Ready for the rebound.
Airbnb is an online marketplace disrupting the travel and hotel industry. Two weeks ago, the company reported first quarter earnings that missed analyst expectations by $0.81 per share. Revenue, on the other hand, came in above expectations and bookings were up 50% from the year prior.
Disruption from the pandemic and an unwinding of the ‘growth’ trade has seen Airbnb stock drop 35% from it's all-time high. At its peak the company had an enterprise value around $130 billion. That is now at $77 billion.
Airbnb is set to benefit from a number of secular trends and a boom in travel as the pandemic subsides. The stock is not cheap but the valuation makes sense given the company’s competitive advantages and huge total addressable market (TAM). It is now the largest position in my portfolio.
In Q1, our revenue was $887 million. This was an increase of 5% year-over-year, and it exceeded Q1 2019 levels as well. But here is the most important fact: Our business improved without the recovery of two of our strongest historical segments: urban travel and cross-border travel. We expect the return of urban and cross-border travel to be significant tailwinds over the coming quarters.
~ Brian Chesky, CEO of Airbnb
Airbnb makes money by facilitating accommodation between hosts and travellers. It receives 6-12% of the booking fee for rental accommodation and charges hosts 3% for every successful transaction.
Airbnb benefits both sides of its customer base. It lets property owners list their spaces and earn coveted rental income. On the other hand, it provides travelers with flexible and unique accommodation. Airbnb also offers hotel rooms and experiences which further enhance customer options and provide additional revenue.
The Airbnb business model is a powerful flywheel that gets stronger as more people join the service. The more people that join Airbnb, the greater the number of available hosts. Every host is also a potential traveler and vice versa. Increased users leads to a higher level of trust and community within the platform which brings people back for more.
Source: Airbnb shareholder letter.
Total Addressable Market (TAM)
The tourism industry as a whole is one of the largest industries in the world. According to Statista the total contribution of travel and tourism to the global economy was equivalent to $9.5 trillion in 2019.
Prior to the pandemic, the economic impact from travel and tourism was expected to advance to $18 trillion by 2029 according to the WTTC, a CAGR of 6.77%.
As seen by the following chart, spending on leisure tourism dropped dramatically in 2020. If the travel industry is going to resume its prior trend of growth we can expect to see a sharp rebound in spending in the coming years.
For its own part, Airbnb estimates its total addressable market to be $3.4 trillion. This includes revenue from short-term stays, long-term stays and experiences. With a trailing twelve month revenue of $3.4 billion this means Airbnb is capturing less than 1% of its total addressable market.
A major benefit with Airbnb compared to traditional hoteliers is that Airbnb has an enormous potential supply of accommodation. A hotel company may need to invest millions and build a new multi-storey complex in order to increase their number of rooms. Airbnb simply needs to convince more property owners to list on their platform.
As property owners learn of the income they can be making they become more likely to join the service and list their own spaces and experiences. This not only increases the supply of accommodation but of new customers.
A major concern for anyone considering an investment in Airbnb is competition. Building an app that connects travellers with hosts is not a particularly difficult or expensive endeavour. This is something that other companies could implement relatively easily.
What is difficult, however, is building a recognised brand and network of trusted hosts. With regard to this, Airbnb has excelled and quickly become the number one player.
Airbnb’s biggest competitor VRBO offers a similar service to Airbnb and has a strong presence in North America. It has also been around longer and is now owned by the Expedia Group (market cap $25 billion).
However, Airbnb is moving at a faster rate and possesses a stronger brand. As shown by the Google Trend chart below, Airbnb caught up quickly with VRBO and is now way ahead based on search data:
Source: Google Trends
Web traffic data from Semrush also reveals that Airbnb receives double the traffic of VRBO. It also posesses a better bounce rate and longer times spent on the site:
Airbnb Web Traffic
VRBO Web Traffic
Airbnb is stronger internationally than VRBO and is more agile.
In fact, Airbnb just announced over 100 upgrades to their platform including more flexible destination matching, faster checkouts, improved support and a simplified sign up process for hosts.
These upgrades are in preparation for a travel rebound that CEO Brian Chesky believes is going to be ‘unlike anything we have ever seen before’. Airbnb is doing all it can to meet the huge pent-up demand that was caused by the pandemic.
Traditional hotel companies and online booking platforms are not innovating to the extent that Airbnb is and Airbnb appears to have a stronger grasp of what the future of travel looks like.
Revenues have fallen less with Airbnb and average daily rates are substantially better than peers:
The pandemic has brought huge changes to the travel industry. Within these changes, three secular long-term trends can be identified.
People are more flexible regarding travel. The world of Zoom and work from home means that people are choosing to travel, work and live anywhere they like. People no longer travel only at weekends or for recreation purposes. This trend is perfectly suited for Airbnb.
People are staying for longer. In 2019, 14% of Airbnb bookings were for 28 days or longer. That figure is now up to 24%. People are not just travelling to Airbnbs they are living in them. Airbnb helps people who want to experience an area but don’t want to commit long-term. It’s popular among freelance workers and people who are in between homes. This is not good for traditional hotels or resorts.
People are travelling everywhere. According to Airbnb, people are no longer traveling to the same 20 or 30 cities. They are getting in cars and traveling to small towns and rural communities, many of which don’t even have a hotel. Some of this may subside as the pandemic diminishes but Airbnb is able to benefit from both rural and urban travel.
As can be seen, Airbnb is perfectly placed to benefit from these secular trends while traditional hotel companies are in a much weaker position. Flexible working, nomadic lifestyle, and financial independence are all trends that play to Airbnb’s strengths.
24% of our nights booked in Q1 were for stays of 28 nights or longer. People are not just traveling in Airbnb, they're now living on Airbnb. And these trends are not going away. The world is never going back to the way it was, and that means that travel is never going back to the way it was either. Our single priority in 2021 is to prepare for the coming travel rebound. To do this, we're professing the end-to-end experience of our core service. This includes educating the world about hosting, recruiting more hosts, simplifying the guest experience, and delivering a world-class service.
~ Brian Chesky, Airbnb CEO
As I’ve mentioned in previous reports, there are some things I look for when assessing competitive advantage; brand, economies of scale, monopoly, network effect, franchise product, addictive product, patents and superior customer service. I like to call these things pillars. The more pillars a company has the better.
In my view, Airbnb possesses at least two of these key pillars.
Airbnb has a powerful brand that is popular among millennials and older generations alike. The term Airbnb has made its way into the lexicon of everyday language. People use phrases like ‘let’s Airbnb it’ or ‘let’s get an Airbnb’. This speaks volumes for the Airbnb brand and the space it occupies in people’s minds.
2. Network Effect
Airbnb also has powerful network effects. The more people that join Airbnb, the stronger the platform becomes and the more revenue the company is able to bring in. To drive revenue, Airbnb simply needs to sign up new hosts.
24% of new hosts in 2020 were former guests which emphasises the feedback loop of the Airbnb business model. Because existing customer also become hosts, Airbnb can spend less on advertising than traditional travel companies.
Astonishingly, 90% of Airbnb web traffic comes from unpaid or direct methods. Instead of searching Google and being bombarded with ads, users more often go to Airbnb and see what’s available.
Meanwhile, traditional hotels and online booking sites must rely on expensive online advertising campaigns that are fiercely competitive.
Airbnb has quickly become the go-to platform for finding unique accommodation and has grown massively since its beginnings in 2009. From 2009 - 2019 Airbnb’s compounded growth rate was 153% according to Stratosjets.
Growth has naturally slowed since then but was still in the 30-40% range before the pandemic hit.
The next table shows how booking numbers have started to rebound in 2021. You can see that while the company is currently loss making it did bring home $500M in positive EBITDA in 2019.
With $6.57 billion of cash and $2.46 billion of debt, Airbnb trades at an enterprise value of $77 billion which gives it an enterprise value to revenue ratio of 22.7. This is based on a current share price of $143.
If we look at 2019 figures which do not show the affect of the pandemic then Airbnb currently trades at 16 times 2019 revenue. For comparison, Expedia trades at 2.7 times 2019 revenues, Booking 6.3 times and Hilton 11.7 times.
Although Airbnb has the most expensive multiple it also has the highest growth rates and profit margins by some way.
Airbnb stands out for its growth rates and positioning for the future of travel. At 2.7 times 2019 revenue, Expedia also looks worth investigating.
Back Of The Envelope Calculation
If we assume that Airbnb is able to grow revenues at 20% for the next 10 years from this level and then trade at a similar multiple of 20 times revenue, then we can expect Airbnb stock to be worth around $421 billion in 2031. This translates to a compound annual growth rate in the region of 18%.
For what it’s worth I believe Airbnb will grow faster than 20%, particularly over the next few years due to the pent-up demand for travel caused by the pandemic. Airbnb bookings are already up 50% from the year prior and bookings have already been accelerating in recent months.
The following chart shows how revenue dipped less for Airbnb than its peers. Airbnb’s revenues dropped around -29% during the pandemic while Expedia’s revenues dropped -57%.
With a hefty EBIT margin of 98% and faster growth rates Airbnb is likely to command a high premium if it continues on its current trajectory.
It’s impossible to put a precise valuation on the company’s shares but $77 billion for a company with this much potential is reasonable.
In a world where Netflix is worth $225 billion and Facebook is worth $950 billion, I see Airbnb at least doubling from here.
No investment is without risk and it’s important to consider both sides of any trade. From what I can gather the main risk factors, aside from competition, can be summarised below:
The key risk factor with Airbnb is that the company gets banned from operating in major tourist cities or communities. Airbnb has been criticised by some authorities for distorting the local rental market and making it harder for people to find long-term accommodation.
A good example of this is in Barcelona where rentals less than 30-days were made illegal without a licence. In San Francisco, rentals are only allowed if hosts are full-time residents and bookings are capped at 90-days. This reportedly led to a drop in Airbnb listings by 50%. It is a similar story in New York and many other cities around the world.
This is no doubt a big risk factor for Airbnb as cities make up a large portion of Airbnb revenue. That said, Airbnb still operates in many of these places. 90-days is a long enough time and many owners will be happy to obtain licences if it allows them to generate extra income.
Many of these cities are also suffering financially from the pandemic. In the latest earnings call, Chesky states that many jurisdictions have reached out to Airbnb in order to build new partnerships. There is a chance that the trend of regulation could reverse and Airbnb could feature more prominently in major towns.
With 4 million hosts and 5.6 million listings, Airbnb has an impressive volume of supply that exceeds the largest hotel brands in the world.
However, that figure of 5.6 million listings is relatively unchanged from last year and an article in the Financial Times reported that the supply of new hosts will be unable to match the upcoming travel boom.
Although it’s true that the number of listings is flat year on year, this is unsurprising given the effects of the pandemic. People can hardly offer up their homes to Airbnb when they are not allowed to leave them. As the pandemic subsides we are likely to see more hosts coming on board.
As mentioned on the latest earnings call, Airbnb are putting all their resources into making sure they can meet the upcoming travel boom.
Travel Has Changed Forever?
Cross-border and urban travel has not yet fully rebounded and there are some who think it may never reach the levels it did before. Certainly, business travel is going to be very different in future years so expected growth of the industry may not reach the levels that people are expecting.
However, this risk may not eventuate. Travel will remain one of the largest industries in the world. Numerous surveys show that the thing consumers are missing most after months of lockdowns is the ability to travel again.
At 22 times revenue with negative EBITDA, the valuation of Airbnb is certainly on the expensive side and pricing in a lot of growth. Last year, value investing professor Aswath Damodaran gave the stock a fair value of $33 - $38 billion. That is less than half the current $77 billion valuation.
However, valuations of Airbnb underestimate the qualitative strength of the company. Brand, network effects and industry size are not always factored into intrinsic valuation calculations but they are important to consider. Given this powerful forces, a $77 billion valuation begins to look more feasible.
The recent IPO lockup expiry means that more downside could come from investors unloading shares. However, such a move would only be short-term and could be considered a gift for investors who want to buy more shares.
Additional Points Of Interest
4 million hosts, 5.6 million listings (1 million more than in 2019)
50% of hosts get a booking within 4 days of activation.
The average host makes $8,000 a year with one listing.
24% of bookings are longer than 28 days.
Urban travel growth rate has increased every month so far in 2021
The risk of government regulation on Airbnb is real and needs to be watched closely. There are also plenty of competitors in the travel space. However, the fact is these issues are not showing up in the numbers.
Airbnb continues to rebond and grow more strongly than its peers. Bookings, revenue and daily rates are all heading in the right direction.
Airbnb possesses a wonderful business model and in my opinion represents the future of online travel. It is a flexible, powerful feedback loop with multiple options to increase revenue.
I wasn’t keen when Airbnb traded above $200 a share but now it has dropped -35%, the story becomes more appealing. Airbnb at $140 feels a lot like Facebook did in August 2012.
In 2012, Facebook IPO’d then dropped around 50% as founders unloaded shares and investors doubted the valuation. Facebook went on to deliver a 4X return in less than 10 years.
Airbnb is the future of the travel industry and the $80 billion valuation is cheap enough to initiate a good sized position. I feel this valuation will look small when we look back in a few years time. Airbnb is now my largest position at an average price of $146 per share.
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Disclosure: I am/we are long ABNB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst and does not purport to tell or suggest which securities customers should buy or sell for themselves. The reader agrees to assume all risk resulting from the application of any of the information provided. We strive to provide accurate data and analysis, however, mistakes and errors do occur. Financial investing is risky and not for everyone. You should not bet more than you can afford to lose. Past performance is not indicative of future results.