Airbnb $($ticker: ABNB$)$ was a high$-$profile initial public offering $($IPO$)$ in January $2021,$ and it has been in the

news ever since. There is a considerable amount of uncertainty surrounding Airbnb$$s long$-$term viability

as local governments attempt to limit its operation. The purpose of this case is to apply your capital

budgeting skills in a valuation of Airbnb.

Think of valuing a company like a big capital budgeting exercise. However, instead of forecasting cash

flows for a single project, you will be forecasting cash flows for an entire company. Likewise, instead of

computing the NPV of an individual project, you will compute the NPV of the cash flows of the entire

company. There will be one key difference: with projects we typically assume they come to an end, but

with companies we don$$t $($at least we hope not!$).$ Thus, we need to make an assumption about how cash

flows in the company grow in the long run. Typically we forecast individual cash flows for $5-10$ years and

then make an assumption about how cash flows grow after that $($more details on this below$).$ Here are

the steps for the Airbnb case:

$1.$ Start with the Airbnb excel worksheet I$$ve posted on Canvas $($Airbnb$.$xlsx$)$

$2.$ The spreadsheet gives assumptions about the year$-$over$-$year $($YOY$)$ growth of revenues and

related expenses for $2024-2030.$ These assumptions come from analyst reports and Airbnb management

forecasts. Combining these sources gives a bumpy growth forecast for the next few years which is why

the YOY growth estimates do not follow a smooth pattern at first. Use the base case assumptions in the

excel sheet to build a forecast of earnings and free cash flows for the years $2024$ to $2030.$ Specifically, start

by forecasting revenues each year. Then, using these forecasts, compute the associated $$cost of

revenue$,$ depreciation and capital expenditures. Cost of revenue are all costs of revenue not including

depreciation, so that Revenue $$ Cost of Revenue $=$ Earnings Before Interest Taxes Depreciation and

Amortization $($EBITDA$).$ Subtract off depreciation to get EBIT. Continue as we did in our capital budgeting

exercises until you eventually get to Free Cash Flow. You can assume a tax rate of $21\%$ and negligible

changes in net working capital. You can also assume an opportunity cost of capital of $14\%$ for all the FCFs$.$

$3.$ Beyond $2030,$ you will need to make an assumption about Airbnb$$s long$-$term growth once it

becomes a mature company.

$$ Start with the free cash flows you forecast for $2030$ and assume that they will grow by $3\%$ to $2031$

and continue growing at $3\%$ thereafter. You can then use the growing perpetuity formula to value

all the cash flows after $2030.$ By doing this, you will have what is called a $$terminal value$$ or

$$continuation value$$ for Airbnb as of the end of $2030($one year before the first cash flow in the

growing perpetuity$).$

$4.$ To avoid timing complexities, we will assume that it is now the beginning of $2024$ and that the

first cash flow $($the $2024$ FCF$)$ will be generated exactly one$-$year from now, at the end of $2024.$ Discount

all cash flows back to the beginning of $2024$ using a $14\%$ cost of capital. The sum of total of these

discounted cash flows is the estimated total enterprise value of Airbnb at the beginning of $2024.$

Enterprise Value $=$ Equity $+$ Debt $($Cash and Marketable Securities$).$

Airbnb Case$|$ MGT $180$R $|$ Winter $2024$ Page $2$ of $2$

$5.$ To arrive at the price per $($equity$)$ share, you must subtract Airbnb$$s debt from its enterprise value

and then add Airbnb$$s cash and marketable securities$.$

$$ Airbnb has $$2\mathrm{.}3$ billion in debt and $$11$ billion in cash and marketable securities$.$

$$ Airbnb has $648$ million shares outstanding. Use this information to calculate the price per share.

$6.$ Next, perform some sensitivity analysis.

$$ Given the uncertain regulatory environment, use the Upside and Downside scenarios for YoY

revenue growth to compute the associated Upside and Downside stock prices.

$$ Also, using the base case, check the sensitivity of your valuation to the assumptions about

Airbnb$$s cost of revenue. The sheet assumes that Airbnb will be able to stabilize its cost of revenue

to be $50\%$ by $2030.$ However, competition, higher product support expenses, or increased

advertising could eat into this. Calculate Airbnb$$s stock price if Cost of Revenue evolves as in the

$$Sensitivity CoR$$ row in the spreadsheet.

$7.$ As of the writing of this case, Airbnb$$s stock price was $$140.$

$$ Consider what it would take for your forecast to produce a valuation that equates to a

$$140$ stock price.

$$ By changing your revenue growth assumptions, find a set of YoY growth assumptions that would

produce a stock price of approximately $$140.$

$$ With these revenue assumptions in place, compute the compound annual growth rate $($CAGR$)$ in

FCF from $2024$ to $2030.$ For example, if your estimate of $2024$ FCF is $$1,000$ and for $2030$ is

$$10,000,$ then you would use the $$RATE$$ function in Excel: $=$RATE$(6,0,-1000,10000).$

$8.$ An alternative way to valu