Driving the Sharing Economy Phenomenon
Airbnb has transformed the retail hospitality industry, is shaking up business travel hospitality and defines the emerging gig economy. Some call this emerging space the sharing economy, others collaborative consumption. At its core Airbnb empowers hosts and guests to have a personal experience, earn income and save money. It is the most advanced and disruptive sharing economy company and forms the core of a macro shift. Founded in August 2008, Airbnb is a community marketplace for people to list, discover, and book unique accommodations around the world – all online. Given its compelling addressable market, large rental inventory and a premier brand name, the company is well positioned to dominate its niche market segment and eventually move up the value chain into the high-end hotel space. We are initiating coverage with a positive thesis as the company should continue to benefit from macro, lifestyle, and demographic tailwinds on the back of a gradually improving regulatory environment.
Our views on Airbnb are derived from our rigorous research process, involving proprietary channel checks with users, competitors, and industry experts, and synthesizing publicly available information from the company and other reliable sources.
Exhibit 1: Airbnb Listings (M): 2015
Source: Manhattan Venture Research
Exhibit 2: Airbnb Revenue Trend ($B)
Source: Manhattan Venture Research
Collaborative consumption has disrupted many verticals. On the front lines of this disruption are many consumer-facing verticals including travel, hospitality, transportation, delivery, parking, among others. Advances in information technology, sophisticated social media and growth of the “app economy” combined with advances in payments technology created the conditions to upend traditional methods of consumption. There is a profound and established socio-economic undercurrent to the disruptive period we are living through. Since 2008 many have struggled with a truly deep and absolutely global economic downturn. Real estate, in the US and beyond, was at the core of this episode. Many were real estate rich and cash poor. Others were just cash poor. Whether its transportation, where Uber and Lyft have upended the traditional status quo, or in the short term rental market, where the marketplace companies like Airbnb, HomeAway, and VRBO have significantly changed the way people vacation, the fault lines are prominent. People carry an advanced, location-aware computing system to all places and at all times. They largely trust the emerging firms building businesses that serve them and offer much needed access to incomes.
The period from 2008 to 2012 was pivotal in a number of ways. During this period, the real need for ‘extra cash” combined with a real need for “deals”. Millennials, a demographic bulge reshaping the economy and consumer tastes, initially drove Airbnb and the sharing or gig economy. The millennials number 83 million in the US and are more than 25% of the nation’s population, larger as a group than baby boomers according to the US census report. Globally there are 1.75 billion millennials according to Millennial Week, further underscoring the significance of this group. Emerging alongside Airbnb, native trusters and users of the system are the largest most distinct demographic group in modern history. We see this mobile and digital super generation well on their way to shaping their consumption habits – and all of our habits as well. Thus, the macro and demographic conditions are very conducive to gig economics and to Airbnb in particular.
Airbnb is a leading peer-to-peer marketplace where prospective hosts list their spare rooms or apartments on the Airbnb platform, establish their own nightly, weekly or monthly price, and offer accommodation to guests. It has been and remains a global ambassador for the industry and the proof point in successfully commercializing collaborative consumption. From Aruba to Zanzibar millions trust Airbnb to send strangers into their homes and to send them into strangers’ homes on distant shores. Rather than staying in an expensive hotel with little space and no kitchen, travelers can rent a full home with more amenities for less money. On the flipside, those renting out their homes now have a highly profitable means of making supplemental income.
Airbnb has hit its stride. The company exited 2015 with roughly 2 million listings worldwide, 80 million nights booked, and $908 million (+87% Y/Y) in revenues. In 2016, we expect 3.2 million active listings, 124 million nights booked and $1.6 billion in revenues. Looking ahead, we have modeled nights booked to grow to 467 million by 2020 (+42% 5-year CAGR) and 907 million by 2015 (+27% 10-year CAGR). This translates to revenues of $6.9 billion in 2020 (+50% 5-year CAGR) and $15.7 billion by 2025 (+33% 10-year CAGR). On profitability, we expect Airbnb to turn EBITDA positive in 2016 following a loss of $70 million in 2015. We expect margins to expand at a brisk pace, resulting in EBITDA of $2.6 billion in 2020, reflecting the high operating efficiency in the business model.
We are initiating coverage with a positive investment thesis. We believe Airbnb occupies a pole position in the short-term rental market on the back of its broad inventory of listings, strong name recognition, and a long runway ahead. The company’s improving conversion rates of listings flow, combined with targeted marketing efforts to acquire new supply, are raising the moat in a market that is expected to get more competitive. While regulatory hurdles are significant, recent positive developments suggest that the problem is not insurmountable and cities are coming around to acknowledge the positive contribution to the local economy in number of ways. The key investment positives and risks are summarized below and addressed in various parts of the report.
Our Airbnb valuation is a blend of two values: implied values based on the mean EV/Revenue and EV/EBITDA multiples of the closest publically traded peers. The comparable basket of publicly traded stocks includes companies in four market segments: a) Lodging b) Vacation Rental c) Apartment Rental and d) Companies with Marketplace Business Models. Our valuation analysis looks out four years to capture and give credit to Airbnb’s superior growth profile and operating efficiency.
Accordingly, we peg Airbnb’s enterprise value at $30.5 billion or $103 per share, on 298 million fully diluted shares outstanding (Figure 1). This is a blend of $31.6 billion based on EV/Rev multiple and $29.4 billion based on EV/EBITDA, and translates to 12.1x our 2017 revenue estimate of $2.5 billion. For reference, Expedia is trading at $18.3 billion, or 1.8x consensus 2017 revenue estimate, Marriott at $21.2 billion, or 1.3x consensus 2017 revenue estimate. For a broader perspective, Ebay, a company with a pure marketplace model such as Airbnb’s – albeit in a different industry – is currently trading at $29.3 billion, or 3.2x consensus 2017 revenue estimate. Finally, Airbnb’s last private market valuation – Series E in December 2015 – was $25.5 billion, or 10.2x our 2017 revenue estimate.
We believe Airbnb’s premium valuation is justifiable given its robust growth rate (+62% Y/Y in 2017 versus combined average of 11.7% for Ebay/Expedia/Marriott, and 11.1% for the entire peer group) and its potential to disrupt the entire lodging and rental market in the long term. Additionally, we believe there is potential for valuation upside if the company can maintain its robust pace of new active listings growth (2.0x Y/Y in Q3:15) on the back of targeted customer acquisition marketing efforts, improved conversion rates, and positive regulatory developments.
Figure 1: Airbnb Blended Valuation ($M)
Source: Manhattan Venture Research
Airbnb is a community-based, two-sided online platform that facilitates the process of booking private living spaces for travelers. On the one side it enables owners to list their space and earn rental money. On the other side it provides travelers easy access to renting private homes. With 2,000,000 listings in 34,000 cities and over 190 countries, its wide coverage enables travelers to rent private homes all over the world.
Figure 2: Airbnb Comparative Listings
Source: Company websites
Airbnb derives revenue from both guests and hosts for its services. Guests pay a 6 − 12% service fee for each reservation they make, depending on the length of their stay, and hosts pay a 3% service fee to cover the cost of processing payments. Personal profiles as well as a rating and reviewing system provide information about the host and what is on offer. Vice versa, hosts can choose on their own to whom they rent out their space.
Figure 3: Airbnb Profile
Source: Airbnb, Manhattan Venture Research
Airbnb has listings across the world in most of the preferred destination sites. The availability of listings are skewed more toward the major European cities and understandably so given the high volume of tourist traffic. The leading five cities outside the United States include Paris with 46,289 listings, London with 30,389, Rome with 18,406, Barcelona with 18,033 and Rio de Janeiro with 17,896 listings. Other leading cities are noted below. The listings, it must be noted, do not include shared rooms in each city, which should increase the total listings in all the cities – albeit very modestly.
Figure 4: Largest Airbnb Cities outside the U.S. – By Total Listings
* Excludes shared rooms, which are still a very small percentage of the total available listings
Figure 5: A Unique Airbnb Listing
The Rise of Sharing Economy
Collaborative consumption, more broadly referred to as the sharing economy, has been on an exponential growth curve over the last couple of years. It has disrupted many verticals by transforming the traditional modes of consuming services. Whether its transportation, where Uber and Lyft have upended the traditional status quo, or in the short term rental market, where the marketplace companies like Airbnb, HomeAway, and VRBO have significantly changed the way people vacation, the fault lines are prominent. People carry an advanced, location-aware computing system to all places and at all times. They largely trust the emerging firms building businesses that serve them and offer much needed access to incomes.
Advances in information technology, growing sophistication and influence of social media in our lives and society, and the growth of the “app economy”, combined with advances in payments technology – particularly mobile technology – have created the conditions to upend traditional methods of consumption. Furthermore, there is a profound and established socio-economic undercurrent to the disruptive period in which we are living. Since 2008 many have struggled with a truly deep and absolutely global economic downturn. Real estate in the US and beyond was at the core of this episode. Many were real estate rich and cash poor. Others were just cash poor.
The period from 2008 to 2012 was pivotal in a number of ways. During this period, the real need for ‘extra cash” combined with a real need for “deals”. Millennials, a demographic bulge of 83 million in the US and 1.75 billion worldwide is reshaping the economy and consumer tastes, and initially drove Airbnb and the sharing or gig economy. Millennials comprise more than 25% of the nation’s population, larger as a group than baby boomers according to the US census report, further underscoring the significance of this group. Emerging alongside Airbnb, native trusters and users of the system are the largest most distinct demographic group in modern history. We see this mobile and digital super generation well on their way to shaping their consumption habits – and all of our habits as well. Thus, the macro and demographic conditions are very conducive to gig economics and to Airbnb in particular.
Technology has been and will continue to be pivotal to the concept of sharing economy, to enable scale and enhance economic impact. It has made goods cheaper and lowered the friction in transactions. The proliferation of mobile devices has heralded a digital revolution to serve as a catalyst of growth.
The concept of sharing economy has essentially created a win-win situation for all the stakeholders, including on-demand access to goods and services, efficient utilization of unused inventory of assets across industries, leading to a multiplier effect such as increased employment, consumerism, digital literacy and the rise of micro-entrepreneurship. This has been driven by the emergence of aggregators in industries like personal transportation and hotel room bookings. A technology platform that provides transparent pricing, verified listings and background checks, and assured delivery of services will reinforce consumer faith in these platforms. A number of sharing platforms have emerged which enable individuals to share goods and services. The following chart highlights a few prominent players among them.
Figure 6: Sharing Economy Players in Select Verticals
Source: Manhattan Venture Research
So how big is the sharing economy? The precise figure is difficult to pin down given the varied definitions. According to one study by Price Waterhouse, where the consulting firm compared the revenue potential in five new ‘sharing economy’ sectors (peer-to-peer finance, online staffing, peer-to-peer accommodation, car sharing and music and video streaming) with the potential in five traditional ‘rental’ sectors (equipment rental, B&B and hostels, car rental, book rental and DVD rental), the five main sharing economy sectors generate $15 billion in global revenues in 2013, making up just 5% of total revenue generated by the ten sectors they looked at. However, by 2025, these same five sharing economy sectors could generate over half of overall sales in the ten sectors – a potential revenue opportunity worth $335 billion.
A Scalable Business Built on Trust and Choice
A key aspect of Airbnb’s business model is that it is scalable to match the demand. The platform has near zero marginal cost, in that a new room can be incrementally added to (or removed from) the platform with negligible overhead. Because of this, Airbnb can scale supply in a near frictionless manner to meet demand, even on short notice. By contrast, increasing hotel room supply involves buildout, causing significant marginal costs for hotel chains. The company provides enabling technology that facilitates suppliers of niche inventory to bring their products to market. In contrast to offline markets, Airbnb provides sufficiently low cost of revenue for individuals to profitably list remnant inventory online; moreover, Airbnb provides enhanced reach by reducing consumer search costs.
Additionally, Airbnb offers a wider range of and services and amenities than traditional lodging facilities. Airbnb users, for instance, can rent anything from an apartment to a treehouse. More importantly, because Airbnb leverages existing housing inventory, it can potentially expand supply wherever houses and apartment buildings already exist. This is in contrast to hotels, which must be built at locations in accordance with local zoning requirements. Therefore, competition by Airbnb is potentially harder for incumbents to adapt to, compared to competition by other hotel firms.
A Community Built on Trust
Airbnb is a community built on trust. The company takes safety, security, and privacy very seriously. Hosts must have a verified profile. Included in this verification is offline and online IDs, personal photos, emails and phone numbers. This helps in ensuring that guests will be staying at a safe location, trusted by Airbnb. In addition, all messaging between the host and guest takes place on the Airbnb website. This prevents users from having to give out their personal cell phone numbers. Furthermore, to ensure prompt service, the company has global customer support that can be reached at any time of the day.
Another important layer of service from the company is host protection insurance. While not unique, the host protection service along with a rating and review system, enables the platform to build trust within the community of users and lowers transaction costs. Profiles and user reviews help to create reputation and trust among participants of the marketplace, as evident on multiple platforms, not just Airbnb.
Powerful Network Effect
Airbnb is a major beneficiary of the network effect on its platform. Essentially, the company’s broad listings attract more travelers, and the large audience of travelers in turn attracts more vacation rental listings from property owners and managers.
Figure 8: Airbnb – Powerful Network Effect
Source: Manhattan Venture Research
The company was adding more than 3000 listings per day in the late-2014-early 2015 time frame, based on comments by co-founder Brain Chesky’s comments in December 2014. We believe the number of daily listings has moved up considerably since then. Furthermore, Airbnb’s hosts more often than not receive high ratings (94% according to a survey by Airdna), enticing guests to share their positive experiences with their friends (91% of guests in Paris said they would recommend the property they stayed in to friends, according to the company blog). A first time guest in most cases has a positive experience, and then shares it with a friend, who is then going to use Airbnb and repeat the cycle. The more positive experiences people have with Airbnb the higher the multiplier effect on the number of new guests signing up.
Airbnb is not immune to experiencing a few untoward incidents in its wide network. Incidents of guests damaging properties or getting hurt, and hosts not delivering on their promise are well known. The network effect is a double edged sword, which is all the more reason to maintain a high level of service and minimize if not eliminate incidents that could tarnish the reputation and trust. On balance, we believe this network effect has been a net positive for the company.
More Complementary than Disruptive Near Term
Short-term rental websites such as Airbnb are a relatively new concern for the U.S. hotel industry, which operates considerably more rooms compared to Airbnb’s 2 million rooms. The growing popularity of these online platforms – particularly Airbnb’s platform – however has caught the attention of the hotel executives, based on recent comments. The consensus however is still dismissive of the threat – at least in the near term. The primary hotel industry argument is that these peer-to-peer platforms target a small niche market and, at worst, complement their own services. This argument is supported by Airbnb’s own assessment that roughly 76% of its properties are outside the main hotel districts.
Figure 9: Percentage of Airbnb Rooms Outside Key Hotel Districts
One case in point is Manhattan, New York, one of the most popular destination cities in the world. According to market data from Smith Travel Research (STR), the average daily supply of Airbnb rooms from 2013 to 2015 was roughly 9% of the total rooms available. Zeroing in on 2015 only, that percentage increased marginally, to 9.8% from 8.5% in 2014.
Figure 10: Average Daily Airbnb Supply as % of Total Supply in Manhattan, NY: 2013-15
Figure 11: Airbnb Supply as % of Total Supply in Manhattan, NY: 2015 vs. 2014
The complementary aspect of Airbnb is particularly apparent during major events. Events such as the Super Bowl and Soccer World Cup tend to overwhelm the hotel supply in the cities where they are held. Airbnb listings provide incremental accommodation and allows more guests to come to the event.
In a study published by Boston University, the causal impact in Austin, Texas on hotel revenue is in the 8-10% range; moreover, the impact is non-uniformly distributed, with lower-priced hotels and those hotels not catering to business travelers being the most affected. The market data and formal studies support Airbnb’s assertion that in many cases its offering is not stealing share from hotels but rather offers incremental supply.
But that is not to say that the hotel industry is immune to Airbnb’s influence in the market. During the peak tourist season, for instance, the flexibility and the wide choice of Airbnb listings has managed to dent the strong pricing power of the hotels in the area, according to one market study. At other times of the year, the Airbnb option for potential guests has had the effect of rationalizing the overall prices in the market, benefitting consumers across the board, not just participants in the sharing economy.
Figure 12: Worldwide Hotel Rooms Availability versus Airbnb Availability
Net Positive Effect on Cities and Property Values
For all the stigma attached to an Airbnb property, there is increasing evidence that the net effect on cities and property values is incrementally positive. Under current rules, short-term rentals are illegal in most of Los Angeles and all of New York City, although hundreds of listings are still posted on Airbnb. In Madison, Georgia however, the popularity of Airbnb and similar platforms is helping to bring buyers into the second-home and retirement-home market earlier than they otherwise could, according to a sales agents in the region. Short-term rentals—typically family vacations stays—are an important pipeline for housing sales in the lakeside area, and Airbnb provides a good preview before committing to the area. Demand for second homes, resort, and vacation properties are also on the rise thanks to short term rental platforms such as Airbnb, HomeAway and VRBO. These companies have effectively removed the veil of secrecy behind the true value and ROI on these investments, according to one sales agent we spoke to. Airbnb, essentially, posts rental prices, service fees, and taxes for its listings, making it easier for investors to see the competition in the area and what the market will bear. Not only has Airbnb made the market more efficient, it has opened the market to a wider, younger, and more global audience.
There are additional cases of positive developments. In October 2015, Jersey City, New Jersey became the first city in the New York metropolitan area to legalize Airbnb, and add it to their existing body of hotels and motels that pay taxes. In the past, businesses were regulated by zoning laws, but Mayor Steven Fulop stated that the city does not have enough inspectors to deal with the number of local units being rented out, approximately 300 of which are rented through the service as of that date, and that rapid-evolving technology such as Airbnb made doing so impossible.
Under the new legislation, Airbnb pays the city 6% hotel tax on the residential properties whose owners rent temporary living space to tourists for under 30 days, which is estimated to bring $1 million in revenue to the city, and expand tourist capacity beyond the city’s 13 existing hotels. Airbnb will also provide insurance protection to homeowners in the event damage is done to their residence by renters. The new laws will not prevent condominium associations from voting to prohibit use of Airbnb in their buildings.
The following chart highlights the positive contributions of Airbnb in some of its major cities. The first column shows total economic impact from Airbnb guests and hosts. The other columns compare the average nights spent in each city by Airbnb guests vs. hotel guests. The key takeaway from the chart is to show that on average Airbnb guests are not only spending a greater amount of time in each city compared to regular hotel guests, but they are also spending a greater amount at local businesses. The savings from Airbnb deals is essentially flowing back into the local economy.
Figure 13: Positive Contribution of Airbnb
Source: Airbnb blog
Consumers are Ultimate Beneficiaries
Hotels in areas where Airbnb has an established presence have responded to increased competition by lowering their prices, which harms their revenue, but benefits travelers, even those who do not use Airbnb. In addition to reduced prices, consumers also benefit from increased variety provided through peer-to-peer platforms. Furthermore, consumers on the supply side benefit through additional income generated by providing goods and services via peer-to-peer platforms. Browse Portland’s 2,400 active listings and you’ll find a basement bedroom with a private entrance in a downtown townhouse for $75 a night—and the owner may provide additional perks for a small fee. An entire two-bedroom home in a quiet Portland residential neighborhood fetches $275 a night—the owners live in the house next door and offer to show you around town.
Figure 14: Average Daily Prices in Select U.S Cities Figure 15: Average Daily Prices – Ex Big Rentals
Large Market Opportunity
Sizing up Airbnb’s addressable market opportunity is difficult given the different types of possible listings. That said, the global vacation rental industry is large and growing, albeit fragmented and inefficient. Airbnb’s growth has benefited from the network effect of having both a broad selection of vacation rental listings and a large audience of travelers. The broad selection of vacation rental listings attracts more travelers and the large audience of travelers in turn attracts more vacation rental listings from property owners and managers.
Airbnb’s current addressable market is roughly $85 billion and expected to grow exponentially, according to one market estimate. We believe the next leg up for the company is business travel. According to Airbnb, about 10% of rentals are currently from businesses and expects to increase its penetration significantly over the next few years. According to data from Global Business Travel Association and Visa, the U.S. business travel spending is expected to increase by 5.4% in 2016 from $303 billion in 2015.
The company has rolled out a number of initiatives to redefine business travel and capture the attention of business travelers. Airbnb Business customers are provided a kitchen and parking spot to call their own. In addition, the travelers get convenient locations outside of the normal hotel district, allowing them to find a spot near the office, or near their favorite restaurant to meet or entertain their clients. Airbnb Business is aimed at providing space for better collaboration among the working teams, and empowering business travelers to be as productive as possible.
Additionally, Airbnb offers simple business solutions for employers. Employers can invite employees on Airbnb for business in order to coordinate travel plans. Also, they can use the business dashboard to keep track where their employees are staying, the dates they are traveling, and the total spending amount. To top it all off, Airbnb Business can send employers an invoice for traveling, allowing expenses to easily be charged to a corporate/company credit card. Overall, Airbnb Business streamlines the hassles of normal travel, making them almost nonexistent, while at the same time finding the most productive work environment for employees.
Airbnb, in essence, has recognized that business travelers demand a higher level of service. To move the needle beyond the 10% of overall business, the company needs to make the experience seamless and efficient by providing normal amenities that are expected by business travelers. These include consistency of service, hassle-free check-in and check-out, free Internet services, laundry and gym services, among others.
Aggressive International Expansion Strategy
Airbnb has embarked on an aggressive international expansion plan. In May 2011, Airbnb acquired a German competitor, Accoleo. This acquisition launched the first international Airbnb office in Hamburg. Then, in October 2011, Airbnb established its second international office in London.
Figure 16: Airbnb – Wide Geographic Footprint
Given the growth of international users, Airbnb opened 6 additional international offices in early 2012. These cities include Paris, Milan, Barcelona, Copenhagen, Moscow, and São Paulo. These are in addition to existing offices in San Francisco, London, Hamburg, and Berlin where Airbnb maintains its international presence for the EMEA markets within a German incubator space. Airbnb announced in September 2013 that its European headquarters would be located in Dublin.
At the beginning of November 2012, Chesky announced his focus on Australia, the second largest Airbnb market behind the United States, as well as Thailand and Indonesia. To support this effort, Airbnb opened its 11th office in Sydney. The Australian consumer accounts for one-tenth of the Airbnb user base.
Weeks after announcing the focus on Australia, Airbnb announced its strategy to move more aggressively into the Asian market with the launch of their newest headquarters in Singapore. The company’s goal is to acquire an additional 2 million properties within the continent.
Following the Obama administration’s easing of restrictions on U.S. businesses to operate in Cuba, Airbnb expanded to Cuba in April 2015, making it one of the first U.S. companies to do so.
Recent Acquisitions Have Expanded the Global Footprint
Since mid-2011, Airbnb has acquired several of its competitors. The first of which was Accoleo based out of Hamburg, Germany (as noted above). This became the company’s first international office. Prior to the 2012 Summer Olympics, Airbnb acquired London-based rival CrashPadder, subsequently adding six thousand international listings to its existing inventory. This acquisition made Airbnb the largest peer-to-peer accommodations website in the United Kingdom.
In November 2012, Airbnb acquired NabeWise, a city guide that aggregates curated information for specified locations. This acquisition shifted the company focus towards offering hyperlocal recommendations to travelers. In December 2012, Airbnb announced the acquisition of Localmind, a location-based question and answer platform that allows users to post questions about specific locations online. These questions are then answered in real-time by experts on the specified territories. Since 2012, the company acquired Pencil Labs in 2014, Vamo in 2015 and Lapka in 2015.
Figure 17: Airbnb Acquisitions
Source: Company reports, Crunchbase, Manhattan Venture Research
Airbnb’s rapidly growing service has sometimes pitted neighbor against neighbor and landlord against tenant. Cities have puzzled over how to regulate the startup. New York City has scrutinized Airbnb and taken steps to push back against commercial renters. San Francisco, Airbnb’s hometown, voted down a divisive ballot initiative that would have restricted home sharing in the city. Airbnb neighbors all over the world have complained of “party houses” that attract rowdy renters during major sporting events. Just recently, government hearings in Tokyo were held to discuss regulatory reform of home-sharing services in Japan. Local governments recently began ratifying Prime Minister Shinzo Abe’s guidelines on regulating the service, a move that has left some Airbnb hosts concerned.
Fluctuation in local regulations of short-term rentals, typically rentals shorter than 30 days, has been a limiting factor in Airbnb’s growth. Cities, towns, and especially resort areas nationwide are rewriting these regulations for a variety of reasons. Some towns hope to benefit from a new tax and license fee revenue stream, while other areas seek to curb the conversion of single-family homes and long-term rental housing stock into transient accommodation. Portland welcomed Airbnb in 2014 by legalizing short-term rentals and striking a deal whereby Airbnb collects and remits lodging taxes on behalf of hosts. The city requires that hosts buy a permit for about $178 a year and have their properties inspected for safety. Portland expects to raise $500,000 a year in tax revenue, the Portland Tribune reported.
The public sentiment toward Airbnb is less enthusiastic in Austin, Texas, which has similar owner requirements as Portland. The city is debating ways to toughen regulations in response to public complaints about Airbnb “party houses” that disrupt the peace and quiet of residential neighborhoods and could potentially lower property values. Austin is considering phasing out short-term rental licensing in some areas, increasing fines for unlicensed rental properties, and prohibiting the use of short-term rentals for gatherings such as bachelor parties, weddings, and concerts, according to the Austin American-Statesman. Officials of San Francisco-based Airbnb declined to be interviewed for this article.
Aiming for even tighter restrictions, San Francisco put forth a ballot initiative in November, sponsored by community groups and the hotel industry that would have given neighbors greater power to sue property owners suspected of violating the law. It also sought to limit the number of days property owners could rent space to just 75 a year—down from the current 90. Voters narrowly defeated the bill. Still, a 2015 ordinance has restricted short-term rentals to owner–occupied properties and requires hosts to register with the city as a business. Airbnb now provides data to the city treasurer about how often homes are being rented out and at what cost so officials can track hosts who are not paying the required taxes.
New York, one of Airbnb’s largest markets, has been particularly inhospitable. The state’s attorney general last year issued a report citing “widespread illegality” among Airbnb hosts in New York City. Airbnb later said it removed some 2,000 listings. New York owners or tenants cannot legally rent their apartments out for short periods less than 30 days, unless they are also in the property at that time. Other cities from Santa Monica, Calif., to Berlin have either proposed or passed regulatory restrictions on short-term rentals. Hotels complain that Airbnb hosts don’t pay the same taxes and aren’t held to the same fire and safety standards.
Proactively Addressing the Regulatory Issue
Airbnb management has realized the regulatory hurdle it is facing and is proactively addressing it. The hurdle is high given the strong and well-entrenched lobbies. The company will need to make its case on a city by city basis just as Uber has been doing. The company is doing just that. Chris Lehane, Airbnb’s head of global policy recently appeared before hundreds of American mayors enticing them with promises of collecting more taxes. They currently collect $42 million in taxes and offered to increase that number to $200 million.
Airbnb has been accused by the American Hotel and Lodging Association, a leading trade group, of operating some rentals that essentially function as unregulated hotels. The association commissioned a study and found that nearly a third of the revenue generated by Airbnb in 12 major markets comes from homes and apartments that are rented out on a full-time basis. The study, which focused on 12 of the nation’s largest metropolitan areas — including Los Angeles, San Diego and San Francisco — found that 30% of Airbnb’s revenue comes from properties that are offered at least 360 days of the year. The study, completed by a Pennsylvania State University professor with funding from the hotel trade group, also found that 17% of Airbnb landlords in the 12 big metro areas rent out two or more properties. Katherine Lugar, chief executive of the American Hotel and Lodging Assn., said the findings emphasize the need for cities and states to adopt legislation that imposes the same restrictions on short-term home rentals as on hotels. Airbnb has disputed these estimates and has retained government relations firms for help. Mayors, governors and publics have generally warmed up to Airbnb over time.
Despite all the efforts made by Airbnb, there is no guarantee these legal concerns will fade. If anything they may grow, as the service grows in popularity. If they do succeed in enticing mayors, governors and voters with tax increases, will it come at the cost of delaying its profitability? That is a pivotal question and only time will tell. At the end of the day, we believe one factor in favor of Airbnb is the groundswell of support for sharing economy platforms such as Airbnb’s. We expect a long drawn out tussle between the sharing economy forces and the powerful entrenched lobbies of the affected companies/industries. Ultimately, we expect a mutually agreeable solution to this issue.
Highly Competitive Landscape
The market to provide listing, search, and marketing services for the vacation rental industry is very competitive and highly fragmented. The barriers to entry are relatively low, and new competitors are entering the arena – most recently via acquisitions. Expedia’s acquisition of HomeAway is the most prominent case in point. Another good example is a global distribution agreement between Booking.com and Wyndham whereby Wyndham Vacation Rentals, the largest professional management company, will be able to use Booking.com’s website and mobile apps to distribute its 105,000-plus properties.
All of the services that Airbnb provides to hosts and travelers, including listing and search, are provided separately or in combination by current or potential competitors. The company’s pure-play competitors in its core market can be narrowed to a few notable companies, a number of which have been acquired and are part of larger online ticketing agencies (OTAs). These include: Flipkey (acquired by TripAdvisor in 2013), 9flats.com, Roomorama, Windu, Stayzilla, HomeAway (Acquired by Expedia in 2015), VBRO (part of the HomeAway family of properties, which was acquired by Expedia) and, to some extent, Wyndham Worldwide (Please see Figure 21).
Figure 18: Airbnb – Competitive Landscape
Source: Manhattan Venture Research
Airbnb also competes with mid-size and budget hotels, independent chains, and an increasing number of the traditional OTAs, which also have a vacation rental business. Additionally, Airbnb faces tough competition as it expands its plans to enter the professional vacation-rental market, where HomeAway is the market leader and other companies are moving in.
Airbnb does not yet pose a material threat to the traditional large/luxury hotels. For one, Airbnb does not own the rooms booked on its site, and many listings are not available year-round. As a result, a direct comparison with the traditional hotels based on total room availability tends to be misleading. A better metric for comparison is the total nights booked and in this category Airbnb lags far behind the traditional hotels. In 2015 for instance, the total nights booked on the Airbnb platform was 80 million, which was a small percentage of the total room nights booked at traditional hotels. Looking ahead, we expect the competitive dynamics to get more intense as Airbnb moves up the value chain and the traditional hotels adjust their value proposition to maintain their competitive position.
Airbnb offers an attractive value proposition when considered in whole. The following chart provides a comparative pricing grid of Airbnb’s closest competitors. While the listings may not be the cheapest in absolute dollar terms, the combined value proposition in terms of trust, choice, efficiency and reputation is considered highly competitive and differentiated.
Figure 19: Airbnb Comparative Booking Rates
Source: Company websites, Manhattan Venture Research
We built Airbnb’s revenue model based on a number of factors including industry fundamentals, competitive position and growth profile, and our own assumptions. Airbnb should continue to benefit from macro, lifestyle, demographic and, ultimately, regulatory tailwinds. As noted earlier in the report, Airbnb has transformed the retail hospitality industry, is shaking up work travel hospitality, and is defining the emerging gig economy. It is the most advanced and disruptive company in the sharing economy and sits at the core of a macro shift.
Airbnb derives revenue from both guests and hosts for its service. Guests pay a 6 − 12% service fee for each reservation they make depending on the length of their stay, and hosts pay a 3% service fee to cover the cost of processing payments.
We have modeled $7.4 billion in nights booked in 2015 (+81% Y/Y), which translates to $908 million in revenues on a consolidated take-rate of 12.4%. For 2016 we expect bookings value to maintain its robust growth rate, resulting in $12.1 billion in nights booked (+65% Y/Y), $1.6 billion in revenue (+71.7% Y/Y) and a 12.9% take rate. Looking ahead, we expect strong year/year sequential growth in new signups, nights booked and bookings value. We are projecting total bookings value to touch $47.3 billion in 2020 (+45% 5-year CAGR), and revenue of $6.9 billion (+33.9% Y/Y) on a blended take-rate of 14.5%.
Figure 21: Airbnb Revenue Projection ($M)
Source: Company data, Manhattan Venture Research
On the profitability front, we expect Airbnb to turn EBITDA positive in 2016, reflecting the strong leverage and efficiency of the business model despite significant sales and marketing expenses. We have modeled an EBITDA loss of $70 million in 2015, improving to a gain of $156 million in 2016, and improving sequentially thereafter. By 2020, we expect EBITDA to touch $2.6 billion on 39% margin.
Figure 22: Airbnb EBITDA Projection ($M)
For a detailed discussion of the model with the analysts, please contact your Manhattan Venture Partner representative at (212-858-9900].
Deriving a fair value of private company is more an art than science, unlike valuing a public company. First, information on key metrics is unavailable, or limited at best. Second, promising private companies are disruptive by definition, blazing a new trail with a unique product or service offering. Accurately estimating the growth, market share and profitability potential can be challenging – but not impossible. The key to accuracy is making reasonable assumptions, and this is where we at Manhattan Venture Research bring our industry knowledge and experience to bear.
Against this backdrop, and after we have the estimates, the next step is to derive a valuation for the company. We believe a good starting point, and in most cases the best and only option in the face of limited information, is comparative valuation analysis. That requires selecting a highly relevant basket of comparable public companies as a proxy for the private company being valued, and then adjusting the implied valuation to reflect the superior revenue growth trajectory and operating efficiency – or lack thereof. We applied this process to derive a fair value of Airbnb.
Our Airbnb valuation is a blend of two values: implied valuation based on the mean EV/Revenue and an implied valuation based on the mean EV/EBITDA multiple. Our basket of comparable publicly traded stocks includes companies in four market segments: lodging, vacation rental, apartment rental, and companies with marketplace business models. The following exhibit shows the comparative valuation multiples, followed by the implied valuation analysis.
Figure 23: Airbnb Comparative Valuation
Source: Thomson Reuters, Manhattan Venture Research
Source: Company reports, Thomson Reuters, Federal Reserve website, Manhattan Venture Research
We peg Airbnb’s enterprise value at $3o.5 billion or $103 per share, on 298 million fully diluted shares outstanding. This is a blend of $31.6 billion based on the mean EV/Revenue multiple, and $29.4 billion based on the mean EV/EBITDA multiple. The implied valuation of $30.5 billion translates to 12.2x our 2017 revenue estimate of $2.5 billion. For reference, Expedia is trading at $18.3 billion, or 1.8x consensus 2017 revenue estimate, Marriott at $21.2 billion, or 1.3x consensus 2017 revenue estimate. For a broader perspective, Ebay, a company with a pure marketplace model – albeit in a different industry – is currently trading at $29.3 billion, or 3.2x consensus 2017 revenue estimate.
Airbnb’s last private market valuation – Series E in December 2015 – was $25.5 billion, or 10.2x our 2017 revenue estimate.
We believe Airbnb’s premium valuation is justifiable given its robust growth rate (+62% Y/Y in 2017 for Airbnb versus average of 11.7% for Ebay/Expedia/Marriott, and 11.1% for the entire peer group) and its potential to disrupt the entire lodging and rental market in the long term. Furthermore, we believe there is potential for valuation upside if the company can maintain its robust pace of new active listings growth (2.0x Y/Y in Q3:15) on the back of targeted customer acquisition marketing efforts, improved conversion rates, and positive regulatory developments.
M&A Take-Out Multiples
We also looked at recent M&A multiples in the space. While we are not implying any take-out value for Airbnb based on these multiples, it is helpful to put our implied valuation analysis in perspective. The sample is small, limited by the available public information, but a good reference point nonetheless of the acquisition multiples in the related space. Our sample includes Expedia’s acquisition of HomeAway and Orbitz Worldwide and Priceline’s acquisition of OpenTable. Two other acquisitions in our sample – Expedia’s acquisition of Travelocity and Trip Advisor’s acquisition of FlipKey – would have rounded out our sample very well, but unfortunately the financial details were not disclosed.
Accordingly, the mean take-out revenue multiple is 7.0x trailing 12 month revenue and 28.6x trailing 12-month EBITDA. Given that Airbnb is still early in its lifecycle, applying these multiples to Airbnb’s revenue and EBITDA will not be meaningful.
Figure 24: Recent M&A Multiples and Implied Valuation
Source: Manhattan Venture Research
Airbnb has raised $2.49 billion to date in 10 funding rounds. The last round (Series E) closed on November 20, 2015 and raised $1.58 billion at $93.09 per share, raising the post-money valuation to $25.5 billion. The round was led by General Atlantic, Hillhouse Capital and Tiger Global Management. Other participants in the last round included Baillie Gifford, Wellington Management, Fidelity, Horizon Ventures, GGV Capital, Sequoia Capital, Horizon Ventures, Lakestar and T. Rowe Price.
Airbnb’s post-money valuation has been on a tear since its Series B valuation in July 2011. Following its $1.3 billion Series B post-valuation, the company’s private market valuation expanded by 119% in the Series C round to $2.9 billion, by 278% in the Series D round to $10.8 billion, and by 137% in the Series E round to $25.5 billion.
The following figure shows the funding rounds to date along with a graphic of the post-money valuation and price per share after each round.
Figure 25: Airbnb Funding Rounds & Post-Money Valuation Graphic
Source: Pitchbook, VC Experts, Manhattan Venture Research
Joe Gebbia, CPO & Co-Founder: An entrepreneur from an early age, Airbnb’s groundbreaking service began in his San Francisco apartment and spread to 2,000,000 listings in 190 countries. He is involved in crafting the company culture, shaping the design aesthetic, and innovating future growth opportunities. Joe has received numerous distinctions such as the Inc 30 under 30 and Fortune 40 under 40. Joe earned BFA degree in Graphic Design and Industrial Design at the Rhode Island School of Design, where he met Co-Founder Brian Chesky.
Brian Chesky, CEO & Co-Founder: Brian is the co-founder and CEO at Airbnb. He drives the company’s vision, strategy and growth as it provides interesting and unique ways for people to travel and changes the lives of its community. Brian met co-founder Joe Gebbia at the Rhode Island School of Design where he received a Bachelor of Fine Arts in Industrial Design.
Nathan Blecharczyk, CTO & Co-Founder: Nathan is the co-founder and CTO at Airbnb. He oversees the technical strategy of the company, and is dedicated to building a team of world-class engineers to keep Airbnb at the forefront of the industry. Nathan received a degree in Computer Science from Harvard University. Nathan held several engineering positions with Microsoft, OPNET Technologies and Batiq before becoming a Co-Founder at Airbnb.
Lawrence Tosi, CFO: Laurence A. Tosi is the Chief Financial Officer of Airbnb. Prior to joining Airbnb, he was the CFO of the Blackstone Group. Before joining Blackstone, Mr. Tosi held a number of senior positions at Merrill Lynch & Co. including chief operating officer of Merrill’s trading and investment banking division. Before Merrill, he worked at General Electric Co.’s CNBC and NBC divisions as a director of business development. Mr. Tosi received a BA, a JD and an MBA from Georgetown University where he is currently a member of the Board of Directors.
Chip Conley, Head – Global Hospitality & Strategy: Chip Conley is the Head of Global Hospitality at Airbnb since September 2013. Chip is also the Board Director of Altius Education Inc., an author, and Founder of Joie de Vivre. In 1987, Chip Conley started his own hospitality company, Joie de Vivre (JDV), and, as CEO for two dozen years, grew it into the second largest boutique hotel company in the United States. Chip received his B.A. and MBA from Stanford University, and was awarded an Honorary Doctorate in Psychology from Saybrook University, where he is the 2012 Scholar-Practitioner in residence.
Figure 26: Airbnb Revenue Model & EBITDA
($ in million)
Source: Airbnb, Manhattan Venture Research
The following pages are a compilation of selected data and charts relating to Airbnb. Sources of the charts are varied including Airdna.com (an independent data and analytics firm), Airbnb website and Airbnb blog, among others.
Figure 27: Bookings & Average Income per Host in France
Source: Airbnb Blog
Figure 28: Typical Airbnb Traveler Profile
Source: Airbnb Blog
Figure 29: Growth Rate of Airbnb: 2008-2015
Airbnb is still seeing explosive growth with only modest slow downs in the frigid winter months. New Airbnb listings peaked at 38,232 in September 2015 of this year vs 26,486 in July of 2014. Nearly 1 in 10 rentals available on the site in September 2015 was created in that same month.
Figure 30: Types of Airbnb Listings
These percentages have remained relatively stable over the past couple of years. If anything, the trend seems to be moving towards a higher proportion of private room listings due to regulations restricting entire home rentals in some major market. The size of Airbnb continues to skew towards smaller and more urban rental units. 47% of all Airbnb listing are apartments, 39% are houses, and the remaining supply is an assortment of wacky yurts, castles, and villas.
Figure 31: Airbnb Listing Sizes
Nearly 70% of all entire home Airbnb listings are studios, 1 bed, and 2 bed units. This is one of the facts that has caught the attention of hotel operators. Short-term rentals are no longer the large homes located primarily in rural vacation destinations, they are located in the condos right next door to their properties.
Full Time vs Part Time Rentals
Thousands of new Airbnb properties come online each day and thousands disappear, only to re-appear again months later. The fluidity of the short-term rental makes it incredibly complex to track. Many properties are only available for rent three days out of the year and others are available all 365 days. The lack of information available to properly profile Airbnb rentals has led to wide ranging speculation from regulators and industry analysts.
Figure 32: Days Available for Rent
Airbnb Rental Frequency
The simplest way to determine a full-time rental is too simply count the total number of days that a unit is available for rent in a given year. As seen in the chart, 78% of properties were available for rent or rented for over 180 days in the past year. This would seem to indicate that a vast majority of listed properties are full-time rentals.
Figure 33: Airbnb – Days Actually Rented
Only 5.5% (19,880) of total Airbnb listings that had a single booking were booked over 180 days during the year. Comparing that to the total U.S housing supply, it is .0003% of total homes. It’s hard to imagine that this amount of supply taken off of the long-term rental market could have any material impact on home affordability. It is important to note that Airbnb is not the only marketing platform that is available for booking a short-term rental. While Airbnb does dominate the market for smaller, hotel comparable rentals, it is possible that this number underestimates the true number of properties that are able to be rented out over 180 days a year by using a combination of Airbnb, HomeAway, and other niche sites.
Figure 34: Airbnb Prices By U.S. Cities
Looking at the top 10 cities based on the number of total listing, the average price of all entire home listing ranges from $283 per night in Austin to $164 per night in Philadelphia. These Airbnb prices are pretty high compared to the average hotel in each of these area. But, it is important to remember that Airbnb rentals range in size from studios to 19 bedroom mansions. Cities, such as Austin and New Orleans, that have a larger mix of large single family homes skew higher.
Excluding the larger rentals, isolating only studios and one bedroom units, the ADR (Average Daily Rate) for Austin drops $100 per night and San Francisco jumps to the top of the list at $190 per night.
Figure 35: Airbnb Average Daily Rates
Airbnb Revenue by City
The following chart shows total 2015 revenue by city, segmented by listing type (entire home = blue and private room = orange). Across the entire U.S., 79% of revenue comes from entire home listings, and 20% is generated from private rooms. New York could generate an additional $28.5 MM in tax revenue (at the current 5.875% hotel tax rate), and Los Angeles another $25.9MM (at 14% tax rate) in revenue could be added to the city coffers by taxing Airbnb rentals like local hotels.
Figure 36: Airbnb Revenue by City
Where are Airbnb Hosts Earning the Most?
According to Airdna research, the following chart shows the best city to invest in a short-term rental property. The abbreviated analysis below uses only one bedroom units to find out what cities have the highest margins between long & short term rental rates as of the end of 2015. The size of the plot below is related to the number of one bedroom rentals in each city. In most of the cities above the trend line, successful Airbnb hosts are able to earn 2x their rent when listing them as full-time rentals, according to Airdna.
Figure 37: Best Cities 1 Bed Graphic
Our Research Methodology
Manhattan Venture Partners provides clients with accurate, timely and innovative research into the companies and sectors we cover. To that end we have established an experienced team of analysts, researchers, economists and industry veterans that focus exclusively on private companies with a proven track record of success. Producing quality research on a private company is uniquely challenging. Our analysts communicate with employees, ex-employees, early investors, VCs, competitors, suppliers and others to gather valuable information about the company under coverage. This information enables us to create unique financial models that value the underlying company and provide insight to our clients and industry experts, leveraging years of experience working for bulge bracket firms.
Manhattan Venture Partners reports include business and financial aspects of late-stage companies. These reports include but are not limited to industry overviews, competitor analyses, SWOT analysis, products (existing and in development), management and key directors, risks and concerns, other propriety channels, historical financials, revenue projections, valuations (using various matrices and valuation recommendation), waterfall analysis, and a capitalization table.
About the Analysts
Santosh Rao has over 18 years of experience in equity research, primarily within the technology and telecommunications space. He started his equity research career as an Associate at Prudential Securities and later moved to Broadpoint Capital (Formerly First Albany Capital), where he was the Senior Equity Analyst, and later to Evercore Partners, where he worked with the Telecom and Data Services Group. Prior to joining Manhattan Venture Partners, he was the Managing Director and Head of Research at Greencrest Capital, focusing on private market TMT research. Mr. Rao started his career as a Financial Analyst in the Operations Groups at PaineWebber (UBS) and Prudential Securities. Santosh has an undergraduate degree in Accounting and Economics, and an MBA in Finance from Rutgers Graduate Business School.
Max Wolff is an economist specializing in international finance and macroeconomics. Before joining Manhattan Venture Partners, he was Chief Economist at Greencrest Capital, and prior to that spent four years as the senior hedge fund analyst at the Beryl Consulting Group LLC. Mr. Wolff teaches finance and statistical research methods in the New School University’s Graduate Program in International Affairs. Max’s financial markets and Macro-Economics work appears regularly in Seeking Alpha, The WSJ, Reuters, Bloomberg, The BBC, Russia Today TV, and Al Jazeera English.
I, Santosh Rao, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.
I, Max Wolff, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.
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