expenses of $1.3 billion a quarter. At that rate, it would blow through the $1 billion in new funding it just got in less than 90 days. If you figure it has less than $3 billion in the bank even after that new funding, its coffers would be empty within three quarters at that spending rate.
But Airbnb's revenue probably hasn't completely disappeared...
To be sure, that's a worst-case scenario. Airbnb is almost certainly in better shape and will likely will last longer than that scenario suggests, even if it doesn't raise any more money and even if the pandemic lingers on.
While cancellations have soared and new bookings have fallen off a cliff, Airbnb is still seeing some activity on its site. Some consumers, particularly city dwellers hoping to get out of hard-hit urban areas, have used its service to book accommodations in more rural areas for 30, 60, or even 90 day stays, according to AirDNA CEO Scott Shatford. Those kinds of long-term reservations now make up nearly half of all bookings on Airbnb's service, he said. So, it does have some revenue - potentially a significant amount - coming in.
Meanwhile, the company is reportedly cutting its expenses. It's stopped all of its marketing spending, largely frozen new hiring, and is delaying paying out bonuses, according to a report last month in The Information. Cutting the marketing budget alone will save the company $800 million this year, according to the report.
Those two factors - some amount of revenue coming in and less cash going out than before - should allow Airbnb to extend its life well beyond the worst-case scenario. But that doesn't mean it's out of danger.
It's still likely burning lots of cash
Let's generously say Airnb's sales are now one-third of what they were a year ago. That would mean that it's pulling in about $300 million in revenue quarterly. Let's also say that thanks to cost-cutting measures it's managed to slash its expenses by about $300 million a quarter - $900 million over the last three quarters of this year. That would mean that its quarterly expenses would be about $1 billion. So, its cash burn rate would now be around $700 million a quarter.
At that rate, it will gobble up its new $1 billion in funding within two quarters. And if you generously assume it has $4 billion total cash, it would eat that up within six quarters. If it has less than $3 billion, that stockpile would last it little more than a year.
It's quite possible the economy will rebound or Airbnb will be able to attract more funding if its current cash starts to run low. And many analysts think it's likely, if it gets through this crisis, that the company will bounce back stronger than ever.
Still, a month or two ago, few would have thought that Airbnb - of all startups - would be in position where its survival was even theoretically on the line.
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