Airbnb: Undervalued at $10 Billion?

By Wayne Mulligan, on Thursday, April 17, 2014

Venture capital financings are at their highest level in 14 years...

Tech M&A last year eclipsed the sky-high levels of 2000...

The NASDAQ is hovering around 4,000...

One could argue that, once again, we’re in the middle of a “tech bubble.”

But the stock market aside, I’d argue that many of today’s technology companies are undervalued.

In fact, I believe they present a stunning opportunity for profit.

$10 Billion in Four Years

Did you happen to see this article about Airbnb last month?

Airbnb is a hospitality start-up that lets people rent out rooms (or their entire home) to travelers. They help facilitate the transaction and take a cut of sales.

When the company was first getting started, it was valued at $1 million.

In the article above, you’ll see that Airbnb is on the verge of closing a new round of financing – at an eye-popping $10 billion valuation.

A 990,000% increase in value in only 4 years – now that’s a staggering number.

But does that imply that Airbnb is overvalued? Does it mean there’s a tech bubble?

As far as I’m concerned, the answer is no.

Let’s take a look at why Airbnb may be undervalued.

Fair Value?

It’s tough to look at a superficial comparison between tech startups and their public market counterparts. Since it’s rarely an apples-to-apples comparison, it requires some thought and analysis.

Tech startups, for example, tend to be more efficient than large incumbents. They create new ways of doing things and entirely new business models.

Think about compared to Walmart.

Unlike Walmart, Amazon doesn’t have any physical locations. They don’t have to invest in the expensive construction and staffing of stores.

The company eliminated those costs and passed the savings onto the customer.

This led to robust growth, healthy margins and a valuation that’s increased rapidly.

The same could be said of Airbnb.

New Economics

Airbnb is pioneering a new business model around hospitality.

The company doesn’t build hotels. It doesn’t own property.

The company merely brokers rooms or homes and collects a fee.

When we compare Airbnb to traditional hotel chains, you can begin to see why I think Airbnb might be undervalued.

Take a look at Hyatt, for example.

Hyatt has over 147,000 hotel rooms available worldwide. It has a market cap (the public market equivalent of “valuation”) of $8.3 billion.

That equates to roughly $56,000 in market value per room.

Now look at Starwood.

Starwood has 346,000 rooms and commands a $14.55 billion market cap. That’s roughly $42,000 in market value per room.

Now let’s look at Airbnb.

Airbnb has over 500,000 rooms available on its site.

But it’s only valued at $10 billion...

That means Airbnb generates just $20,000 in market value per room.

This is a company that’s growing faster than, and will soon have more rooms than, any other hotel chain in the world.

And yet, Airbnb commands a market value per room that’s less than half of Hyatt’s (a company one-fifth its size).

That sure looks like a potential investment opportunity to me.

Don’t Let Big Numbers Scare You

The mainstream media enjoys writing sensational stories about young founders raising millions of dollars at billion-dollar valuations.

And while the big numbers may be reminiscent of the dot-com days, we shouldn’t let our emotions get the best of us.

Private start-ups like Airbnb are generating real financial value. They’re generating meaningful cash flow and revenue growth.

And thanks to the JOBS Act, you now have the opportunity to invest in private starts-ups – like the next Airbnb – at its earliest stages.

My co-founder, Matt, wrote a fantastic essay earlier this week that sums up why we’re focusing the majority of our personal investing on the private markets.

If you haven’t read it yet, definitely take a look »

Happy investing!

Best Regards,
Wayne Mulligan
Wayne Mulligan


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