April 13, 2020
Oil Price Truce - Airbnb’s Missed Window - Number of Quarters with Zero Revenue
It’s no secret that the prolonged global lockdown due to the COVID-19 pandemic is causing global commerce to stop. For many companies, revenues have dropped significantly, especially for companies that operate in the travel, physical retail & entertainment, automotive, and restaurant industries. Because of this, preserving cash is even more important than ever for many companies.
In today’s post, we will be discussing (1) the end of the oil price war, (2) Airbnb’s cash crunch, and (3) which US companies have the most cash on hand to wait out the lockdown.
The end of the oil price war
OPEC and the US agreed to cut oil production. Each country will cut their oil production proportional to their prorated share. Saudi Arabia agreed to cut its production by approximately 31% (to 8.5 million barrels a day, from a peak of 12.3 million barrels a day in April). Meanwhile, the US, Brazil, Canada and other G20 countries will reduce production by another 3.7 million barrels a day.
What does this mean for oil prices in the short term? It’s unclear whether this will lead to a significant rebound in oil prices for several reasons:
- Two primary drivers of oil prices crashing are the glut of supply due to the price war and significant decline in consumption due to the global lockdown. The production cut will not solve the demand issue.
- Despite the agreement to cut production, oil supply in storage is at an all time high, so much so that there’s a shortage in storage.
- The magnitude of demand decline is more than 2X the 9.7 million barrels a day production cut agreed. Some analysts even estimate that due to travel restrictions and work stoppage, oil consumption is expected to fall by 30 million barrels a day this month.
Airbnb and the missed IPO window
Airbnb had internal debate to go public as early as 2018. With good macroeconomic conditions, fast growth and a profitable (at the time) business, the timing seemed right. But the founders decided against it - due to their aversion to deal with the whims of public market investors.
The long wait to go to a public market has frustrated employees, whose options are expiring this year (stock options typically expire 10 years after issuance). These employees are not able to freely sell their shares as long as the company is still private, leading to frustrations.
So in 2019, the company announced that it would go public in 2020, and in preparation seemed to have increased marketing spend to boost revenue, increasing its losses for the sake of growth. But then the global pandemic happened.
Impact of COVID-19 on Airbnb
Bookings went down in all the major regions around the world (see Figure 1), resulting in sharply declining revenue. The drop in reservations have caused economic strain on Airbnb hosts (many have purchased or rented additional units and made renting properties on Airbnb their primary occupation - and with no incoming revenue, they are strained under mortgage obligations). In order to help these hosts, the company announced a US $250 million fund (Airbnb cannot afford to lose their hosts since that will negatively impact the supply of rentals on their platform in the long term).
Figure 1: Number of Airbnb bookings globally plummeted in Q1 2020. Data is from AirDNA
The cash situation
In Q4 2020, the company reported revenue of US $1.1 billion and losses of US $276.4 million. This implies costs of approximately US $1.4 billion per quarter. It also reported to have about US $2 billion of cash in the bank. With significantly declined revenue and such massive quarterly costs (not to mention the US $250 million fund), the US $2 billion dollars will be rapidly depleted. Airbnb needs a lifeline.
In order to replenish its coffers, the company raised debt from private equity firms, to the tune of US $1 billion. The terms are quite unfavorable for the company, however: 10% interest rate plus libor, plus warrants that can be converted into shares, up to 1% equity, at a US $18 billion valuation (that is about half the private valuation in 2017!).
Thus far, the company has survived and seems to have replenished its cash to weather the storm. Nonetheless, it is still not clear whether travel will return to normal in the second half of this year. Despite this uncertainty, Airbnb is still committing to an IPO in 2020, which means that it will be going public during a period where its revenue is down and in an economic climate that might still be weakened by the pandemic.
So what’s the takeaway? Cash is king, and IPO when you have the chance.
Speaking about cash...
With the global lockdown, many companies are seeing a rapid decline in their revenue. As such, having cash on hand is paramount in order to maintain operations. But having a massive amount of cash is not sufficient if you have large debt obligations or high operational expenses.
In order to gauge survivability at zero revenue, we combed through several notable companies in the US to gauge their balance sheet health by calculating how long they can maintain operations and debt payments before they deplete their cash.
For this exercise, we use the latest available quarterly earnings report. Note that this is a hypothetical situation assuming no new cash infusion from debt, that expenses stay the same and that revenue remains at zero. Figure 2 summarizes the results.
Figure 2: Number of quarters with no revenue (based on latest quarters earnings report, assuming no changes in expenses and no new cash infusions)
Notice that the companies that can survive the longest are companies that are asset-light (tech-enabled companies) with healthy balance sheets.
- Apple, although a hardware company, outsources its manufacturing and holds little inventory, giving it more capital efficiency (also - the company has a lot of cash).
- On the lower end of the spectrum are the asset-heavy and manufacturing companies: Boeing, GM, Ford, Disney, Tesla and Bristol-Myers Squibb.
- Although recent media coverage of Disney has revolved around its streaming efforts, the company earns 40% of its operating income (FY 2019) from Parks, Experiences and Products (theme parks and resorts), which are closed due to the global lockdown. It is estimated to cost more than US $1.5 billion per month to maintain these parks. The closures started in mid-March, with no end in sight. To reduce expenses, the company furloughed (stop paying salary) 43,000 of its parks’ employees.
- Warren Buffett’s time to act? His company, Berkshire Hathaway (ticker: BRK.A / BRK.B), is sitting on top of a massive amount of cash (US $128 billion, the most of the companies we reviewed). Buffett is famous for being opportunistic during times of crisis and has been the source of capital of last resort in the past. He famously provided capital to Goldman Sachs and Bank of America in the last financial crisis. He did so with very preferential terms that netted Berkshire billions of dollars.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
Our team members at Vested may own investments in some of the aforementioned companies. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.