Airbnb: A Potential IPO Candidate

  • Airbnb IPO is likely to happen in next few months.
  • Airbnb raised USD 450 million in the latest round of funding, valuing the company at $10 billion.
  • While, Airbnb is experiencing a sharp growth in total listings, nights booked and guests served, it faces legal challenges in many cities.
Airbnb logo

The recent Alibaba IPO has attracted huge interest from investors and companies alike. There are many companies like Dropbox, and Box lined up for IPO. Airbnb, a San Francisco based rent sharing company, is reportedly one amongst them.

Airbnb raised its sixth round of funding this year in April. The company allows hosts to let out their apartments and other unconventional accommodation, helping them to monetize their hard assets while also allowing tourists access to relatively cheaper accommodation. Airbnb, like Uber, doesn’t own any of the properties. It acts as a digital marketplace for accommodation.  Airbnb defines itself as “a social website that connects people who have space to spare with those who are looking for a place to stay”.

Revenue and growth

Airbnb charges 3% from hosts and 6%-12% from buyers, making 9%-12% on every transaction. There has been no official disclosure about revenues. However, the Wall Street Journal  estimates that Airbnb doubled its revenue in 2013 to $250 million.

Airbnb has been experiencing a ‘hockey stick’ growth in total listings, nights booked and guests served. In February 2011 Airbnb announced its one millionth booking since inception. It reached the 10 million mark in June 2012, registering a 100% growth in just five months. In December 2013 Airbnb announced that over 10 million guests had used Airbnb since its formation, of which 6 million used the platform in 2013 alone, double the previous four years total guests count.

On June 10, 2014, the CEO of Airbnb Brian Chesky announced that Airbnb had crossed the 15 million mark in total guests served. While it took Airbnb four years to get one million guests, it now serves one million guests every month. Airbnb has more than 550,000 listings in more than 190 countries.

listing growth of Airbnb
Source: TechCrunch

Funding Raised by Airbnb

In April this year Airbnb raised $450 million at a valuation of $10 billion, taking the total funds raised by Airbnb to $794.8 million from six rounds of funding. The chart below summarizes the details on funds raised over the last five years.

Fundraising of Airbnb

Airbnb Valuation

In 2012, Airbnb had raised $200 million at a valuation of $2.1 billion while the latest funding round valued the company at $10 billion. Airbnb saw its valuation grow approximately five times in less than 18 months, making Airbnb more valuable than established hotel chains like Hyatt and Wyndham Worldwide. Hyatt and Wyndham Worldwide had revenues of $4.345 billion and $5.15 billion respectively, in the trailing twelve months (ttm) while the estimated revenue of Airbnb in 2013 was $250 million. Assuming that Airbnb continues to grow its revenues at 100%, 2014 revenues will come in at $500 million with a price to sales ratio of 20.

Valuation of Hotels
Source: Wall Street Journal

Acquisitions by Airbnb

Airbnb has also acquired several of its competitors, including Hamburg based Accoleo and British rival CrashPadder. In November 2012 Airbnb acquired NabWise, a city guide which aggregates curated information for specified locations. A month later the company acquired Localmind, a question answer platform allowing users to post questions about any location, which are answered in real time. The recent acquisitions allow Airbnb to provide guests with additional useful information like restaurants and shops in a locality. This can be a potential source of revenue for Airbnb from advertising.

Competition to Airbnb

Airbnb faces competition from both traditional hotels and rent sharing sites like Roomoram, FlatClub and Wimdu.com. A study by Boston University found that a 1% increase in listings on Airbnb impacts .05% of quarterly revenues of traditional hotels. Taken alone this doesn't have any serious impact on financials of traditional hotels. However, the pace of Airbnb’s growth compounds the problem of traditional hotels. Also Airbnb has disproportionate impact on small hotels, due to similarity in their offerings. The hotel industry has put up a stiff resistance, campaigning in many places for listings on Airbnb to be declared illegal.

Airbnb is facing serious legal challenges of late. New York Attorney General Eric Schneiderman has started a probe into illegal hotel operations in NewYork City. The probe is based on local laws which prohibit homeowners having more than one property to rent out living space for less than 30 days unless they are staying on the same property.  Recently, in an event hosted by Crain’s, Schneiderman estimated that more than 50% of Airbnb’s listings in New York could be illegal.  The city of Barcelona fined Airbnb approximately $34,000 for breaking local laws on property renting. However in Portugal the legislature has passed law meant to help rent sharing companies like Airbnb, and of course to collect taxes.

There have been stories of apartments being ripped apart, doors being cut open with axes, listings being used for illegal purposes, raising safety concerns. Airbnb has improved its safety checks with its ‘Verified ID’ initiative.   Considering the fact that Airbnb’s revenue model faces legal challenges in cities like New York and Barcelona, the legal and regulatory risk is very high. With estimated revenue $500 million in 2014 (assuming 100% growth in revenues) $10 billion valuation at a price to revenues ratio of 20 appears expensive.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and PCLN stock

stocksman
bearish
Airbnb will have to shut down once all the legal and security issues are exposed. Just google for airbnb problems and you will know it all.
1 10 reply
abhi
bullish
Airbnb's legal troubles have been extensively covered by us in this article http://amigobulls.com/articles/airbnb-ip... However it is unlikely that legal challenges will force Airbnb to shut down.
7 1
Do share this awesome post