MorningWord 9/23/16: Unicorny

by Dan September 23, 2016 9:56 am • FREE ACCESS

On September 13th in this space (The Silicon Stock Exchange) I had some thoughts on private tech market valuations:

For the first time in a very long time (or at-least in the modern investment era) private market investments may pose the greater risk of wreaking havoc on public markets, than the other way around.  While the demise of Theranos (once valued at close to $9 billion, now basically zero) has been contained, can you imagine if Uber (who’s most recent valuation neared $70 billion, with $9 billion in cash in the bank and $2 billion in debt, raised close to $15 billion to date) experienced massively decelerating growth before profitability? Would the push-out of profitability due to what Gurley calls the “intense subsidy battles” among many sharing economy companies cause massive reverberations in the public markets, where most tech companies who have IPO’d in the last 5 years have materially less profitability on a GAAP basis (or in many cases like Twitter, adjusted profits swing to a huge loss)?

Yesterday, the other Mega-unicorn in the U.S., private home rental service Airbnb (Didi & Xiaomi in China are valued higher, but below Uber), had a monster capital raise. Per the WSJ:

Airbnb Inc. has brought on Alphabet Inc.’s investment arm as a backer, part of an expected $850 million funding round that values the home-rental company at $30 billion, people close to the deal said.


Google Capital and another investment firm, Technology Crossover Ventures, co-led the round, the people said, valuing the company at $105 a share, higher than the $93.09 a share investors paid in last year’s round that put Airbnb’s valuation at $25.5 billion.

To put that $30 billion valuation in some context, it is larger than Marriott’s (MAR) public market value of $27 billion, a hotel company that is expected to book $15.3 billion in sales this year with net income of about $1 billion. Last year when Airbnb raised nearly $1 billion, the company expected to book $850 million in sales in 2015 (up 3 fold from 2013) with a projected $10 billion in sales in 2020, with expected ebitda of $3 billion.  If they were able to achieve that sort of sales growth, and that sort of profitability then $30 billion will be viewed as cheap given the international growth opportunities.

For comparison sake, Expedia (EXPE) has a $16 billion market cap with expected 2016 sales of $8.75 billion. It is growing 31% year over year, with GAAP net income of only $311 million. Priceline (PCLN) sports a $72.5 billion market cap, is expected to have $10.6 billion in sales this year, up 15% year over year, and is expected to book nearly $3 billion in GAAP net income / $4.26 billion in ebitda.

Maybe Airbnb’s round ain’t that crazy. Especially when you consider that they will continue to siphon a healthy chunk of EXPE, PCLN, MAR etc’s sales along the way to their $10 billion 2020 sales expectations.

Whether Airbnb’s potential disruption to the hotel and the hotel booking industries is similar to the impact Facebook (FB) has (and continues to have) on traditional print & tv news and advertising, Uber has on the transportation industry (and soon auto ownership) and Amazon has had on bricks and mortar retail remains to be seen. Perhaps AirBnB isn’t just eating into traditional bookings, maybe it’s even encouraging more travel (Uber has this potential as well). But either way it’s another massively disruptive industry. And that’s the rational (but skeptical) justification for valuation that may appear to be irrational.

But what’s new about it, like other mega-unicorns, is that AirBnB now has 30 billion dollar valuation, entirely within an opaque and lightly regulated private market. The private market pricing of all these unicorns may end being the most disruptive player of them all.