What to keep in mind before Airbnb’s upcoming IPO | Valuation | Risks
Not Financial Advice, just a college student trying to do some research!
With Airbnb’s upcoming 35 Billion IPO in December, the question is, how do I value it, especially during this pandemic? What is the Total Addressable Market and growth opportunity. What aspects of the business set it up for success?
In essence, Airbnb created an infrastructure for people to rent free spaces in other people’s house or properties and tries to build trust through secure payments, viewings, and messaging.
S-1 Facts
From it’s S-1 filing, we see Airbnb is global and a lot of recommendations are organic.
86% of Hosts are located outside of the U.S, with listings in 100,000 cities
In 2019, there were 54 million active bookers which booked 327 million nights.
91% of users come through direct or unpaid channels
Total Addressable Market
Airbnb estimate
From the S-1, we see the Future Total Addressable Market to be at $3.4 Trillion. ($1.8 T for short term, 0.21T for long term and $1.4T for experiences)
From the S-1, Airbnb estimates current TAM to be $1.5 Trillion.
My Estimate
For the short term, I believe the current TAM (post covid) to be at least $1.5 Trillion dollars in 2020.
Currently in 2019, the total global travel and tourism market is approximately $2.9 Trillion. However, this was pre pandemic.
36% of households rent their homes from a total of 136.57 million housing units in the U.S. Suppose average house rental price is conservative $12,000/yr based on sources for a 1 bedroom rent. 36% of houses is 49.16 million houses. From this rough calculation, TAM of rental properties purely in the U.S per year is $589 Billion. I can’t say much about emerging markets, but for the U.S this is a rough estimate. However, this was pre pandemic.
From Airbnb’s stats, we see a rough (30%) decline in YOY bookings from June to September. Assuming a 30% decline worldwide in rental properties (due to moving in with family/remote work) and 60% decline worldwide in travel and expenditure based on TSA, that puts the current TAM at 0.7 * 589 Billion + 0.4 * 2.9 Trillion = $1.57 Trillion (Post Pandemic).
Pandemic Travel
From Airbnb’s S-1, we see that short term domestic travel is rather resilient, with a shift towards longer stays
Growth Strat
- Increase Hosting
- Increase experiences
- Expand Airbnb network
- Build reliable and trustworthy brand
- Safe From Covid compared to Hotels
- Remote work creates room for travel and thus Airbnb
- Reduce Operating Costs by reducing staff
Risks to Growth
- Slow in revenue growth
- Failure to retain guests
- Competition
My Take and Modeling
I believe Airbnb may slow in revenue growth until a vaccine hits, but once it comes around, will explode. As shown in Airbnb’s Q3 2020 statement, it pulled a profit of 418 Million. This is showing signs of growth and resiliency for domestic travel. Additionally, I believe Airbnb has a first mover advantage, creating trust and allowing it to retain guests and a higher rate than competitors due to the widespread nature of the verb “Airbnb”. Just like “Google” or “Uber”, Airbnb’s brand name will do wonders.
However, Airbnb pales to competition in China compared to Tujia and Xiaozhu which control a majority market share, leaving Airbnb with a small 7%. Thus, like Uber vs DIDI, I believe Airbnb may suffer abroad for local Chinese consumers. However, unlike most U.S applications, Airbnb still functions in China, unlike Google, FB, Snapchat, so U.S travelers will likely utilize Airbnb for international travel to China. However, due to the small small market share of Airbnb in China, we’ll have to factor that into our model when valuing Airbnb.
Based on Revenue, we see North America and Europe represent a large portion of Airbnb’s current revenue, so if we factor out Asia’s growth, it isn’t the largest of issues. HOWEVER, China’s Tourism is expected to increase exponentially from $0.87 Trillion to $2.5 Trillion in 2025. If Airbnb isn’t able to snag this portion, this is a lot of money left on the table.
Based on the balance sheet, they have a healthy asset to debt balance and are able to survive for at least 3 years based on 2020 burn rate for cost of revenue.
Although I’m optimistic of Airbnb generating a profit, we’ll need to see a clear operating leverage before we can value Airbnb using a DCF analysis. Since Airbnb isn’t a profitable company(although it has free cash flow, it is still at a net loss) and probably will not be consistently anytime soon, we’ll have to value it using a multiple. Since Airbnb is still a high growth company, I’ll provide a lower price to sales ratio of 10 and higher bound of 15.
P/S Ratio of 10
Assuming $4 B in revenue for 2020. $4B growth at 30% a year for 5 years is $14.85 Billion in revenue for 2025.
Current Day 2020: $4 B in revenue * 10 = $40B valuation
2025 30% CAGR Value: $14.85 Billion * 10 = 148.5 Billion. Discounted 5 years to present day is 148.5/(1.08⁵) = $101 Billion Valuation
P/S Ratio of 15
Assuming $4 B in revenue for 2020. $4B growth at 30% a year for 5 years is $14.85 Billion in revenue for 2025.
Current Day 2020: $4 B in revenue * 15 = $60B valuation
2025 30% CAGR : $14.85 Billion * 15 = 222.75 Billion. Discounted 5 years to present day is 222.75/(1.0⁸⁵) = $151.6 Billion Valuation
Of course, this valuation is flawed in that it predicts a linear trend of growth which is hard to achieve. Also, it utilizes a high growth multiple 5 years out, but the current 40–60 Billion Market cap is reasonable based on current revenue numbers.
Future Potential Growth:
If Airbnb is able to capture a 10% worldwide market (Currently 20% in the U.S) of all vacation and rental, that puts it at a $340 Billion Total Addressable Market. Even 15 years down the line at a P/S ratio of 2 or 4, that puts Airbnb at a future market cap of roughly $680 Billion to $1.3 Trillion dollar Market Cap.
In general, I think Airbnb is a steal if the market cap is at $35 Billion in current market conditions due to growth potential to be a trillion dollar business.