Airbnb: Record Cash Flow & Poised To Ride Travel Tailwinds (NASDAQ:ABNB)
Airbnb (NASDAQ:ABNB) was founded in 2008 when Brian Chesky decided to rent out a room in his house to cover the rent. They laid airbeds on the floor and bingo, Airbnb was born. After that point, the company focused on providing surplus accommodation capacity for overbooked conferences, before expanding globally to all aspects of travel.
Airbnb is a true “disrupter” of the traditional hotel industry. Before Airbnb, the thought of staying in someone’s house was pretty much unheard of. Founder and CEO, Chesky, often talks about the number of times he was called “crazy”, but investors decided to take a chance on the founder, as they could see his entrepreneurial talent. Airbnb stayed private for a very long time and was growing very well until…the pandemic hit. The travel industry and Airbnb were sent into turmoil as travel shutdown globally. The company which was famed for its “family” like culture found themselves having to lay off a quarter of their workforce or 1,900 employees. Airbnb’s lifeline was the bull market of 2020, which saw stocks rise and strong retail demand thanks to a swath of stimulus checks. The company saw this as a prime opportunity to go public in December 2020. I covered the Airbnb IPO on my investing YouTube channel (Motivation 2 Invest) and stated at the time that the company was “tremendous” but it was clear they were going public to “survive” rather than for the benefit of public shareholders, thus I decided not to invest. Airbnb was valued privately in April 2020 at “just” $18 billion, then by December 2020, the valuation was a staggering $100 billion, making Airbnb the biggest IPO of 2020.
Since Airbnb’s IPO over $28 billion has been wiped off the market cap thanks to rising interest rate fears while the company has been growing revenues rapidly and produced a record $1.2 billion in free cash flow in the first quarter. I believe this is the first signal of the upcoming travel rebound, which is about to occur this summer. According to Statista’s Mobility Market Outlook (MMO), the global travel industry is projected to grow by a meteoric 48%, reaching $637 billion in 2022. In 2023, demand is expected to overtake pre-pandemic levels by ~5% reaching close to $756 billion. As a former owner/investor into a large travel website (100,000 visits/month), I can attest the fact there is a huge amount of pent-up travel demand. I believe Airbnb is poised to ride this wave while simultaneously the stock is trading at a “fair valuation and offers Growth at a Reasonable Price (G.A.R.P). Let’s dive into the business model, new product features, financials and valuation to find out more.
Evolving Business Model
Airbnb operates with a two-sided marketplace, that includes “Hosts” and “Guests”. The Hosts are the people who rent out their room, house, apartment, log cabin, etc. while the Guests are the travellers who stay. The company makes their money by charging booking fees to both the guest and the host via their “Split Fee” structure. This includes an approximate fee of 3% charged to hosts and up to 14% for guests. The reason Airbnb can charge such seemingly high fee is they have an abundance of inventory and a secure protected platform.
Airbnb is one of the largest travel providers in the world but famously “doesn’t own any hotels”, a little like Uber doesn’t “own Taxis”. The beauty of this business model is threefold, the first benefit is the low Capex (capital expenditure) required, Airbnb doesn’t have to build or lease hotels where they think demand will be “hot”. Secondly, the company has effectively unlimited inventory, as hosts can sign up no matter where in the world and thus this company is like owning a piece of every hotel in the world, what value would that be worth?
Thirdly, Airbnb’s structure allows for greater flexibility of inventory, which is necessary in this ever-changing world. For example, pre-pandemic, major cities were the place to be and Airbnb had countless battles with popular tourist cities such as Barcelona, of which their regional government even went as far as to ban Airbnb without a “license” in the city. As the Pandemic hit and remote working became more accepted, major cities saw a drain of talent as the “need” to be in the office was not as prevalent. This has pushed up real estate prices in outer city suburbs and even the countryside. While Airbnb has seen this as a prime opportunity to represent themselves as the go-to provider for digital nomads and remote workers who wish to spend longer stays in remote regions from desert homes to French Chateaus.
Airbnb Summer Release
Airbnb Summer Release 2022 is a presentation which showcased the launch of new features which are tailored to the longer stay traveller and remote workers. The company has revamped their app to include “categories” which include everything from beach houses, treehouses, camping and desert homes to “OMG” homes. This is the product category which includes the wacky and wonderful places to stay from unique treehouses to even a yellow submarine. The benefit of this is it appeals to a new range of travellers while simultaneously providing Airbnb with more revenue, as longer stays equal more bookings. I believe hotels are still very appealing for short stays of one to two nights, but Airbnb’s are really better for longer term as you do want to feel “as home”.
The company has also introduced AirCover, the most comprehensive protection policy in travel. This will be included in all bookings and is free. This includes many benefits such as booking protection, check-in guarantee and even a 24-hour safety line. The beauty of this platform is it does solve a big issue with Airbnb and that is the majority of hosts are not professionals. The greatest fear for many guests is they turn up to a house booking on Airbnb in the middle of the night and the host doesn’t answer. At a hotel, this is not a worry and you will be greeted by a friendly receptionist most of the time. Airbnb’s new “AirCover” should help to solve this pain point for guests.
Airbnb produced some incredible results for the first quarter of 2022. Revenue rose by a rapid 70% year over year, reaching $1.51 billion and beating analyst expectations. While the company’s total bookings soared by 59% year over year to 102 million, this was a landmark moment for the company as it was the first time total nights stayed and experience bookings had been greater than 100 million.
As a software company, Airbnb has a very high gross margin of 80%, which is fantastic. They did produce a net loss of $19 million in Q1 but this was a significant improvement from the same period in 2018 and 2019. While adjusted EBITDA came in at $229 million, which was their first positive adjusted EBITDA in Q1, this gives an adjusted EBITDA margin of positive 15%, up from a negative 7% in the prior year and a negative 30% in Q1 2019.
The cherry on top was really the $1.2 billion of free cash flow in the quarter, which was an all-time high for the company.
The company also announced strong guidance with an expectation of growth at a similar rate for the second quarter compared to 2019. They are forecasting between $2.03 billion to $2.13 billion for Q2.
Airbnb also has a strong balance sheet with $8.3 billion in cash and just $1.9 billion in long-term debt.
In order to value Airbnb, I have plugged the latest financials into my advanced valuation model, which uses the discounted cash flow method of valuation. I have forecasted the company to grow at 35% growth rate for next year and 25% for the next 2 to 5 years, which is in line with pre-pandemic revenue growth rates of 33% since the years 2018 to 2019.
I have conservatively predicted margins to increase to 14% in the next four years as the company reaches greater scale.
In order to increase the accuracy of the valuation, I have capitalised the R&D expenses of the company.
Given these factors, I get a fair value of $105 per share. The stock is currently trading at $110 at the time of writing and thus, in my eyes, is “fairly valued”. This implies the company can continue to grow at the rates predicted. I believe, in 2022, they may be able to grow at a much faster rate thanks to the travel rebound tailwinds. However, for my valuation, I prefer to be conservative rather than “swing for the fences”.
The company trades at an EV to EBITDA multiple of 26.5, which is “cheap” relative to their historic multiples which average ~60.
Relative to competitors, Airbnb is still highly priced, with an EV to EBITDA (forward) = 26.5. This is more expensive than Booking Holdings (BKNG) which trades at an EV to EBITDA (forward) = 15.9 and Expedia Group (EXPE) which trades at an EV to EBITDA (forward) = 9.2.
Airbnb faces a lot of competition from the travel industry. I believe Booking Holdings is their biggest threat, as they also offer apartments to rent in addition to hotels. Also, Booking.com enables guests to book their entire trip including flights and car rentals from one place, which I personally think Airbnb should integrate. Now, although Booking.com doesn’t seem to be very innovative unlike Airbnb, their standard formula works. Booking Holdings produced gross bookings of $76 billion and revenue of $10.9 billion in 2021. This was much greater than Airbnb which produced $46.8 billion in bookings and ~$6 billion in revenue. However, Airbnb does have a higher Net Promoter Score (NPS) of 32 vs Booking Holdings at 24. This is based upon how likely a customer would be to recommend the service to a friend. Airbnb also edged Booking.com in app store downloads with 12 million, vs 11 million for Booking.
The annual inflation rate for the United States is a staggering 8.3% for the 12 months ended April 2022 after rising 8.5% previously. This is much higher than the Fed’s 2% target. Inflation raises the cost of goods which can impact consumer spending habits. Thus, if people have left excess money in their pockets, they may be less inclined to travel. We have also seen record-high oil prices with WTI over $100/barrel, which could impact airline ticket prices.
According to the CEO of Delta Air Lines, Ed Bastian, the effect of high oil prices on tickets:
“is probably about $25 on a ticket, that could be anywhere between 5% to 10% at these high levels of oil… and international [flights] will be a bit higher than that”.
Delta is planning to mitigate these issues by introducing fuel surcharges on international flights. Economics 101 states higher prices slow demand and thus this could be a headwind against the consumer. Personally, I believe a lot of airlines use hedging and options to “lock in” fuel prices in advance but that doesn’t mean they won’t feel the need to pass extra costs onto consumers.
Thanks to high inflation and rising interest rate fears, the market has been extra sensitive to companies’ earnings results. Many FANG stocks such as Facebook (Meta) (FB), Amazon (AMZN) and Netflix (NFLX) have seen huge declines giving up pre-pandemic gains. Be sure to follow and see my other posts for details on other value opportunities.
Airbnb is a tremendous company, with a strong culture and market-leading position as one of the “big three” online travel providers which include Booking Holdings and Expedia. Airbnb is growing revenue faster than competitors, and their recent pivot towards longer-term alternative stays could prove to be very lucrative for the company. They have had a fantastic start to the first quarter and are poised for tremendous growth ahead thanks to the pent-up travel demand tailwinds. Given the stock trades at a fair valuation, this could be an opportunity to purchase “Growth at a Reasonable Price”. On a personal level, the main issue for me is the opportunity cost as there are many very cheap stocks around right now (see my other posts) and the FANGs have seen major declines.