Very few companies in the Private Tech Growth asset class have the growth and disruptive potential of Airbnb. Airbnb started as an online marketplace where users could rent out surplus or unused space inside their homes to host travelers. Today, Airbnb is well on its way to becoming the single largest disruptor in the $2 trillion-plus travel and tourism industry in the 21st century. With a $30 billion implied valuation, Airbnb is more valuable than some global hotel chains (e.g., Hilton and Hyatt), leading airlines (e.g., United Airlines and American Airlines), and online travel companies (e.g., Expedia and Ctrip).
Investors certainly have plenty of reasons to be cautious including competition, regulatory issues, and of course the most important one, the valuation. However, I believe that Airbnb has a credible case to go public at a $50 billion valuation or more, for the following reasons (coupled with the projections presented below): 1) Airbnb faces a large and fragmented market; 2) Airbnb benefits from secular, demographic, and cultural tailwinds; 3) Airbnb is currently a clear leader in alternative accommodations space; 4) Airbnb has lots of ways to grow its business; and 5) Airbnb benefits from marketplace-style network effects. A detailed analysis, including our survey of 5,500 online travelers, is available here.
How Much Revenue Can Airbnb Generate?
It depends on the level of supply (listings) and demand (traveler bookings). Based on the arguments below, I believe, in 2019 alone, Airbnb can generate more than 600 million room-nights bookings, translating to $73 billion in gross booking volume. At a flat 10% take rate, this will allow Airbnb’s net revenue to reach $7.3 billion. There are multiple risks to achieving this, beyond lack of user and listings growth. These include the potential decline in take rate from the current levels and the likely increase in marketing costs, as Airbnb could spend more money to acquire and retain consumers and listings. This could pinch Airbnb’s EBITDA margin trajectory, which should show a pathway towards 20% in 2019 (in our base-case scenario).
How Would Public Markets Value Airbnb?
If Airbnb pursues an IPO route, and if Airbnb goes public in Q3:18 (roughly 18 months from today), we’d guess that prospective and potential public investors in Airbnb shares would calculate the company’s Enterprise Value based on 2019 estimates. We agree there are a lot of “ifs” in this scenario. However, based on publicly available information and applying reasonable growth rates, we’d guesstimate Airbnb’s revenue to grow between $7.0-7.5 billion in 2019, expanding at 40-45% year-on-year. If Airbnb’s forecasted profitability is above “mid-teens” (from an adjusted EBITDA margin standpoint), we’d expect a “mid-to-high” single-digit EV/Revenue multiples. Our base scenario leads us to believe that Airbnb could go public with a $50B market cap.
What does a $50 billion IPO mean from a profitability standpoint?
Peak EBITDA multiples for Internet marketplaces have hovered around 60–80x one–year forward estimates. Additionally, Peak EV/EBITDA multiples for online travel marketplaces have hovered around 30–35x one-year forward estimates. Assuming investors would be reluctant to pay beyond this range, and assuming a 30x one-year forward EBITDA multiple on a $50 billion EV, we would guess Airbnb’s estimated EBITDA is in the range of $1.5–1.75 billion in 2019 (or, overall EBITDA margins are expected in high-teens percent in 2019). Put another way, Airbnb could go public in 18 months with a valuation of $50 billion or more, if 2019 forecasted revenue growth exceeds 45 percent and 2019 forecasted profitability exceeds mid-teens (from an adjusted EBITDA margin standpoint).
Where could we go wrong?
The case for $50 billion or greater valuation in a base-case scenario is still heavily dependent on Airbnb’s execution over the next 12-18 months, the regulatory environment as well as investor sentiment which will govern the Revenue or EBITDA multiples. Most crucially, however, a $50 billion valuation rests on the assumption that Airbnb continues to grow its listings and consumer adoption. If it is successful on both fronts, it would indirectly help the company with operating costs and overcoming regulatory hurdles. The factors that could make these risks materialize include competition from Priceline & Expedia leading to higher marketing expenses and/or lower take rates, both lowering profitability outlook for Airbnb.
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