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Valuation

Airbnb Valuation – Growth is expensive in this market

Quick Summary:

  • AirBnb has more than 4 million hosts offering private rooms in their own homes to luxury experiences, from one night to several weeks or months. AirBnb has a presence in more than 220 countries and regions and has served over 825 million guest arrivals and has cumulatively earned $110bn in revenue.
  • AirBnb intends to disrupt the one-size-fits-all approach that was the standard for travel and leisure. The company believes that hosting is at the center of the AirBnb experience and this focus enables guests to access unique places and experiences that were previously inaccessible.
  • In 2019, the company generated Gross Booking Value (“GBV”) of $38bn, 29% growth y/y, and has generated $507mm in free cash flow since inception, signifying its clear potential to cash generation in the near future. GBV were down 39% y/y in the first 9 months of 2020 due to the Covid pandemic per the company S-1.
  • The company business model has shown resilience in the face of the pandemic with business beginning to pick up within two months of travel shutting down around the world per the company S-1. Domestic travel has been especially strong and has rebounded at a rapid pace with people choosing to travel closer to home.
  • The stock is priced incredibly high, and while we love the company and what it’s doing, the valuation is simply not enticing as an investor. The stock is trading near our absolute Bull Case scenario which we outline in our valuation.

Business Model:

The concept of AirBnb was born in 2007 when the two founders, Brian and Joe, noticed an international conference was coming to town and every hotel was sold out. The founders quickly created a website, AirBedandBreakfast.com, and were able to rent their apartment to the conference attendees.

Airbnb is the latest company to make use of the sharing economy, or the peer-to-peer economy. The business model is built on buyers and sellers sharing resources through collaborative consumption of goods, services, and of ownership. The Airbnb platform provides tools that make it easy to connect hosts who own houses and apartments with guests who seek to rent them for short-term stays. Airbnb’s revenues comes from fees collected on guest rental stays with fees being charged on both the host and the guest side per the company S-1. In 2016, Airbnb added another business line with experiences, but the business has been slow to gain any meaningful traction with only $10 million in sales in 2017.

This is a handy graphic summarizing the business model courtesy of Aswath Damodaran.

Source: Aswath Damodaran

And Airbnb provides an illustrative example of the business model at work with the fees they would collect in their S-1.

Source: Company S-1

Hosts:

As of September 30, 2020, AirBnb had 4 million hosts around the world, with 86% of hosts outside the United States, and 7.4 million available listings of homes and experiences, 5.6 million of which were active listings per the company S-1. Per the company, “We consider a listing of a home or an experience to be an active listing if it is viewable on Airbnb and has been previously booked at least once on Airbnb.”

Hosts generally fall into two categories – individual and professional. Individual hosts activate their listings directly on the Airbnb platform through the website or app. Professional hosts in contrast run their own property management or hospitality business and use programs to list their properties on the Airbnb platform. As of December 31, 2019, 90% of hosts were individual hosts and 72% of nights booked were with individual hosts per the company S-1. Individual hosts are the core component and key supply for Airbnb.

Airbnb provides a number of services to enable their 4 million hosts. Anyone can become a successful host on the Airbnb platform and Airbnb is able to provide a number of services per the S-1 including:

Source: Company S-1
  • Global demand: Anyone with an internet connection can book an Airbnb experience from anywhere in the world
  • Merchandising: Airbnb helps hosts create and activate their listings on the platform. By taking hosts step-by-step through the process, Airbnb is able to make posting effective and easy.
  • Pricing: Hosts can set their own prices, but Airbnb does provide smart pricing tools that suggest prices based on changes in demand for other similar listings based on factors like the season and expected demand.
  • Scheduling: Hosts can easily manage their calendars and accept and manage their listings and reservations on the platform through the website or app.
  • Payments: Airbnb facilitates all payments by collecting payments from guests and processing the payments to hosts. In 2019, Airbnb processed approximately $70bn of guest and host transactions.

Airbnb also provides services like community support, host protections, posted reviews and feedback, and a superhost program.

Key metrics and Covid resilience:

According to the company S-1 filing, the majority of guests who have ever made a booking on Airbnb were between the ages of 18-34. In 2019, 54 million active bookers worldwide booked 327 million nights and experiences on the platform.

Source: Company S-1

Nights and experiences booked are a key measure of the true scale of the Airbnb platform. Per the company S-1, “Nights and Experiences Booked on our platform in a period represents the sum of the total number of nights booked for stays and the total number of seats booked for experiences, net of cancellations and alterations that occurred in that period.”

In 2019, Airbnb had 326.9 mm Nights and Experiences booked, a 31% increase from the 250.3 mm in 2018, which grew 35% from 2017. Typically, the first, second, and third quarters of the year each have higher Nights and Experiences Booked compared to the fourth quarter, as guests travel during the peak travel season, which is in the third quarter for North America and EMEA according to the company S-1.

Covid has obviously had an effect on the hotel industry, and Airbnb is not immune with 2020 being a down year and Q2 being particularly severe across several key metrics. However, the business model has shown resilience and management attributes this to the renewed ability and willingness of guests to travel. I know personally I’m looking at Airbnb’s in warmer climates as I’m itching to get out of the cold and soon to be lock downed northeast US.

Source: Company S-1

For the nine months ended Sept 30, 2020, the company had 146.9 mm Nights and Experiences Booked, a decrease of 41% compared to the prior year period according to the company S-1. However, the decline was most severe in the second quarter and business has rebounded with Q3 being down only 28% y/y. The company credits this improvements primarily to stronger results in North America and Europe and in particular to resilience in domestic and short-distance travel.

Gross Bookings value ((GBV)) is defined in the S-1 as “the dollar value of bookings on our platform in a period and is inclusive of host earnings, service fees, cleaning fees, and taxes, net of cancellations and alterations that occurred during that period.” Growth in GBV reflects the company’s ability to attract and retain hosts and guests and reflects growth in Nights and Experiences booked. In 2019, GBV grew 29% y/y and 2018 grew 40% y/y.

Source: Company S-1

In 2020, there is a similar drop in GBV due to the Covid pandemic. For the first nine months ended Sept 30, 2020 GBV was $18bn, a 39% decrease from the prior year period according to the S-1. The decline was once again most severe in Q2 and Q3 rebounded, being down only 17% y/y.

In 2019, GBV and revenue by region were about equal between EMEA and for North America. However, as a result of the pandemic, GBV and revenue have reflected a shift toward NA where the recovery has been strongest. “For the first nine months of 2020, GBV was $9.7 billion, or 54% of the total, in North America compared to $5.6 billion, or 31%, in EMEA, $1.6 billion, or 9%, in Asia Pacific, and $1.1 billion, or 6%, in Latin America” – company S-1

Source: Company S-1

Historically, Airbnb has had a strong weight toward cross-border travel, with 49% of nights in 2019 compared to management’s estimate of 20% of total overnight paid trips for the travel industry as a whole according the company S-1. However, the pandemic has marked a shift to domestic travel in Airbnb’s traditional travel corridor mix. In September 2020, 77% of experiences booked were domestic compared to 52% in January. In fact, domestic bookings have grown at a rapid clip with 54% growth in June 2020 and 35% growth in September 2020.

Source: Company S-1

This shift has been especially pronounced in short-distance (within 50 miles of guest origin) travel and travel outside of Airbnb’s top 20 cities. From May through September 2020, short-distanced GBV actually grew year over year and travel between 50 miles and 500 miles returned to growth in June of this year. Airbnb’s top 20 cities typically make up high single to low double digits of total experiences booked, but travel outside of these cities has been resilient throughout Covid being down only 19% y/y in September 2020 according to the company S-1.

Source: Company S-1

Clearly, Airbnb is well-positioned because of its wide offering to cater shifting consumer travel habits and this has enabled the company to be more resilient in a downturn than travel competitors, in some metrics even being able to achieve grow. If we look at hotel and travel booking competitors, we see that Airbnb has weathered the pandemic much better than most peers when looking at 9 months ended Sept 30 2020 revenue. Airbnb revenue is down -31.9% so far in 2020 compared to the median hotel revenue being down -48.2% and travel bookings being down -53.3%. Airbnb has also bounced back faster than every competitor minus CHH in Q3 with revenues down -18.4% compared to the 50.9% median for hotels and -52.7% for travel bookings companies.

Source: Company 10-Qs and Airbnb S-1

TAM and growth strategy:

Management highlights massive market opportunities in its S-1 filing, “We have a substantial market opportunity in the growing travel market and experience economy. We estimate our serviceable addressable market (“SAM”) today to be $1.5 trillion, including $1.2 trillion for short-term stays and $239 billion for experiences. We estimate our total addressable market (“TAM”) to be $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.

In general, these assumptions are based on the belief that new travel behaviors will expand the market opportunity over time as well as the need to justify a large market cap. Management uses their own internal estimates to come up with the $1.2trn for short-term stays and Euromonitor estimates of tourist spend on attractions and experiences to estimate the $239mm for Experiences.   To get the TAM short-term stays estimate, management assumes an increase in trips per capita based on The World Travel and Tourism Council estimated 3.5% CAGR. For long-term stays, the company uses 10% of the $1.6trn global residential rental market. And for experiences, they add $1.1trn of non-tourist recreational spend, again as estimated by Euromonitor.

Source: Company S-1

In its early stages when it was a startup pitching to VCs back in 2009.  Airbnb estimated the TAM to be 2 billion+ trips a year and its SAM to be 560mn trips a year.

Source: Airbnb 2009 Pitch to VCs

Another way to look at Airbnb’s TAM is to look at the hotel business globally. According to NYU professor Aswath Damodaran’s Airbnb analysis. The industry generated over $600bn in revenues in 2019, but its growth has stalled and the industry remains concentrated among the top 5 hotel chains. The US is the leading geographical market, but Asia has been gaining ground.

Source: Aswath Damodaran

The truth is Airbnb’s TAM, and we agree with Damodaran’s analysis here, is probably somewhere in between these two numbers. Ignoring Airbnb’s experiences portion of the TAM calculation because that business line is nascent at best, we get an upper estimate of $2trn and a lower estimate of $600bn for Airbnb’s TAM.

Peers:

We identify comparable peers to get a sense of Airbnb’s valuation and how in-line it is with the industry, while also keeping in mind Airbnb is growing faster and attempting to disrupt the hotel and travel booking industries. Current Hotel comparable peers are trading at a median of 4.1x 2021 sales and 2.0x 2022 sales according to Bloomberg Analyst Consensus estimates, while Airbnb’s IPO price implies – 18.45x and 15.33x Sales based on our own estimates of 2021 and 2022 sales, respecivetly. The EBITDA comparison is tough to make with Airbnb because we estimate they will be EBITDA negative in 2021, and the EBITDA in 2022 and 2023 will be $130mm and $370mm leading to high multipliers. We can see that the median hotel company is trading at 22.3x 2021 estimated EBITDA and 13.9x 2022 estimated EBITDA according to Bloomberg consensus.

However, perhaps a more apt comparison is looking at online travel booking peers such as Expedia (EXPE) and Booking.com (BKNG). The EV / Sales and EV / EBITDA are slightly higher for this comparable group vs the pure hotels peers, primarily due to Booking.com. The median among this group trade at 4.5x 2021 sales and 3.4x 2022 sales according to Bloomberg consensus.

Source: Bloomberg Consensus Estimates

Is the Airbnb premium justified? One can argue a more resilient business model, the promise of fast growth, and large market opportunities created by disruption and innovation may make the premium seem reasonable when we try to compare the company to peer groups. There truly is only one Airbnb and these peer groups aren’t entirely indicative of the future company profile of Airbnb.

Valuation:

Setting the stage for the valuation, we take a look at Airbnb’s Venture Capital pricing in the rounds leading up to the IPO. We can see that the company has raised $5.8bn in VC funding and it’s latest Series F round in 2016. In April 2020 the company was valued at $18bn.

The IPO has clearly priced in a lot of generous assumptions as well as simple speculation with a hot market. Initially, Airbnb planned to sell shares for a range of $44-$50 per share in a filing made December 1. Then on December 7, they announced plans to sell shares for a range of $56 – $60. The company then priced their IPO at $68 a share on Wednesday, December 9. Shares opened trading at around $150 and ended the day at $144.71.

Here’s some institutional investor background on how this IPO is being looked at, Sanford Bernstein ran a Procensus investor survey to compile major talking points. ~100 investors participated, representing >$10T in AUM. Consensus suggests Airbnb delivers a +16% revenue CAGR in the next decade with steady state margins at ~25%. Bulls will argue the IPO price range (now indicating near ~$60) is reasonable”

+16% Revenue CAGR seems somewhat reasonable to us, so the biggest assumption in question really is the ~25% margins in our view. With that being said, and trying to remain reasonable from an assumptions stand point, here are our main assumptions:

  • In 2020 Airbnb Bookings will be down ~34%, but Airbnb will have a bounce back year in 2021, with high Bookings growth in 2022-2025, and Bookings growth slowing in 2026-2030. Our Base case in Bookings growth is shown below.
Source: Our estimates
  • Revenues as a % of Bookings will continue to increase in the future as the new host model for professional hosts and Experiences business gain steam and a larger % of Airbnb Bookings. Revenue as a % of Bookings was 12.6% in 2019 and we estimate it will be around 14.6% in 2025 for example.
  • Operating costs will continue to decrease as a % of revenue as Airbnb continues to grow in scale. This continuing growth in scale culminates in a high single digit operating margin by 2025 and a 27.1% operating margin by 2030. This is lower than Booking’s (BKNG) operating margin of 35.5% in 2019, but higher than hotel operators such as Marriott’s (VAC) or 17.4% Hyatt (H), 9.1% respectively in 2019.
Source: Company S-1 and our estimates

Taking a look into future revenue growth scenarios with revenues increasing as a % of Bookings and Bookings growth, we get a range of potential 2025 revenues. We think anywhere from $11bn to $13.7bn in revenue is the likeliest scenario for Airbnb in 2025.

Source: Our estimates

Using a discounted cash flow model with a Weighted Average Cost of Capital of 8% and a perpetual growth rate of 3%, we get a Base Case price of $77.40.

What’s interesting in our valuation is that the vast majority of value in Airbnb is from the Net Present Value of the terminal value. Because Terminal Value is based on the company’s value in perpetuity beyond our 10-year cash flow forecast, assumptions have an incredibly large effect on the current valuation. Any sort of valuation can be justified based on any set of input growth assumptions. We try to stay reasonable while acknowledging the upside that Airbnb does really exhibit. We show a range of cases below:

Source: Our estimates

Upside and Downside Risks:

Upside risks include higher than anticipated Bookings leading to higher revenue estimates. It is certainly possible we (and the market) are underestimated top line growth potential as Airbnb continues to expand domestically and abroad.

Another upside risk is profitability. Airbnb in theory should be able to scale effectively given its business model and that the company itself does not own or hold the properties. They provide a platform and services, not the physical product, so as they become larger more efficiencies should be achieved and redundancies should be eliminated.

The main downside risks are two: valuation and regulatory issues. We love this company, but the valuation is simply incredibly rich and already at our Bull Case. A good company does not equal a good investment if the price is not good. However, we are not calling for shorting this because the market is red hot and can continue to be for months or even years. We are simply stating that odds are not in your favor here at this price level.

Another meaningful risk is regulatory scrutiny. Airbnb lists what regulations apply may to a host’s city and there has been pushback in certain cities and communities against short-term rentals through platforms like Airbnb. Here is a list of certain short-term rental laws across the US.

Investor Takeaway:

If you were in on the offering, congratulations. If you are a trader then do as you see fit as this name will be volatile and has a lot of interest. However, if you are an investor, this is clearly overvalued even though it’s a great company. Is it possible that Airbnb grows into this valuation years from now? Certainly, but everything must go absolutely right to justify this valuation. Is it likely to grow into today’s valuation? Not very.

We attach our model for free download here:

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Posts are not investment advice or endorsements.

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