SEC Could Let More Small Investors Into Private Equity Fundraising

On Aug. 30, The Wall Street Journal reported that the Securities and Exchange Commission is considering options that would allow retail investors the opportunity to take part in fundraising for private companies, such as Airbnb and Uber. Last month, in collaboration with PitchBook, we published detailed reports on these two sharing-economy companies and rated both with narrow economic moats. Please see our July 20 Stock Strategist article, "Airbnb Offers Investors a Unique Stay," and our July 27 Stock Strategist article, "Uber May Pick Up Investors in Its IPO."

Ahead of its anticipated initial public offering in 2019-20, we see Airbnb’s current market capitalization ranging between $53 billion ($180 per share) and $65 billion ($221 per share), based on a peer-based and discounted cash flow-derived exit multiple approach. This is 70%-110% higher than the $31 billion the company fetched at its most recent funding round in July 2017 and above the valuation of any hotel operator. Our valuation implies an enterprise value/2019 EBITDA multiple range of 28-32 times (with an assumption of $3 billion in net cash), a premium to the 18 times awarded on average to other companies with online marketplaces.

Although Airbnb faces competition in alternative accommodations from narrow-moat companies Expedia EXPE, Booking Holdings BKNG, and TripAdvisor TRIP, we believe a premium valuation is warranted based on several attractive features Airbnb offers investors, including: (1) a powerful and rare network advantage that should drive continued share gains in a rapidly growing alternative accommodations market; (2) an opportunity to expand its network and addressable market with vertical extension into hotel, experiences, corporate, and transportation; and (3) strong profitability prospects driven by the company’s high consumer awareness that allows it to leverage top-line growth. We believe Airbnb’s IPO should be on the radar screens for investors seeking exposure to a company positioned to gain share in the nearly $700 billion global online travel market, which we estimate will grow 9.4% annually on average over the next five years.

We value Uber at a $110 billion market capitalization, above its implied $72 billion valuation after Toyota recently invested $500 million in the company. Reports suggest that Uber is likely to go public during the second half of 2019. This ride-sharing service provider, which sits at the number-two spot in the world (based on rides hailed), is attempting to gain traction in what we estimate to be a $630 billion addressable market by 2022. We think Uber’s core business, the ride-sharing platform, warrants a narrow moat rating, as it has displayed moat sources such as network effects and intangible assets. We project that Uber’s net revenue will grow at a 27% average annual pace over the next 10 years. We foresee Uber continuing to spend on expansion and research and development but think it will become profitable by 2022.

We also think Uber may leverage its moaty ride-sharing business and tap into other growth opportunities, including bike-sharing, meal takeout and delivery, freight brokerage, and ride-sharing via autonomous vehicles. In our view, autonomy is the most transformative technology set to affect the world of ride-sharing; we see powerful economic forces driving autonomous vehicle adoption in the ride-sharing industry, from which Uber may benefit. We note that risks remain, such as increased competition from various companies, including Alphabet (Waymo) GOOG/GOOGL, General Motors GM, Tesla TSLA, and Grubhub GRUB. Further, legal issues, which gave Uber a tainted reputation under former CEO Travis Kalanick, persist, although we believe that under new CEO Dara Khosrowshahi, Uber will see better days.