Fundamental analysis and valuation of Airbnb – Hyped from the start (value $79.87 vs price $171.95)

Airbnb went public on December 10th, 2020, which is not that long time ago. The IPO price was $68/share and on the first day, it opened at $146. This already points to the fear of missing out to invest in a company that disrupts an industry as the demand was incredibly high.

In this relatively short period, the stock price was very volatile moving from $130 to $220 a couple of times. For a company that is highly dependent on traveling, to go public in the middle of a pandemic is definitely brave. Currently, the market cap of the company is at around $106b, but let's round it down to $100b and we can refer back to it.

In this post, as in all of the previous ones, I'll do my best to provide an in-depth analysis of the company's fundamentals and at the end provide calculate its intrinsic value based on certain assumptions.

How does Airbnb make money?

We can divide the company into two operating segments:

Segment #1 – Marketplace that connects hosts and guests (both groups are customers of the company) – This is what the company is known for.

It gets 3% flat-free from the hosts and anywhere between 6% and 12% from the guests. The average take-rate has been around 13% of the gross booking value. The total addressable market is estimated at around $2 trillion:

-$1.8t is related to short-term stays.

-$210m related to long-term stays

There's no doubt that this is a disruptive business as it provided value to both the hosts and the guests. On one side, the hosts have an easy way to set up their business and make money from their property that is not being used.

On the other side, the users have more affordable alternatives to choose from.

Segment #2 – Marketplace that connects experience hosts and experience users.

There has been an attempt to sell this as an important part of their business and their take-rate, in this case, would be around 20%. I did some research to figure out what kind of experiences are available around my area and in some major cities and I was not very happy with the results. The most common ones were restaurants and photoshoots. It is clear that the first segment is disruptive, but I am fairly pessimistic about this one. There are plenty of alternatives to find what to do in a given place and when it comes to restaurants, I would say Google Maps is one of the go-to place as it has lots of reviews as well.

Although the total addressable market is $1.4t, I am not confident that Airbnb can capture a significant portion of it. Of course, I could be wrong.

How did they perform in the past?

Let's start with the gross bookings, which is the value of the services provided through their platform. In 2017, there were roughly $20b gross bookings and this amount more than doubled to $41.5b for the last 12 months (ending September 2021).

Their cut is around 13%, so the revenue that the company brings increased from $2.5b in 2017 to $5.3b for the last twelve months. That means the company's currently trading at over 20x Price/sales. Of course, it is too early to draw any conclusions, there are plenty of pieces of the puzzle to put together.

What about the margins?

The first costs that they need to cover are the direct costs, in this case, payment processing fees, costs related to 3rd party data centers that are used to host the platform, and community (customer) support. Historically, they've been around 40% of the revenue, which brings the gross margin to 60%. The economy of scale can definitely kick in here and I would not be surprised if the gross margin increase to 70% over time.

After that, there are 3 operating expenses that need to be covered:

– Product development (16% of revenue in 2017 to 59% LTM)

– Sales & Marketing (34% of revenue in 2017 to 28% LTM)

– General & Administrative (13% of revenue in 2017 to $25% LTM)

– Restructuring (0% of revenue in 2017 vs 2% LTM) – During 2020, Airbnb reduced the # of employees by 25%

If we deduct these percentages from the gross margin, we can see that in 2017, they had a negative operating margin of 3.2%, while for the LTM, it is negative over 50%. This is not surprising as the pandemic had a huge impact.

So, looking into the future, there are three main questions to answer:

Question #1 How quickly can the company grow the top line?

The analysts are forecasting growth between 12% and 32% for 2022. My assumption for the next twelve months is 30%. It might seem that I'm on the high end, however, as my base year, I have the last twelve months up to September 2021, so I'm forecasting 1 quarter of 2021 and 3 quarters of 2022.

After that, I'm forecasting 20% growth in the next 5 years and then slowly decline to the risk-free rate (1.93%). By then, the company's revenue will grow 315% to $22.1b. If we assume a take-rate of 14%, that brings the total gross bookings to almost $158b, which I think is a fair portion of the total addressable market. Let's not forget that the current market cap is $100b, that's 5x my forecasted revenue in 10 years.

Question #2 What is the operating margin that can be expected?

Airbnb operates as an intermediary and if we take a look at Booking, they have an operating margin of 35%. In my model, I am assuming that Airbnb will be improving the operating margin over time and will get to 30%.

Question #3 How much will they reinvest?

I've forecasted a relatively high sales/capital ratio of 4. The reason behind it is, Airbnb doesn't need to invest in heavy machinery in order to grow nor to provide the service to more users. A lot of the reinvestment is already done through their expenses (product development and sales & marketing)

DCF valuation

The assumptions related to the revenue, operating margin, and reinvestment are already provided above. The discount rate used is based on WACC and it amounts to 8.15%.

Based on these assumptions, I got a fair value of $79.9/share.
If compared with the current market price, it seems overvalued from the very beginning. Let's not forget, the IPO price was $68/share and it is hard to believe that it was significantly mispriced.

What if the assumptions are significantly incorrect?

Let's take a look at different scenarios in regards to the revenue in 10 years & operating margin:

Revenue / Op. margin 25% 30% 35%
250% ($18.6b) $57.2 $68.3 $79.3
315% ($22.1b) $66.8 $79.9 $92.9
450% ($29.3b) $85.5 $102.5 $119.6
550% ($34.6b) $99.3 $119.3 $139.4

There are plenty of pieces in this puzzle, so feel free to contribute in the comments below and let me know if I'm missing something or if you agree/disagree.


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