Dissecting Airbnb’s IPO Strategy with Wardley Maps

Reverse Engineering Airbnb’s Strategy for IPO Valuation

Literally the last flight I took in 2020 was in February this year to London. Since then it’s been pretty much downhill for obvious reasons. In February we heard whispers of this virus emanating from China but nothing much was thought of it. I try to get to London as frequently as possible to watch my blues Chelsea FC. This year I found a great Airbnb about half a mile from Stamford Bridge. For the first time I also took 2 ‘experience’ tours. One was a day trip to Stonehenge and the other was a half-day London walkabout. These experiences are with local people not professional tour operators, they are small and personal and amazing ways to experience the tourist sights without feeling like an exploited tourist. I remember thinking the upcoming Airbnb IPO should be one to watch.

Experience tour of Stonehenge with Ellie
Wardley Map derived mainly from Airbnb S1 disclosure

Gameplays

Gameplays
  1. The most obvious play which we have seen and known about for years is the network effect of these types of businesses. A virtuous circle exists as more hosts and guests sign-up so the value of the network increases and more will sign-up. This is at the core of the value proposition and provides a competitive protection unlike competitors. Currently capturing 2.5% of the serviceable addressable market the upside is still there.
  2. Clearly the platform can be leveraged and we see this occurring in the acquisitions which are adding to the network. The user experience design in my opinion is excellent and has evolved over the years with continuous improvement. Personally speaking, adding restaurant/meals experiences will round out the platform nicely.
  3. The most interesting play in my mind: sensing engines as coined by Wardley. Building on the evolving machine learning toolset is the opportunity to make sense of lots of data points around scheduling, locations, pricing, occupancy. This consumption data becomes invaluable for creating new streams of product offerings.
  4. For me the gap opportunity is creating repeatable bundle. Loyalty programs play into this but it’s more about subscription models. My ‘content diary’ gameplay could accompany this. However I think to truly attain the FANG status they will need to come up with repeatable subscription products.
  5. My final thought on gameplay is a personal ‘want’ but I think is rooted in logic. I think of it as a ‘travelers diary*’ but at its heart it’s a content play and is directed at organic marketing with a couple of objectives; carving operating margin out of the high 30–35% marketing cost (as a percentage of revenues), increasing network effects, creating supply. I would leave it to the design geniuses at Airbnb to come up with something in the realm of ‘diary plus plus’.
  6. Operational Evolution — supply demand competitive pressures are naturally causing some of the operations hurdles to evolve and Airbnb clearly leads the lobbying in many of these such as cleaning standards, risk and insurance, regulatory environment, tax collections. The problem is any levers here are not really a competitive advantage for very long.
*My unreadable diary entry for the London walkabout

Value

To value Airbnb I have used a discounted cash flow model — intrinsic valuation — since this offers the ability to link levers to the valuation model (most IPO valuations use relative valuation which simply price relative to comparables and multiples). You can see extracted below how I have mapped a pipeline of components which are grouped around core drives of operating margin. After all, operating margin is the biggest unknown of the Airbnb valuation. Since currently they are in negative territory (not unusually for a young company). Starting at the top GM% is gross margin percentage and you can see it runs at a healthy 75% clip. Then you have 3 core operating expenses G&A (general and administrative), Sales and Marketing, and Operations and Support. Currently each has historically been in the range 13%, 30–35%, and 15–18%. Simple maths says that deducting these from the 75% gross margin leaves approximately 15%. However this is quickly depleted into negative territory by Product Development.

Map Extract of Operating Pipeline Elements
Airbnb Operating Expenses and Percentage of Revenue
  • Dec 7th — we are hearing that the IPO price is now between $56 to $60. I will update my valuation closer to final pricing.
  • Dec 10th — pricing is set for $68- (see updated S1); look for ‘wisdom of crowds’ i.e. going live at around midday. I have updated my valuation and put in place a few scenarios which I have called implied pricing. Read this as in watching where the price lands over the next few weeks and then what does it imply for the growth drivers.
My next aspirational stop when/if the world gets back to normal
  • Dec 11th — with the price around $145 below are the implied growth numbers. Currently Operating Margins are negative 13, Airbnb grew 42% in 2018, 31% in 2019 and negative 25% in 2020. Personally I don’t see any basis in the intrinsic numbers to justify this, but we may have to wait for the next earnings review in January to come down to earth.

On Decision Making

As you can see in the above analysis there are lots of variables at play in determining the value. It’s quite difficult to understand what each piece of information contributes to the investment decision. Also each of the gameplays has different layers of complexity. Overall a pretty confused picture. To make for a clearer perspective I have leant on the Cynefin framework developed by Dave Snowden. I have included a diagram overlaying the strategy-valuation tools, but will use another post to get into this in more detail.

Cynefin framework

Conclusion

Simon Wardley uses the analogy of strategy being akin to chess. I am not so sure. Certainly understanding the landscape as in a chess board is really useful for any business. Unfortunately the gameplays are much more unconstrained in the real world; as are the rules of engagement. Perhaps it’s closer to the world of warcraft, which is why Simon built his thesis on Sun Tzu and John Boyds’s OODA loop. For investment decisions you are looking to tie together ‘your story’ and the numbers. For me story telling is problematic mainly because of the HIPPO effect (highest paid person’s opinion). Whereby the leader in the room gets the prevailing story across the line. Mapping is very useful in depoliticizing the discussion since most people understand that maps are just representations and can be pointed at, debated, changed and even discarded.

Attribution: Image by Wolfgang Eckert Pixabay

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