Why Airbnb Achieved a Cool $100+ Billion Market Cap on its IPO day
The company was valued at $18 billion in April and reached up to $114 billion on its first trading day on the Nasdaq
The bankers have spoken and Airbnb’s shares were priced at $68. It started trading as ABNB on the Nasdaq, opening at $149. That is much higher than the $44 to $50 initial range. Airbnb reached a pre-IPO valuation of around $47 billion. It has now a market capitalization exceeding $100 billion. It reached $114 billion at some point, on its first day of trading as a public company.
Earlier this year, Airbnb was privately valued at about $18 billion when it was seeking fresh capital in the form of debt to support its operations and face the pandemic with a stronger cash position. Back in 2009, the company has a seed round with a valuation of $2 million.
Amid the pandemic impacting travel, Airbnb has still been one of the most anticipated initial public offerings of 2020. Airbnb has many good and great cards in its deck, boosting the current valuation and also the prospects for the company:
1. Limited supply and high demand for the shares
Talks about an Airbnb IPO have been going on for years. Demand for the shares has exceeded supply. That has positively impacted the price range for the shares and therefore the valuation. The company raised $3.5 billion so the float is limited given the demand.
Airbnb also allocated shares to hosts, which were quickly oversubscribed. That obviously reduced the number of shares available to other investors. Hosts could each purchase up to 275 shares pre-IPO and ended getting up to 200 each, for those happy few who were able to sign up on time.
Takeaway: Demand for shares wildly exceeded the available supply
2. The Market for Tech has been Red Hot
The demand for and success of other recent tech IPOs and promising technology companies have boosted the demand for the Airbnb IPO:
- Snowflake surged past $120 billion in market capitalization as Airbnb shares were being priced pre-IPO. Snowflake is up from a $12B valuation in its last private round back in February of this year.
- That same day, Doordash surged about 86% at $189.51 per share on its first trading day, to reach a $60 billion market capitalization. It was priced at $102 a share.
- Palantir, Tesla, Asana, Unity Software, and C3.ai all locked in significant gains recently.
Takeaway: Timing is extremely favorable for tech IPOs
3. A Solid Business Model
Long-term, Airbnb has a sustainable business model, which will keep growing the bottom line:
- Airbnb is a double-sided marketplace: customers pay a fee to rent and hosts pay a service fee. It is one of the strongest business models, similar to Amazon and eBay.
- It benefits from network effects: the more people join the platform, the more successful it becomes.
- The company benefits from low marginal costs and does not have to spend double to handle twice the number of hosts or customers. Margins increase as the business grows.
- The company has been diversifying into experiences and other streams of revenue.
- Airbnb’s business does not have to pay 15% or 30% fees to the app stores because it does not sell digital goods, unlike video games, for example
- Airbnb does not have any inventory and acts as a payment processor: hosting listings and handling payments, limiting its risk and costs.
- It collects services fees on all transactions on the platform. There are not any free nor freemium services provided.
- Airbnb is first and foremost a technology company. It has built a platform, which is mostly custom coded and therefore unique.
Takeaway: Technology companies with a marketplace business model at scale are often very successful
4. A Strong Position
The founders’ background in design and their hands-on experience from the early days has paid off. The company benefits from its cool factor and has built a sleek website, which is both enjoyable and efficient.
Airbnb has become a household name and a leading brand in its category.
In the same way that Amazon is used directly as a search engine for shopping, Airbnb is used as a search engine for short-term stays and 91% of the 2020 visits were direct, unpaid. That is up from 77% in 2019, according to Airbnb’s SEC filing. Most companies have to pay Google to rank well in their search engine and ensure traffic to their site.
Over the years, the company has added categories that improved the experience further with super hosts, “plus” listings, travel content, Luxe, and non-standard accommodations, including tents and castles.
The company has also very promising financial metrics, including CAGR and potential revenues at scale, assuming that listings, bookings, and price per night all continue to increase. Multiples of future revenues or extrapolations on growth rates can lead to rich valuations for the business.
Airbnb can attract and retain top engineering talent, which has been instrumental in creating and defending a competitive advantage. It leads to a superior user experience and automation behind the scenes.
Takeaway: Airbnb is a market leader with significant potential for further growth
5. A Large Global Market
In its S-1 form, Airbnb estimates that its total TAM (Total Addressable Market) is $3.4 trillion. Right now Airbnb’s key demographic is the 18 to 34 years old crowd and can expand to older, wealthier customers as it becomes more mainstream.
The company has reached a critical size, with a presence in 100,000 cities and more rooms available than Hilton and Marriott combined. It typically offers more spacious, cheaper stays than hotels and more privacy. That is especially valuable during this pandemic.
For special events, such as World Cups or New Year Eve, Airbnb tends to get a surge in listings as the local hosts list spare bedrooms to benefit from the temporary surges in pricing. It translates into millions in additional revenues. Airbnb has compiled some interesting numbers on this here.
“44 percent of Airbnb hosts around the world say they hosted guests traveling for a sporting event, which goes up to 54 percent in the United Kingdom and 55 percent in the United States”
Takeaway: Airbnb’s concept works worldwide and is competitive
6. Nobody is perfect
Airbnb, similarly to any company, faces challenges, including:
- Volatile revenues as of late due to the pandemic, which impacted the bottom line, switching from a profit to a loss
- Costs to operate: potential need to invest more in SEO (Search Engine Optimization) and paid listings to remain high in the search rankings
- Payment processing costs: Airbnb has a high cost for processing payments compared to its competitors
- Financing: $2 billion of debt at 9% and 11.5% obtained this year to face the pandemic weigh on cashflow
- Taxes: the IRS is seeking a $1.35 billion payment on income from prior years
- Use of funds: those last 2 could be paid off but that would be equal to the amount of the funds raised
- Serious competition from sites such as booking.com and others
- Threats from cities regulating short-term rentals to preserve their inventory of housing
- The risk of bad press, as any tragic events tied to a company in the new economy tend to spread faster and be used as a counterexample
Takeaway: Airbnb has the cashflows necessary to manage its challenges
A lot has changed since 2007 in San Francisco when Airbnb founders Brian Chesky and Joe Gebbia were looking for extra cash. All hotel rooms were booked because the Industrial Design conference was taking place. They charged visitors $80 to sleep on the floor. 13 years later, Airbnb is a publicly-traded company and a market leader.
There is a ton of potential for Airbnb to accomplish great things. As the pandemic subsides and travel bounces back, Airbnb will see its profits and revenues grow. It will have the cash to pay off its debt and invest in expanding the platform.
From there, the sky is the limit. Airbnb has a bright future as a publicly-traded company. That is why its valuation jumped from $18 to $47 pre-IPO and then up to $114 billion on its first day. It could reach new highs over the next few quarters, as business ramps up and bounces back from its pandemic levels.
Max Dufour is a Partner at Harmeda. He leads strategic engagements for Financial Services, Technology, and Strategy Consulting clients. Connect at firstname.lastname@example.org, on LinkedIn, or visit Harmeda. Any links to external sites can be affiliate links and therefore generate compensation as part of the Amazon Associates Program and other similar programs.