RESEARCH REPORT

Airbnb - Unlocking Travel’s Final Frontier

Airbnb

Very few companies in the private-tech growth asset class have the growth and disruptive potential of Airbnb. With a $30B implied valuation, Airbnb is more valuable than large hotel chains (e.g., Hilton and Hyatt), airlines (e.g., United Airlines and American Airlines), and leading travel companies (e.g., Expedia and Ctrip). Only four publicly traded travel companies are more valuable than Airbnb today – Priceline ($80B in market cap), Marriott International, Delta Airlines, and Southwest Airlines (all between $32–36B market cap).

In this report, we analyze the evolution of the home-sharing space and Airbnb in particular. We provide an in-depth analysis of Airbnb’s business model, revenue potential, and operational risks. We also present a variety of valuation approaches to help investors make their own decisions about Airbnb’s value, now and in the future.

What makes this report unique is that we also share usage metrics and consumer attitudes about home-sharing from our proprietary, nationwide survey of more than 5,500 travelers. It is our goal to provide one of the most comprehensive research reports to date about Airbnb and home-sharing apps.

Specifically, here’s what you will find in this report:

  • Discussion regarding Airbnb’s market opportunity today and five years from now
  • Potential scenarios and events that would give us greater confidence in Airbnb’s positive outlook
  • Investment risks and downside scenarios to monitor as an investor
  • Proprietary research supporting scenarios and hypothesis
  • A valuation framework benchmarking Airbnb’s capital raise track record with public, private, and acquired peers
  • Historical growth and valuation multiples of leading public tech companies that frame Airbnb’s place in the tech ecosystem

Equally important is what you will not find in this report:

  • A recommendation to buy or sell Airbnb shares
  • A target price or an implied fair market value on Airbnb shares
  • Estimates around Airbnb’s gross bookings, take rates, or revenue estimates for 2020 and beyond

We believe that very precise calculations of intrinsic company value, if they can be done at all, require detailed current and forward-looking financial statements. Such financial statements are unfortunately not publicly available for the companies discussed in this report. For this and other reasons, the private market is not a place for day traders. Additionally, we believe that committed long-term investors who thrive in the private market tend to focus less on day-to-day valuation levels. Instead, they focus more on the long-term ability of a company to disrupt an industry, bring new technology to market, and achieve audacious goals. SharesPost’s research is intended to provide our clients with the data and analysis they need to form a reasonable opinion of a company’s future value, should the company achieve those goals.

Executive Summary

Airbnb started as an online marketplace where users could rent out surplus or unused space inside their residences to host travelers. Today, it has completely upended the travel and hospitality business. While vacation-rental and “for rent by owner” listings and aggregation services have existed for several decades, Airbnb has crafted a compelling yet straightforward host-and-traveler value proposition because of its attractive economics, global reach, plethora of traveler choices, and ease of use. Over the past seven years, Airbnb has raised over $4.5B in capital, aggregated almost 3 million listings, hosted 150 million guests, and likely generated $40B in cumulative bookings through 2016.

We think 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. Airbnb has already established itself as a market leader in most geographies, and its business model has inherent network effects. Airbnb and other alternative accommodations offerings tap into homeowners’ desires to make their spaces available for short-term rental, but also the desire of willing travelers to book them. Airbnb is pursuing a large and fragmented market opportunity, but it is benefiting from significant secular and demographic tailwinds.

While regulators and legislators continue to wrestle with the implications of a rapidly growing and evolving shortterm rental landscape, we believe Airbnb is quickly maturing, as is legislation on all levels. Apart from the legal and regulatory challenges associated with Airbnb, the key issue to monitor over the next 12–18 months is the effect of competition from large incumbents on Airbnb’s profit margins.

Highlights From Our Proprietary Alternative Accommodations Survey

In December 2016, we conducted an online survey of U.S.-based internet consumers with the objective of testing unaided/aided awareness, usage frequency, and consumer likes/dislikes about alternative accommodation apps and online hotel booking websites. Our survey also included questions related to corporate travel, use of mobile apps for travel, likelihood to offer one’s residence for rent, and opinions about the legality of home-sharing services. We received roughly 5,500 complete responses. In this report, we have included more than 25 charts and graphs highlighting our survey takeaways. Our top takeaways are:

  1. The majority of American adults still haven’t used alternative accommodations for overnight stays.

    Forty-six percent of American adults have stayed overnight in a shared accommodation, a vacation rental, or another non-hotel alternative accommodation in the past. Forty-one percent have heard about such services. The remaining 13 percent have never heard about home-sharing apps.
  2. The majority of home-sharing users have stayed in a shared or private room,

    But the majority of home-sharing users prefer entire homes. Fifty-two percent of alternative accommodation users have stayed in a private or shared room in the past, but 74 percent prefer to book and stay in an entire home.
  3. Airbnb is a clear leader in alternative accommodations.

    About 36 percent of home-sharing users have used Airbnb to book recent overnight stays, followed by Expedia and Priceline properties, at 22 percent and 10 percent, respectively. Over 90 percent of American adults associated the Airbnb brand with alternative accommodations in an unaided brand awareness test.
  4. Home-sharing users spend more nights and pay less per person, per room, per night than hotel travelers do.

    Our survey reveals that, on average, three to four home-sharing travelers stay for between four and five nights. These travelers pay $37 per person, per night while using homesharing services. This rate compares favorably to hotel stays, which usually have two to three travelers staying three nights and paying $52 per person, per night. All in all, a typical alternative accommodation booking is roughly $550–600, or almost 50 percent more than a typical hotel booking in the range of $350–400.
  5. It’s still early days for corporate travelers, but there is significant potential ahead.

    Twenty-eight percent of home-sharing users have booked alternative accommodations to stay on a business trip. Forty-one percent of survey respondents who haven’t yet stayed in alternative accommodations in the past (or roughly 23 percent of American adults) would consider staying in one for an upcoming business trip.
  6. About 50 percent of American adults are following the regulatory debate over home-sharing services.

    Forty percent of those who are following this issue do not favor hotel or lodging taxes for homeowners.

Airbnb Brand Awareness

Investment Positives and Upside Catalysts to Track

Alternative accommodation is a large and fragmented market.

Today, home-sharing apps such as Airbnb have a large revenue opportunity and the potential to disrupt several sectors directly involved in the $2T global travel and tourism industry. The global travel accommodations spend has been in the range of $650–700B, and we have witnessed a steady shift from offline to online booking channels. According to our proprietary survey of 5,500 American adults, 45 percent of travelers have stayed at a private home in the past. Of those who have used home sharing, roughly one-third have stayed overnight in alternative accommodations. All in all, we estimate about 10–15 percent of the travel accommodations spend is currently done via home sharing. Less than 5 percent of potential shared home inventory is available online. Both these trends imply significant market opportunity ahead for Airbnb.

Airbnb benefits from significant secular and demographic tailwinds.

Home-sharing apps benefit from secular trends at the intersection of the mobile, technology, and travel industries, coupled with favorable demographic, cultural, and behavioral changes associated with a rising millennial population. We have seen evidence that the alternative accommodations market has significantly lower online penetration rates (the amount of inventory that is booked online) than that of other travel markets. Specifically, we estimate that the global online penetration rate for shared homes is approximately one-third of the rate of traditional hotels. This low level of online bookings creates a significant opportunity for a listing consolidator such as Airbnb to create an easy, one-stop-shop storefront for the home-sharing market.

Airbnb is a leading alternative accommodations marketplace.

Airbnb has established itself as the clear market leader, particularly in the U.S. and several international markets for home-sharing services. Our analysis of thirdparty mobile app review and ratings data (from App Annie, Google Play, and Apple iTunes) along with web/mobile traffic data (from Alexa, Compete.com, and Google Trends) indicates that Airbnb has a significant lead over its home-sharing peers across many geographies. Additionally, its user engagement is growing significantly faster than that of its large online travel peers.

Airbnb benefits from marketplace-style network effects.

Home-sharing apps such as Airbnb benefit from the simple yet powerful network effects inherent to internet marketplaces. Our traveler survey indicates that 80 percent of the 750+ Airbnb users who responded are “extremely” or “very” satisfied, with Net Promoter Scores comparable to successful internet marketplaces such as Amazon and Netflix. An even higher 86 percent of the frequent Airbnb users exhibited similar satisfaction levels, indicating solid network effects at work – higher satisfaction levels among more frequent users. Our analysis of a sampling of Airbnb data disclosed in the recent “Airbnb Policy Tool Chest” report indicates that guests per listing rise as listing density rises in metro areas. All in all, Airbnb benefits from network effects that can help drive substantial growth and create barriers to entry.

Airbnb faces several greenfield opportunities.

We believe Airbnb has several opportunities to reap “low-hanging fruit” revenue growth. Over the near-term, we expect Airbnb to do more of the same – expand its geographic footprint, increase listings density, and add travelers. In this report, we have identified six potential and incremental revenue growth opportunities for Airbnb. These include subscription offerings for hosts, mobile or online advertising, integrated corporate travel bookings, expansion to emerging markets, introduction of core travel bookings such as hotels and airlines, and tourism adjacencies such as entertainment, activities, and restaurant reservations.

Airbnb has a strong management team.

We are big fans of founder-led, late-stage, VC-backed start-ups. Airbnb’s core founding team remains intact, with each founder still playing a key role at the company. Airbnb’s supporting executive cast is quite impressive, coupled with seasoned advisors and board members.

Key Risks and Downside Scenarios to Monitor

Airbnb faces significant competition from online travel agencies (OTAs) and hotel chains.

Competition in alternative accommodations is based on several factors, with marketing and brand recognition, inventory pricing, and network size as the primary components. What makes us marginally more cautious about Airbnb’s mediumterm outlook? Over the past few years, Airbnb’s competitive headwinds have stiffened, given the increased focus on alternative accommodations among large travel properties (particularly Priceline and Expedia). On the flip side, our survey highlights that consumers clearly prefer Airbnb’s value proposition versus online travel agencies’. We think Airbnb’s market share, scale, and brand awareness all point toward a sustainable competitive advantage in the near- to medium-term.

Airbnb comparison with OTAs

There are lots of unknowns about Airbnb’s regulatory environment.

As with ride-sharing apps, the specific regulatory debate regarding home-sharing apps varies by geography. However, in most cases there are two major questions. The first is whether it should be legal for residents to rent out their homes using these services. The second is whether homeowners or residents should be legally required to pay some form of hotel or occupancy tax. Our survey says that about 50 percent of American adults are following the regulatory debate over homesharing services – and 40 percent of those who are following this issue do not favor hotel or lodging taxes for homeowners or residents. Legal troubles have followed disruptive and innovative tech companies (e.g., Google and Microsoft vs. EU, Facebook’s privacy-related lawsuits), as regulatory framework tends to lag behind innovation. We expect the regulatory framework regarding Airbnb to stabilize as consumer adoption continues to grow. However, that may come at a cost to Airbnb.

Price competition and price sensitivity are relatively high in online travel.

Price sensitivity remains a decisive factor in the travel decision-making process. Our survey indicates that lower price is the top reason that homesharing users book alternative accommodations. Furthermore, regular hotel shoppers switch to home-sharing only when they are offered a lower price on a private home. We believe such behavior is more prevalent among younger travelers, who tend to over-index toward home-sharing as a demographic.

Marketing spend will likely impact Airbnb’s long-term profitability potential.

We are encouraged by recent media reports that Airbnb reached EBITDA profitability in 2H:16. However, the long-term cost structure and unit economics of home-sharing companies remains unproven and debatable. Online travel companies such as Priceline and Expedia spend a significant proportion (almost 60 percent) of their variable operating expenses on sales and marketing. These companies have been fairly successful in building brands and expanding their addressable markets via greater awareness, largely by long-term, TV-related advertising campaigns. For instance, we think Priceline’s “The Negotiator,” featuring William Shatner, is one of the most successful brand advertising campaigns by an internet company. Airbnb’s recent Super Bowl ad campaign and ongoing marketing ramp in new markets will likely weigh on its profitability near-term. However, we think there is a clear precedent in which successful brand campaigns (fixed upfront costs) can lead to lower traffic acquisition costs (variable ongoing costs).

Airbnb faces marketplace management risk.

As an operator of a two-sided marketplace, Airbnb has limited direct control over the quality of consumer experience. Its success is dependent on the performance of hosts, and it can face potentially negative downward-spiral trajectories if it ends up over-monetizing, under-innovating, or creating conflicts in the marketplace. Airbnb’s ongoing pricing, policy, and product changes should continue to balance the supply-side and demand-side incentives. Furthermore, it is hard not to review the history of eBay and Amazon, Yahoo and Google, and other internet marketplace companies (such as Etsy, Grubhub, and HomeAway), and conclude that marketplaces need to strike a balance across all marketplace participants to ensure long-term success.

Travel industry remains in consolidation mode.

Over the past few decades, the travel industry has undergone fundamental consolidation across all sectors. For context, there are just three major network airlines (American, Delta, and United), 10 car rental brands owned by three rental car corporations (Avis, Enterprise, and Hertz), and over 80 hotel brands operated by fewer than eight companies. The online travel sector is largely emulating these offline consolidation trends. The OTA sector has turned into a duopoly, as Priceline and Expedia have consolidated the space. We think these competitive forces have led to Airbnb also becoming a bit more acquisitive. While most of Airbnb’s 10+ acquisitions have been technology-, product-, or personnel-driven, we believe that acquisitions increase integration risk and negatively impact near-term EBITDA margins.

Private Tech Valuation Framework

Though valuing private tech growth companies is challenging because of the lack of reliable financial information, there is data and analysis that can help guide valuation conclusions. At SharesPost, our valuation framework relies on publicly available data points, funding-round-based valuation multiples of private peers, and historical valuation ranges of publicly traded comps, as well as the overall market trend since the most recent primary round of company funding. As a matter of corporate policy, we do not publish a specific market value for a private company. . In this report, we have provided a basic framework highlighting the following approaches and supplementary that analysis with an objective to provide clients with the tools and framework to triangulate a reasonable range of investment values:

  • Waterfall Model
  • Multiple On Invested Capital (MOIC)
  • Option-Pricing Model
  • Publicly Traded Comparables
  • Mutual Fund Holdings
  • Secondary Market Transactions

Airbnb M&A Liquidation Scenario

We have also included a hypothetical IPO-outcome valuation for Airbnb. This valuation is based on a financial model constructed based on publicly available data points, layering in reasonable growth and profitability assumptions. If Airbnb’s forecasted revenue growth exceeds 40 percent for 2019, and if Airbnb’s forecasted profitability is above “mid-teens” (from an adjusted EBITDA margin standpoint), we’d guess 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 in about 18 months.

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CONFLICTS: This report is being published by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management, LLC., an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with, owns and/or seeks to own positions in the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report.

This report was originally prepared and distributed to institutional and certain private clients of SharesPost Financial Corporation. Recipients who are not market professional or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell or a solicitation of an offer to buy or sell any security and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

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Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the grown and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable, however, we cannot guarantee the accuracy of all such information.

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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk and should only be considered a long-term investment.

You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

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PLEASE READ THESE IMPORTANT LEGAL NOTICES AND DISCLOSURES

CONFLICTS: This report is being published by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management, LLC., an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with, owns and/or seeks to own positions in the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report.

This report was originally prepared and distributed to institutional and certain private clients of SharesPost Financial Corporation. Recipients who are not market professional or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell or a solicitation of an offer to buy or sell any security and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

Investors should be aware that the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest any of the issuers that are discussed in the report at any given point in time. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, Investors are cautioned to consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION: The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst(s) compensation was, is, or will be, directly or indirectly, related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the grown and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable, however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation. SharesPost Financial Corporation and SP Investments Management, LLC are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk and should only be considered a long-term investment.

You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, SharesPost Index, SharesPost Investment Management, SharesPost 100 Fund, and SharesPost 100 List are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

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