- December 14, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
My Analysis Of Airbnb’s IPO
Airbnb went public last week, and its debut proved to be a booming success after its share price started at $146, skyrocketing from the IPO price of $68, giving the firm a $100-billion valuation. This strong demand for Airbnb shares clearly shows that investors have tremendous confidence in its business model, which can endure one of the harshest operating environments for hospitality and travel companies. Presently, Airbnb is more valuable than the seven largest hotel chains in the United States combined. In this post, i present my analysis of Airbnb’s IPO, its valuation, and whether it can be the next FAANG stock.
Airbnb’s IPO – Flexible Business Model
After COVID19 impacted Airbnb’s travel industry and earnings, it had swiftly shifted its strategy to concentrate on local stays when travelers began evading taking flights during the first wave of the pandemic.
Airbnb’s comparative resilience in a historically bad year for the travel industry emerged from a flexible business model that enabled the business to meet customers in the places they wanted to go. That indicated people from cities were retreating to less crowded locations or families and groups looking to vacation close to home.
Another distinctive factor for a disruptor like Airbnb is that it’s popular among millennials, who are the largest group of consumers now, and generation Z (anyone born between 1995 and 2015), which is the future.
Airbnb is a brand the new generation of millennial investors grew up using. Such name recall can further cement the company as the place to go for short-term rentals. It further implies that Airbnb has to spend a lot less money on advertising, helping profitability.
Airbnb’s Network Effects Provide Significant Scale Advantages
Airbnb’s existing property owners and room listings generate a real network effect that could significantly scale benefits. In principle, the more listings available on the platform, the more customers will look to Airbnb first, which will turn more property owners to the platform to give the largest audience. As Airbnb states, “guests draw hosts, and hosts draw guests.”
Airbnb already has the most comprehensive platform for room listings of its several competitors, including significant size advantages over more established hotel room providers. Scale advantages were usually a bull argument for financing in tech startups Uber and Lyft. However, those were exaggerated, as the firms offer a mostly commoditized service, taxi rides, and delivery that isn’t novel to either business. On the other hand, Airbnb benefits from scale, as with each new listing, it becomes more convenient, apparently cheaper, to entice users, and vice versa.
Further serving Airbnb during the COVID-19 pandemic is the rise in demand for short-term rentals over hotels when deciding about to stay. Should the COVID-19 pandemic effect a perpetual shift in consumer behavior (some industry forecasts don’t anticipate hotel demand to recover until 2023 fully), Airbnb could stand to realize the benefits given its larger scale compared to peers.
Regulations Pose a Huge Risk
Despite the network effects or scale advantages, Airbnb’s business is hugely susceptible to local, state, and country regulations worldwide. Some locations have considered the business of providing homes/apartments for short-term rental as criminal and initiated outright bans on the practice.
The risk of future regulations in one of the 100,000 centers Airbnb operates could substantially impact its operations. For instance, Airbnb notes in its S-1 that imminent regulations in New York could result in revenue from listings in the state substantially decline due to the departure of hosts who do not want to share their data with the city. While no one can be sure of how future regulations will go, any new regulations, particularly those that make it difficult for hosts to extend their homes for rent, adds a level of risk to Airbnb’s valuation.
What is the right valuation for Airbnb?
Airbnb determines its total addressable market (TAM), which entails spending on short-term stays, long-term stays, and experiences are $3.4 trillion. To value Airbnb, let us model scenarios to ascertain Airbnb’s worth based on future cash flows growth.
Scenario 1: I assume Airbnb can maintain revenue growth similar to before the COVID-19 pandemic while successfully reducing its marketing expenses and realizing margins.
Expressly, I assume Airbnb can:
- Steadily grow its NOPAT margin to 10% over four years, compared to -8% in 2019 and -16% over the trailing twelve months.
- Increase revenue by 30% compounded annually for the next five years.
In this scenario, I get a valuation of $35 billion for Airbnb.
Scenario 2: I assume Airbnb focuses on cost efficiency – while losing some revenue growth in the process – to attain profitability.
Expressly, I assume Airbnb can:
- Progressively improve its NOPAT margin to 30% over the next five years.
- Grow revenue by 25% compounded annually for the following five years,
In this scenario, Airbnb is worth $65 billion. I have assumed that Airbnb’s working capital and fixed assets rise YoY at a rate equivalent to 5% of revenue. This invested capital growth matched the YoY change in invested capital as a percent of revenue in 2019. If Airbnb can increase revenue, NOPAT, and free cash flow (FCF) more efficiently, the valuation can still increase.
My Analysis Of Airbnb’s IPO
In my view, Airbnb looks significantly overvalued, and this crazy IPO buzz of recent weeks is getting me nervous. It’s not only Airbnb. Tesla’s value (at ~$600 billion) has skyrocketed this year even though it plans on manufacturing less than half a million cars next year.DoorDash IPO’d the day before Airbnb also had insane pricing.
Would Airbnb be the next FAANG stock?
FAANG stocks have displayed absolute resilience in the face of adversity and helped establish interest in the sector. Since its September IPO, snowflake has experienced a warm reception raising $3.4 billion at a valuation of $33 billion at IPO, making it the most extensive software IPO in history. And since then has advanced on to rally to a market valuation of more than $120 billion. While Airbnb may fit the travel sector, it’s undoubtedly a tech stock because it conducts all its operations online. It may appear like a massive leap of faith for Airbnb to be the next FAANG stock, but if it continues to expand and grow, then anything’s possible.