[disclaimer: Although 10Ks and S1s are snapshots of the company in question, We are interested in the nature of the business and economics of the industry / sector. These articles will not go into financial analysis of companies but highlight interesting business models, macro and microeconomic insights of the industry and companies, interesting accounting issues, risks and any interesting tidbits we can discern. These are not recommendations to buy or sell any securities of the company in question.]
Airbnb is the latest in the line of decacorns to be going public. This is one of those companies that has turned its name into a verb. Many of these new icons defy traditional valuation metrics and render projections meaningless. The dean of valuation Aswath Damodaran has pegged the valuation at $36B here based on some amazing work here.
While $36B is nothing to sneeze at, we believe that Airbnb is one of those once in a lifetime companies and perhaps $36B is just the tip of the iceberg. Think Amazon, Tesla and others that have come before. Airbnb is neither unique in the sharing economy, nor in creating a two sided marketplace. Afterall many like Ebay, Etsy, Uber and Lyft have blazed these trails before. Also bed and breakfasts have been a staple for travelers in the UK and EU for decades. What then has made this the most anticipated IPO of 2020? We believe it is a confluence of several factors including a phenomenal founding and management team, coming of age of the sharing economy, great product and design, winning user trust and design. Combine all these with giving millennials great travel and unique experiences and you have a multi billion dollar winner.
We believe this story is in its first innings, much of Airbnb’s future is unwritten and will evolve from being a home sharing company to one that becomes the go to destination of any kind of experience away from home. AirBnB already was investing in experiences which have a much higher margin than home stays. We can see Airbnb eventually competing with online travel agencies which traditionally have much better margin and financials — see here. So if we look at Airbnb from the lens of the traditional hotel business, here are its peers. Data from Koyfin
And here is Airbnb’s revenues for the last few years from their S-1
Clearly with Airbnb’s $30B+ valuation with 2019 revenues of $4.8B it appears rich considering that Marriott is valued at $40B with revenues of $10.8B. However when you consider that Booking.com is valued at $87B and Expedia is at $18B, the Airbnb valuation looks outright cheap. Here is why we believe $30B just scratches the surface for Airbnb
- The two sided market that Airbnb has created is immense — the gross booking dollars created on the platform in 2019 $38B is already bigger than the revenues of the top 8 hotels chains combined.
- While hotel chains have embraced the asset lite models with franchising. [ Most hotel chains don’t own the real estate anymore. They provide the marketing and management processes while the underlying properties are owned by other entities.] Airbnb is not an asset lite model, it is an “asset zero” model, with no capex involved in the core business.
- The Airbnb platform can eventually be much bigger than the travel vertical that we think of it today — the adjacencies they can get into like travel ticketing, travel experiences, cruises, entertainment, dining, events, babysitting, childcare (during travel) are numerous. There is no reason why they could not compete or partner with a dozen companies like Booking, OpenTable, Eventbrite, Uber, Care.com etc.
- There is no reason why when outside the home — Airbnb becomes your super app for ordering food, tickets, events, cabs, day trips etc.
- This is one of those platforms that is creating an entirely new economy around its business like specialized property management (for Airbnb like stays), cleaning services, dark kitchens serving Airbnb’s etc.
The regulatory issues Airbnb faces are real, especially in cities where the rental market is impacted. However we believe these will be hiccups rather than roadblocks. We believe this is a once in a lifetime opportunity like Amazon in 1997 to own a company that will surprise us in ways we have not thought about today. Investors should keep in mind while today Amazon has returned over 2000 times its IPO price, there were two years when Amazon lost over 90% of its value. Regardless of the IPO pop or bust and other short term gyrations, Airbnb should return its investors handsomely in the next 10 to 20 years.
