Airbnb, Inc.

Investment Recommendation

Allen Miller, 5/5/2015

1

Investment Thesis

• Investment Opportunity: Recent news articles have reported that Airbnb is raising $1B at a

$20B pre-money valuation. Assume there is an opportunity to invest $1M as part of the

syndicated $1B round led by a major hedge fund.

• Recommendation & Rationale:

• Do not invest in the $1B raise at a $20B valuation:

• Airbnb may be a great vertical marketplace business attacking $85B in TAM with

proven traction and a strong business model. In fact, it was a very good business to

invest in during the early rounds when the price was low.

• However, there are 3 major problems with the investment opportunity at this stage:

(1) A $20B valuation overinflates the true value of the business, which is closer

to $10.2B. This high valuation will hinder returns for later stage investors.

(2) Airbnb has important competitive advantages in terms of network effects

and customer captivity, but nothing that will allow it to be a complete “winner-

takes-all” business. At the very least, it will have to share TAM with HomeAway.

(3) There are a number of unknowns that make Airbnb a risky business to

invest in including: macro-economic trends, regulation and an uncertain cost

structure. Some of these unknowns could be detrimental to Airbnb’s growth.

2

Service Description: Global Vacation Rental Marketplace

• Overview: Vertical marketplace connecting

travelers looking for lodging and renters looking to

rent out their properties across 34,000 cities.

• Value Proposition:

• Guests: (1) Affordability (less expensive than

alternatives such as hotels); (2) Convenience

(greater flexibility on rental length, timing of

check in, number of guests, variety of

accommodations); (3) Community (local hosts,

full rating and review system).

• Hosts: (1) Incremental Income (additional

source of income for underutilized property

(2) Security ($1M insurance coverage, secure

payments, relatively trusted community).

• Revenue Model: Both guests and hosts pay a fee

every time a booking is completed. The guest

booking fee, ranges between 6% and 12% based on

the value of the transaction (larger transaction =

lower fee). The host service fee is 3%.

Source: Airbnb

Market: Vacation Rental Market Size & Competitive Landscape

3

Market Size

Competitive Landscape

Annual Vacation Arrivals Worldwide 1,087,000,000

Average Airbnb Guest Stay (# of nights) 5.2

Annual Room Nights 5,652,400,000

Average Price per Night $125

Gross Booking Revenue $706,550,000,000

Midpoint of Guest Fee (6%-12%) 9%

Host Fee (3%) 3%

Total Addressable Market $84,786,000,000

Bottoms-up market sizing yields a TAM of ~$85B.

However, this may be grossly understating the full

potential, which could be well over $1T:

• Growth: Most countries have had vacation

arrival CAGRs of 5-10%, which will only

accelerate in the next decade.

• Redefined Market: Traditional market sizing

doesn’t account for all the new “hosts” enabled

by the shared economy principles at play.

• Novel Rental Properties: Castles, B&Bs, yachts,

motor homes, etc. are not accounted for.

Sources: Statista, Skift, Airbnb, Beyond Pricing

Traditional Hotels OTAs Marketplaces Smaller Players

Key Takeaway: TAM is estimated to be $85B, though the reality is likely well over $1T. There are a

variety of competitors with HomeAway being the chief competitor.

4

Competitive Advantages Framework

Government

RegulationScale Customer Captivity Cost

SEC FilingFixed

Costs

Network

Effects

Switching

Cost

Search

Costs

Proprietary

Technology

Special

Resources

Mid Low High High Low Low Low

• Scale: There are no fixed cost advantages as Airbnb doesn’t own any of its properties. There are however,

huge network effects—the service becomes increasingly valuable to hosts and guests the more people there are on

both sides of the two-sided platform. This advantaged is evidenced by Airbnb’s 1M+ listings world wide.

• Customer Captivity: While it may seem easy to multi-home, Airbnb has built in a number of features that

create high switching costs. The full end-to-end integration, $1M insurance policy, payments features and reviews

create a sense of security for both hosts and guests that is hard to replicate. The captivity is evidenced by

average stays per booking: 5 nights with Airbnb vs. an average for vacation hotel stayers of only 2.5 nights.

• Government Regulation: As a side benefit to it’s scale and willingness to proactively work with local

governments to shape rental policy, Airbnb has been effectively moving through a number of regulatory issues

that hinder smaller players. In Portland and SF, for example, they have built the internal capability to collect

hotel taxes on the hosts behalf allowing them to stay in business in those markets.

• Cost: No advantages in terms of proprietary technology or special resources.

Key Takeaway: Airbnb has clear competitive advantages over nearly everyone in the areas of scale

(high network effects) and captivity (high switching costs). The challenge, though, is that

HomeAway shares these same advantages so, at the very least, it’s a 2-horse race.

Sources: Skift, Airbnb, The Guardian

5

Financials & Valuation

Discounted Cash Flow

10.0% 12.5% 15.0% 17.5% 20.0%

4% $11,609,684 $8,490,579 $6,755,047 $5,638,735 $4,854,406.66

5% $13,664,522 $9,457,562 $7,315,457 $6,004,040 $5,111,261.40

6% $16,746,779 $10,722,077 $8,000,403 $6,432,875 $5,404,809.68

7% $21,883,873 $12,446,417 $8,856,586 $6,943,394 $5,743,519.22

8% $32,158,063 $14,937,129 $9,957,392 $7,561,390 $6,138,680.36

WACC

Lo

ng

-term

gro

wth

Company EV

Sales

(2014)

EBITDA

(2014)

EV/

Sales

EV/

EBITDA Weight

Travel Marketplaces

HomeAway $2,581 $447 $127 5.8x 20.4x 30%

Priceline $65,452 $9,350 $3,762 7.0x 17.4x 15%

Expedia $12,744 $6,372 $1,108 2.0x 11.5x 15%

Other Vertical Mkts

Lending Club $8,591 $213 $21 40.3x 403.3x 20%

Zillow $5,342 $326 $22.17 16.4x 241.0x 20%

Weighted Average: 14.4x 139.3x

Implied Enterprise Value: $6.9B $12.0B

Airbnb $ 10.7B* $475 $86

Public Comps

Key Takeaway: While Airbnb is certainly an impressive and fast growing company, a combined

DCF and Comps Analysis suggests an EV of only $10.2B, well below the $20B pre-money

valuation implied in the private funding round.

Sources: Skift, Business Insider, HomeAway 10K, Factset

*Weighted EV/Sales (25%) & EV/EBITDA (75%)

DCF Assumptions

• Room Night growth slows to ~5-7%

by 2020; inline with low end of

historical travel CAGR.

• Airbnb captures ~33% of the vacation

rental market by 2020; reflecting

market-leader position but leaving

room for HomeAway and traditional

hotels.

• Take Rate of 12% (3% fee charged to

host, average 9% fee charged to guest).

• Similar cost stucture to HomeAway.

• 20% long-term margins reflecting

strong network effects and solid

customer captivity. Lack of other

meaningful competitive advantages

prevents higher margins.

Combined Final Valuation

Methodology EV Weight

Midpoint DCF: $8.9B 30%

Public Comps: $10.7B 70%

Weighted Avg: $10.2B

6

Return Analysis & Other Important Factors

• Current Valuation is Hyperinflated:

• Airbnb is an attractive business, but investors pouring in private dollars to fuel growth have inflated the

company’s valuation. This will particularly hurt later stage investors who are getting in at higher prices.

• At a $20B valuation, Airbnb would be valued at a 42.1x EV/Sales multiple and a 232.4x EV/EBITDA

multiple—both of which are well above the average for public comps.

• A $20B valuation would imply Airbnb has an EV 8x the size of HomeAway, which seems unlikely given the

similarity of their businesses and metrics to-date.

• Inflated Valuations Impact Returns:

• In order for investors to get a 3x return at a $21B post ($20B pre + $1B investment), Airbnb would have to

exit for $63B. This implies that Airbnb takes ~75% of the TAM, which is highly unlikely.

• Only an IPO can produce that sort of outcome. Even the major hotel brands, with real assets, billions of

dollars in revenue and many more customers, don’t have valuations at that level: Hilton ($29.3B), Marriott

($22.4B), Starwood ($14.8B).

• Many Unknowns Remain:

• Macroeconomic Trends: consumer behavior around the shared economy is a relatively new phenomenon and

it’s unclear how seasonality and cyclicality will effect the business moving forward.

• Regulation: The unpredictability of local governments and the decentralized regulatory environment could

stymie the pace of growth.

• Costs and Margin Pressure: As the vacation rental market continues to narrow into a two horse race between

Airbnb and HomeAway, both players will compete for the same customers, which will likely increase CAC,

burn rates and churn as well as threaten to lower margins.

Sources: Skift, Yahoo Finance, Factset

Key Takeaway: Private dollars have inflated Airbnb’s valuation making it difficult for later stage

investors to realize sufficient returns. Additionally, there are a number of unknowns that could

negatively impact Airbnb’s growth and long term success.