The Secret Math of Airbnb’s $24 Billion Valuation

Home-rental site’s revenue projected to top more than $900 million

By Rolfe Winkler and Douglas Macmillan

June 17, 2015 3:15 p.m. ET

Home-rental site Airbnb Inc. has given potential investors in a $1 billion funding effort an ambitious revenue forecast to justify a richer valuation than hotel giant Marriott International Inc.

Airbnb representatives in recent months told prospective investors the startup expects $850 million in revenue this year, according to people who viewed the projections. That would be more than triple the recorded revenue of $250 million in 2013.

Airbnb recently raised that projection to more than $900 million after its site performed better than expected in the first quarter, said a person familiar with the matter.

The company’s revenue is then expected to grow to $10 billion in 2020, said the people who viewed the projections.

The forecasts also show Airbnb’s business becoming profitable, reaching $3 billion of earnings before interest, taxes, depreciation and amortization in 2020, according to these people. For the moment, the company is burning cash to expand, and forecasts an operating loss of about $150 million this year.

The projections assume that Airbnb’s online marketplace can seize a notable share of the hospitality industry from hotel operators and booking sites such as Priceline Group Inc., while also fending off continuing battles with city regulators over taxes and lodging laws.

Within the month, Airbnb expects to close a $1 billion funding round at a $24 billion valuation, according to people familiar with the matter. It isn’t clear which investors are taking part in the newest round.

Marriott, which manages more than 4,000 hotels and last year had $13.8 billion in revenue, is valued at about $21 billion.

Airbnb’s value would also eclipse that of rival travel site Expedia Inc. by nearly two times. Airbnb arguably commands a premium valuation due to its higher growth rate—roughly 90% projected over the past two years compared with 17% expected for Expedia, which analysts expect will have $6.5 billion of revenue this year.

On the other hand, Expedia’s business makes money. Analysts forecast it will have earnings before interest, taxes, depreciation and amortization of $1.1 billion this year.

The current leader in hospitality, Priceline, has a market value of about $61 billion, and expects to generate $9 billion in revenue this year, according to analyst estimates, about 10 times Airbnb’s projection. Priceline’s expected Ebitda for the year is $3.6 billion.

Airbnb’s new round would make mutual fund giant T. Rowe Price and private-equity firm TPG look savvy, at least for now. Just 14 months ago, those investors led a funding round for Airbnb at a $10 billion valuation.

It is quite an ascent for a website that began in 2008 as a way to help people rent spare couches and beds to travelers. In those early days, co-founders Brian Chesky and Joe Gebbia and Nate Blecharczyk sold novelty cereal to keep the startup afloat. Now they will soon most likely be billionaires on paper.

Their website had nearly 1.4 million listings as the end of May, according to YipitData, a research firm that tracks Web data for institutional investors. That was more than double the 600,000 listings the company said it had as of February 2014. The listings include modest apartments, exotic beach homes and quirky properties such as a windmill on the Aegean Sea.

Airbnb generates revenue by taking a 3% cut of each booking along with a 6% to 12% service fee from guests.

To meet its lofty revenue targets, Airbnb would need to increase its share of the global lodging market from 1% to as much as 10% over the next five years, according to Douglas Quinby, an analyst with research firm Phocuswright.

“We’re still very much in the early days of travelers being aware of and considering Airbnb for their next trip,” said Sean Hennessey, industry consultant with Lodging Advisors LLC. “They could achieve a sizable amount of market share as the market grows and as their mind-share grows.”

Still, Airbnb’s revenue is getting pinched by regulators in some big cities.

New York, one of Airbnb’s largest markets, has been particularly inhospitable. The state’s attorney general last year issued a report citing “widespread illegality” among Airbnb hosts in New York City. Airbnb later said it removed some 2,000 listings.

Other cities from Santa Monica, Calif., to Berlin have either proposed or passed regulatory restrictions on short-term rentals. Hotels complain that Airbnb hosts don’t pay the same taxes and aren’t held to the same fire and safety standards.

At the same time, Airbnb could face tough competition as it plans to expand into the professional vacation-rental market, where rival HomeAway Inc.dominates. Priceline and others are also moving onto Airbnb’s room-sharing turf.