Airbnb is set to list its shares on NASDAQ on 10 December 2020. It plans to sell 51.9mn shares at US$56-60 apiece. This is higher than the US$44-50 it originally planned, on the back of improved sentiment.
Airbnb is a vacation rental online marketplace. Through its service, users can arrange lodging, primarily homestays, and tourism experiences or list their properties for rental. Airbnb has a global presence in 100,000 cities across more than 220 countries and regions. As of 30 September 2020, 75.7% of its homes and experience listings were active i.e. 5.6mn active listings out of 7.4mn available.
Source of revenue. The primary source of Airbnb’s revenue is service fees from bookings. It typically charges 14-16% service fees for accommodation bookings, either shared by hosts and guests, or borne entirely by hosts. Airbnb Experiences charges hosts a 20% service fee.
Geographical breakdown. The bulk of its revenue is derived from North America & Europe and the Middle East & Africa (EMEA). These two regions also provide higher gross daily rates than Latin America and the Asia Pacific (Figure 2). Its largest single-country market is the U.S., which brings in 36.8% of its revenue.
i. Near-term Covid-19 uncertainties. Covid infections spiked in 4Q20. As countries imposed strict lockdowns, particularly Europe which accounts for 40% of its revenue, a decrease in bookings is expected this current quarter.
ii. Regulatory curbs on short-term urban rental. Government bodies, including the EU, are planning to curb the market power of big tech companies to promote fairer competition. Any tougher regulation of urban rental may limit Airbnb’s profitability.
iii. Competition in online travel market by Booking.com and Expedia. Airbnb faces competition in the online travel market from travel giants such as Booking.com and Expedia. Huge marketing expenses have to be spent in order to defend or increase market share. Booking.com alone spent over US$5bn on marketing in 2019.
Recent optimism on Covid-19 vaccines may boost sentiment on travel stocks. While the current quarter is expected to be weak for Airbnb due to a resurgence of Covid-19, investors are looking forward to a normalisation in 2021. Airbnb may then gain traction as a recovery play.
Assuming next year’s sales grow 60-70% for Airbnb, its valuation at the top end of its listing price is 8.1x price-to-sales. This may be a 130% premium over its global peer group but is comparable to that of online travel market leader, Booking Holdings (Figure 4).
Investors may attribute a premium for its dominance in the home-sharing space, asset-light business and better geographical diversification than its rivals. At current market environment, investors may value high-growth companies at more than 10x annual sales such as Tesla and Snowflake. A 10x price-to-sales for Airbnb will command an expected share price of US$74.