Posted on June 19, 2015 by

AirbnBubble?

airbnb

Maybe. Maybe Not.

The Wall Street Journal reported that Airbnb is closing an uber financing round of $1BN at a $24B valuation.

A valuation that factors in a projected loss of $150M and estimates revenue of $900M in 2015. Tech bubble? Maybe.

WSJ compares AirBnB to Marriott, specifically citing that Airbnb’s valuation is comparable to that of the hotel giant. Marriott is currently trading at an enterprise value of $25BN (Marriott shares x share price + net debt) after generating $13BN of revenue and earning $1.5BN of EBITDA in 2014.

Marriott’s revenue is 1,344% higher than Airbnb. Tech bubble? Maybe.

Investors in public company stocks bet on the future growth of the underlying company. Their investment purchases a portion of the company’s future earnings. As such, expected growth opportunity is a large contributor to price appreciation. Marriott operates over 714K hotel rooms that have a74% occupancy rate (193M total nightly bookings). Airbnb had 37M nightly reservations in 2014, less than 20% of Marriott.

However, for Marriott to grow 10%, they would need to increase prices (which could decrease occupancy), increase occupancy (by decreasing prices), or add more rooms (via acquisition or capital/time intensive build-out). Expensive.

Meanwhile, Airbnb grew 300% in 2014, driven by their organic brand awareness, two-sided marketplace supplying new customers, and cheap customer acquisition. If it grows at just under half of its current rate, it will surpass Marriott nightly bookings in 2 years with only a fraction of the overhead. Moreover, Airbnb is creating a new market. Not only is it shifting market share away from the incumbents, but it is also creating inventory in places where it previously didn’t exist (see: Bedford-Stuyvesant and Harlem), something VRBO/Homeaway missed out on by targeting extended vacations. By expanding the market of users, Airbnb owns a larger share of the growth opportunity in its industry.

Back to the financials: Marriott grew EBITDA by 15% in 2014. Extending this growth through 2020, Marriott’s will expect to earn $3.4BN of EBITDA. To benchmark “price” against Airbnb (and other hospitality / lodging companies), we can take their enterprise valuation of $25BN over their 2020 EBITDA of $3.4BN, which results in a 7.4x enterprise value / EBITDA. According to the WSJ, Airbnb is projecting $3.0BN of EBITDA in 2020. Their current valuation of $25BN represents an 8.0x enterprise value / 2020 EBITDA multiple, which is line with Marriott’s multiple.

If Airbnb and Marriott are priced the same, could we consider Airbnb’s valuation relatively cheap given the growth opportunity?

The Airbnb and shared economy investors certainly think so. And Marriott investors? Here is what they are holding on to:

(1) Marriott (and other hospitality brands) have incredible lobbying power that will continue to invest in the enforcement of regulation against Airbnb.

(2) Apartment buildings will enforce sub-leasing restrictions.

(3) Airbnb currently has no physical asset value; Marriott and others have significant real estate / asset value (much of which may be depreciated off the books for tax purposes but still carry significant value).

(4) Marriott can fire sale real estate for cash. Airbnb can’t fire sale users for cash

(5) Airbnb growth will slow and Marriott is a better long-term (and safe) bet because:

  • That Airbnb’s revenue and profitability projections are wildly wrong.
  • That Airbnb will not turn the corner to profitability.
  • That Airbnb will face increased competition from Homeaway/VRBO or newcomer given the software barrier to entry.

*earnings before interest, tax, depreciation and amortization