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Editor’s Morning Note: Airbnb’s Robust Health And Why ‘Buyback’ Can Be A Rude Word

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It’s a little known fact that this is how all VCs see themselves in the mirror each morning.

Welcome back to our little morning chat. Today we observe that for the second time in a mere pair of days a unicorn has made positive noise about its financial health, and we’re taking the shortest of looks at buybacks. The latter is a slightly contentious topic, but one that matters in our broader discussion about how we should vet companies’ maturity, and performance.

Oh yes, and I wrote you a poem. Off we prance.

Area Unicorns Display Signs Of Health

Airbnb is in better financial shape than you might have thought. According to Bloomberg, the well-funded startup has added a $1 billion debt facility to its collection of financial tools.

Also notable in that report is the following: “Airbnb has lost less than $250 million since it started in 2008, and it generated roughly $1 billion in revenue last year, a person familiar with the matter said.” According to prior reporting, that figure should represent net revenue, and not GMV. The accumulated loss is even more surprising. Many unicorns have been, and are willing to burn at a far quicker clip. Airbnb, it seems, hasn’t had the need.

The greater context of this is Dropbox’s recent disclosure that it is free cashflow positive. That means that at least two of the decacorn crop are in decent to robust health; Dropbox is in far better control of its destiny having reached that particular financial milestone, and Airbnb has all the access to cash that it should need to get itself to a public offering.

Does that mean that Airbnb is ready to pull the trigger? I haven’t heard that, but the firm likely now has stronger ties to banks that might want to take a piece of its eventual IPO business. After all, the billion dollar facility wasn’t put together by VCs. VCs are too poor for such things.

Share Buybacks For Good And Evil

Many large companies repurchase their own equity, slowly decreasing their float and concentrating earnings per share. Even at a flat profit rate, if that profit is spread across fewer shares there is more profit attributable to each share, bolstering at least short-term EPS. That increases the value of the share itself. Speaking in the most general terms, buybacks done correctly reward long-term shareholders for their investment by boosting the amount of the company they own over time as other outstanding shares are retired by the firm itself.

According to a recent article on BusinessInsider, share buybacks by United States-based companies totaled $2.1 trillion in the last 5 years. That’s quite a pile of money. Whether buybacks are effective, or efficient however, will always be company and market dependent. A concern could initiate a buyback when shares are depressed across the board, allowing it to scoop its own stock at a discount. Or, the opposite could occur.

But when companies discuss buybacks, it’s generally worth considering the sum promised compared to the firm’s total market capitalization. Sometimes a buyback can sound more impressive in the abstract that in any sort of correlative ratio. The corollary of that point is that a company can spend quite a lot of cash on what amounts to very little EPS assitance.

For tech companies, buybacks — and their cousin in shareholder return, dividends — can be considered signals that the company in question simply cannot find enough places to invest its cash. That may imply slowing future growth.

Once a firm reaches a certain cash account balance, the growing surplus becomes increasingly restless. Microsoft and Apple both pay dividends and have engaged in share buybacks, for example. Alphabet decided in late 2015 to pick up $5 billion of its own stock. And even more recently, Amazon decided that it would hoover $5 billion its own shares as well. Hell, even Facebook operated in a similar fashion back in 2012.

To summarize: What do we want? Mild earnings concentration! And when do we want it? When the company in question is cash rich and has decided that increased spend elsewhere would be inefficient and its shares are fairly valued, or are valued at a discount to their inherent worth!

Microsoft Bought Another Thing

For one reason or another, Microsoft keeps cropping back up on these pages. So to avoid another full paragraph, we’ll write a poem:

Microsoft bought another thing,

Apparently it involves chat bots,

This poem doesn’t rhyme,

I still don’t get the LinkedIn deal.

Publishers, direct your book deal offers to my agent.

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Top Gif Via Giphy.
© Mattermark 2017. Sources: Mattermark Research, Crunchbase, AngelList.
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