The Business Of

Sharing | Airbnb | What Do They Do With Their Profits?

Morning All!

Yesterday we put together Airbnb’s costs with their revenues. And we’ve covered a fair amount this week. So, let’s have a quick recap…

• Happy Hosts - Airbnb charge service fees to both guests and hosts. But whilst they take ~14% from guests, they only take ~3% from hosts!

• Happy Developers - Airbnb have a mammoth ~2,000 software developers at the company. Making up ~30% of the workforce.

• Scale = Operating Leverage - As Airbnb’s platform has scaled, it has led to operating leverage. Which meant a healthy EBIT margin of 21% in 2022.

And speaking of margin. It is a Thursday morning. Which means it’s time to take a look at our famous TBO EBIT Margin ranking! Below, we can see our ranking updated to include Airbnb. And I’ve actually included two bars for Airbnb - one for its EBIT margin. And the other for its Adjusted EBITDA margin - which the company also reports!

And later today, we’ll investigate why Airbnb use adjustments to their EBIT. Because on an EBIT margin basis, the margin looks very good - but not great. However, on an adjusted EBITDA margin basis, the margin looks absolutely amazing!

But for now, let’s crack on. Because, with ~$8.4bn in revenues. And a 21% EBIT margin. It means Airbnb made a solid ~$1.8bn EBIT in 2022. And the question we’ll be answering today is - what does Airbnb do with all that profit/cash?!

Errr… Where Did $6 Billion Cash Come From?

So, let’s as always take a look at the waterfall chart below. Which shows us how Airbnb have spent their cash from operations (CFO) since 2017. And we can make some interesting observations.

Capex is incredibly low - as you’d expect from a software company that’s very asset-light. Airbnb doesn’t need to invest in machinery or warehouses. And there’s no dividend - again, as you’d expect from a young company that’s focused on reinvesting into growth.

But some of you may be wondering - is that chart right? Surely Airbnb as a startup lost loads of money? We saw yesterday that the company only really became profitable after the pandemic! So why on Earth does the chart above show that Airbnb made $6.1bn in cash from operations (CFO) since 2017?

Well, if you are thinking that - great stuff! Because you’re right. We need to go back a step. Because in our Thursday emails, we always see this waterfall chart with CFO as the beginning yellow bar. But to get to CFO, we make adjustments to net income. And one of these adjustments is going to be the focus for the rest of today!

It’s Not Just Mark Zuckerberg Who Got Rich From Facebook…

Okay, so how do we get from net income to CFO? We add back in non-cash items. And the reason we do this is because some of the expenses included in net income aren’t cash expenses. Like the amortisation costs we saw in The Business Of Man United. Check out this Investopedia article if you want a simple, clear explanation!

But the one non-cash item I want to really focus on today is called share based compensation (SBC). In fact, it’s the largest non-cash adjustment in the chart below, making up ~$5bn worth of costs since 2017. So, what is share based compensation?

Well, let’s provide some context. Startups - like Airbnb was in 2010 - want to hire the best people to build their company. You need marketing people, finance people, and crucially for Airbnb - you need software developers. And some very good ones!

But here’s a question - how did Airbnb get the best developers to join them? The company didn’t have loads of money in the bank. And the most talented developers were earning so much at Google! Remember this heading from yesterday…

Well, one of the answers is stock options! It’s basically when a company says ‘okay, we might not be able to pay you like Google can right now. But here’s 0.1% of our company. And if we become a billion dollar company, your 0.1% is then worth $1 million!’ This form of compensation is called ‘share based compensation’.

And this was in fact how Facebook and plenty of tech startups created millionaires. In fact, the Facebook IPO reportedly created over 1,000 millionaires! As people who joined Facebook and received stock options were able to cash out their equity. Yes, it wasn’t just Mark Zuckerberg and Facebook’s investors who cashed in. Hundreds of software developers hit the big time! We’ll talk more about IPOs next week in The Business Of Uber!

Sundar Pichai Gets Paid How Much?!

But share based compensation (SBC) isn’t just for startups. No, no, no. SBC is used by the biggest companies around. For example - Jamie Dimon was given 1.5 million stock options by J.P Morgan in 2021. And Google’s CEO, Sundar Pichai, gets given ~$200 million worth of stock options every 3 years. Yes you read that right, $200 million!

But why are JPMorgan and Google giving their CEOs so much stock? They’re not startups anymore!

Well the reason is retention. JPMorgan and Google want to keep Mr Dimon and Mr Pichai at their firms. And stock options helps with retaining these key people. Because a critical part of these options is something called vesting. And vesting means that Mr Dimon and Mr Pichai will have to stay at JPMorgan and Google for an agreed period of time before they can use those stock options. For a really nice overview of how stock options work and all the technical elements behind them, I think this article would be a really nice read.

Uncle Warren Doesn’t Like Adjustments…

So, let’s wrap up and return to the question we asked ourselves yesterday. Airbnb remove share based compensation when they calculate Adjusted EBITDA. So should we look at Airbnb’s EBIT margin or their Adjusted EBITDA margin to get a ‘correct’ view of profitability? Well, let’s take a look at both sides.

Why should we look at Adjusted EBITDA margin for a true view of profitability? Well, because SBC costs aren’t your normal type of cost. There’s no cash that’s paid out by the company to employees! When stock options have vested, Airbnb basically create new shares and give them to their employees. Then employees have the option to either keep the shares or sell them. But no cash has left Airbnb! So hold on, where’s the cost?

Well, the cost here is felt by Airbnb’s shareholders. When new shares are created by Airbnb, what does it do? It increases the number of shares outstanding. Which dilutes (decreases) the value of a single share. And this is why Warren Buffett amongst others believes we shouldn’t look at Adjusted EBITDA! Because despite cash not coming out of the company, SBC has a negative impact on existing shareholders of the company.

Out of all the tech companies, this issue was most apparent with Twitter. In the mid-2010s, the company had a big SBC problem. Because the number of shares they had to create in order to pay employees in stock was causing considerable dilution for existing shareholders. That article explains it nicely.

Now, one way a lot of companies can get out of this dilution impact, is by buying back shares. Which is what Twitter began doing. And it’s what Airbnb do now. Because what happens when a company buys back its own shares? It lowers the number of shares outstanding. Which increases the value of a single share!

And this is what we see at Facebook and other tech giants too. Facebook had massive SBC costs of $12bn in 2022 - which increases the share count. But the company also bought back $28bn worth of stock - which ended up decreasing the share count overall. So they’re pleasing employees with stock options and pleasing existing shareholders with share buybacks! Classic Mark!

So, back to the original question of EBIT margin or Adjusted EBITDA margin! I guess the answer is… look at both, but EBIT margin probably edges it. As the EBIT margin will always give you the ‘clean’ margin level - including all the operating costs incurred by the company.

And last thing for today. I couldn’t write about Airbnb’s shares without mentioning this golden nugget! In the first half of 2023, Joe Gebbia - one of Airbnb’s founders - sold an absolutely incredible $890 million worth of Airbnb shares. Imagine opening up your mobile banking app and seeing $890 million in it!

28th Sep 2023

Nigel Jacob CFA