How Airbnb Earned Itself a $25 Billion Price Tag

Home-sharing juggernaut Airbnbreached a jaw-dropping valuation of $25 billion in its most recent funding round. That figure left some observers scratching their heads as the company is projected to bring in just $900 million in revenue this year and is still operating at a loss.

Is Airbnb worth this colossal sum? Before breaking down the numbers behind the valuation, let's take a closer look at how the company got here.

What is Airbnb?One of the champions of the sharing economy alongside Uber, Airbnb is a website that allows home dwellers to rent out spare rooms or their entire homes for any period of time. Spaces can range from a simple backyard for camping to a luxurious beach house for thousands of dollars a night. The concept itself is not new, with competitors likeHomeAway and VRBO, a subsidiary of HomeAway, and for years, Craigslist has provided a more rudimentary substitute for such a service.

What has separated Airbnb from sites like HomeAway and VRBO is that Airbnb has always handled payments for its hosts, as opposed to the other two, which began as online classifieds and have since added direct payment options.HomeAway and VRBO also tend to specialize in vacation rentals, while Airbnb has become the dominant force in urban apartment rentals.

How big is this market?Home-sharing competes within the larger hotel and lodging industry. Founded in 2008, Airbnb already has 1.4 million listings on its site, while HomeAway has 1.1 million on its network.

Determining the number of rentable rooms in the world is difficult, as there are several different categories of lodging, big and small, but according to hospitality research company MKG Group, there are about 20 million hotel rooms globally.

That means Airbnb and the home-sharing industry in general are still a small piece of the overall lodging industry. It is important to note as well that many Airbnb listings are only available for a limited portion of the year.

What Airbnb has that the others don'tHilton Worldwide Holdings, the most valuable hotel chain in the world, is expected to see 9% revenue growth this year. HomeAway, Airbnb's closest rival, is expecting a sales increase of 10% to 12%, or about 20% in constant currency.

At Airbnb, meanwhile, that number is going through the roof, as its projected $900 million in revenue is more than triple its 2013 total of $250 million.The company has taken a good idea and executed it to near perfection. It provides free photography to new hosts to show apartments in the best light; it handles all payments, eliminating a potential trust issue; and it resolves any disputes between hosts and guests. At the same time, Airbnb provides a much wider variety of housing, both in type and location, and at lower prices than hotel chains.

It is easy to see why its popularity is exploding. The site is a simple way for the average American to leverage an underused asset -- a spare room or an apartment vacated when the host goes out of town -- to make extra cash.

Do the numbers add up?With this recent round of fundraising, the company carries a valuation on a price-to-sales basis of nearly 30 times. In the realm of publicly traded companies, that puts Airbnb above even social media titans likeFacebookandTwitter, which trade at 17 and 14 times sales, respectively. Facebook, however, is raking in boatloads of profits, and its high price-to-sales is as much a reflection of its huge profit margins as it is its massive valuation.

Airbnb, which expects an operating loss of $150 million this year, is not in the same league as Facebook, but it could be one day.

The home-sharing site benefits from many of the advantages that has madeFacebook so successful, including network effects, word-of-mouth advertising and popularity, and user-generated content. Facebook has developed such a profitable business model, with operating margins of 35%, because it simply provides a platform for its users and then sells advertising within the content. Similarly, Airbnb, with the dominant brand in the industry, only needs to provide the online platform for users to make transactions, allowing the company to collect a commission fee of 6% to 12% on bookings. Though it is losing money today because of expansion efforts, over the long run, it should be highly profitable. With the global hotel market coming in at more than $500 billion, this presents an enormous opportunity.

Airbnb expects to hit $10 billion in revenue by 2020,representing a compound annual growth rate of over 60%. It is clear that Airbnb does not expect its dramatic growth to slow down anytime soon.

Is the company overvalued at $25 billion? Perhaps, but if it can follow through on that projection and revolutionize the hotel and lodging industry, it will be worth much more than that one day.

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