- The company that is changing the way we travel has had a strong opening on the NYSE, despite the lack of global travel.
- The COVID-19 pandemic had a material impact in 2020, but revenues were down less than expected, displaying Airbnb's ability to show resiliency and flexibility.
- The classic Peter Lynch quote - "invest in what you know" - fits this stock perfectly.
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As many hyper-growth technology stocks pull back amid global reopening stock rotation, Airbnb (NASDAQ:ABNB) the tech-enabled travel giant has held strong displaying its promise as a buy and hold investment for investors with a long-term horizon. Despite an act of god that has crippled most travel companies in 2020, Airbnb has weathered the storm and looks ready to dominate through the post-COVID-19 period.
Why we love Airbnb:
As one of Wall Street's best ever investors once noted, investors should keep it simple and just "invest in what you know." For most humans on earth, they know and have most likely used, Airbnb. We think there are only a handful of companies globally who can claim to be classed as a "verb" stock. When you next take a flight on your holidays, you touch down and head outside the terminal to grab an Uber (UBER) on your way to your Airbnb. Taxi and self-catering accommodation are barely part of the English vocabulary going forward.
Of course, for strong stock performance, it's not enough to simply infiltrate the Oxford English dictionary - investors will require sound financials and growth prospects to get on board. That is exactly what we believe Airbnb offers with its many growth opportunities and global footprint.
The Growth story and future prospects
When assessing future growth opportunities, there is nowhere better to start than the market itself. If you are looking to invest in a fast-paced global growth market, the travel and other accommodations market could offer the right environment. According to BusinessWire, the sector is expected to provide a compound annual growth rate (CAGR) of 19.1% in 2021, when compared to 2020 with the global market forecast for revenues of $801.9 billion, up from $673 billion. This growth is expected to continue onwards to 2025, albeit at a slower rate of 7% for a total global revenue figure of approximately $1.052.84 billion. While this strong market growth provides a great foundation for company growth, key to Airbnb's success over the next 3-5 years will be their ability to continue their trend since inception of increasing top-line revenue growth via greater market penetration.
Their recent 10-Q filing shows top-line revenue of $3.4 billion in 2020, which was down 30% from the 2019 total revenues of $4.8 billion. When assessing future growth prospects, it's important to account for any one-off events or aberrations, such as in this case COVID-19. If we delve back deeper into the Airbnb annual reports, ignoring 2020 and the impact of the pandemic, we can begin to paint a picture of their ability to grow revenues and market share.
Per this data, we note a company that is still growing revenues (pre-pandemic) in the region of 30% year on year. Assuming the company can recover to pre-pandemic levels in the coming year, and that this growth trend can be continued - and even baking in some slowdown per the trend above - we can easily foresee a headline revenue figure of approximately $13 billion in FY2025 per our calculations below.
(Source: Revolution Capital estimates)
If these calculations seem ambitious, remember that the global travel and other accommodations market itself is set for expansion to $1,052 billion, meaning Airbnb would only have to show a market penetration of 1.22% ($12.8 billion/$1,052 billion), current market penetration is 0.51% ($3.4 billion/$673 billion). So what exactly are the growth catalysts that can achieve this goal?
The Growth Catalysts
There are really two key catalysts which underpin the headline revenue figures in the Airbnb financials, the number of trips booked per annum and the average daily rate (ADR). Key to maintaining revenue growth will be their ability to entice new hosts to join the platform, new customers to use Airbnb, and also to increase the ADR for those guests.
Looking ahead, we see a fairly ideal mix of ingredients for the company to do just that. Firstly, while many people globally have felt the impact of the pandemic and will be facing redundancies, lower income, and potentially difficult economic times, there are a high proportion of the work from home crowd who've been bashing away at their laptops, earning pennies, and building up a war chest to splurge on post-COVID, Instagram-worthy holidays.
This graph from the U.S. Bureau of economic analysis shows a huge spike in savings rates over the prior-year period, which we feel will inevitably be put to use by increased consumer spending in years to come.
Put these two key elements together and you have new hosts on potentially low or reduced income, looking to raise some extra cash by letting out their spare room or their whole home. Alongside a pent-up demand from major sections of the global population, with high levels of disposable income looking for their first holiday in 12-18 months.
It is not difficult to see how the surge in demand could also spill over into an increased ADR. Airbnb (and most of it hosts) operates on a dynamic pricing model, where prices increase in line with demand. In the current environment, once global travel is back on the agenda, we would expect increasing nightly prices to be a feature, as many travelers try to access accommodations in popular venues.
For those more pessimistic on the global travel recovery, it was reassuring to hear management discuss on their recent earnings call their expectations for the work from home culture to actually provide support for bookings globally. In the post-pandemic world, they foresee a change to the way we travel. As more people work from home or remotely, they can see this enabling people to leverage their home as an Airbnb hosting asset, to fund a stay in another location for a longer period. Think about an NYC working professional, taking a break from the city to escape to the slower-paced life of New England, working remotely, and funding accommodation via their apartment in Manhattan - two income streams for investors from one host.
Supporting the scope for ADR increases is Airbnb's pivot into their experiences, management has highlighted this as a key area for them going forward. CEO and Founder Brian Chesky commented in their recent earnings call:
With Experiences, this is a very important product for us. Experiences are one of the purest manifestations of hosting and connection that we have. I mean, in a sense, that is the entire product. You have an experience with a host and you connect with other guests. So, this is really important to us.
He continues on to say that based on user ratings and feedback that "what we found statistically is that guests on Airbnb actually like Experiences statistically more than homes." For investors, this provides an optionality that is key to continued growth, the ability to harness your user base and either up-sell new products such as experiences or pivot into new industries altogether can increase the likelihood of successful growth and valuation in the future.
What this means for the Airbnb valuation
If the growth story plays out as we've outlined in our thesis thus far, we would expect a strong continued uptrend in stock price as revenues increase and the company moves towards strong earnings. Airbnb's current valuation is not exactly cheap at an EV/Sales figure of 24.5 based on FY19 pre-COVID revenues, calculated by utilizing current market cap ($109 billion), plus cash ($6 billion) less debt ($2.3 billion) to give an enterprise value of $112.7 billion, divided this by sales of $4.6 billion on a trailing 12-month basis.
Our assumed revenue figure of $13 billion per annum in 2025, based on growth projections outlined in our table above, would mean an enterprise value of $318.5 billion in FY 2025 using the same EV/sales multiple of 24.5, giving an implied CAGR of 23%. For investors looking for a blue-chip long-term stock, in the Peter Lynch mode of buying stocks you know and leaving them alone, this appears to be a sensible option. Of course with any forward-looking assumptions, there are many factors that can affect the thesis, in valuation terms a contraction of the EV/sales multiple or a reduction in revenue growth would both have a material impact on our thesis.
Further risks to the bullish thesis for Airbnb
While the bullish thesis looks promising thus far, of course, it is always imperative to also consider the risks to any thesis. From our research, we think there are two key risks to the bull case for Airbnb, although we think a number of them can be rebutted depending on your opinions on how the future of travel will look.
The first risk in our opinion is that booking revenue and/or the number of nights booked began to stall. While it's almost certain that there will be an uptick in bookings post-COVID, no one yet knows when this will fully take hold as the pandemic continues to be an ongoing feature of our lives. It's our opinion that investors will give the stock some leeway until we're clear of the other side of the pandemic, which may take 12-18 months more.
At this point, the expectation should be to return to at least FY2019 levels, with further growth scoped into the following years. Any sign of slowing growth, that is not directly related to COVID-19 restrictions would no doubt affect the outlook and signal a change of characteristics for the stock. It does appear that Airbnb is well-posed to counter this risk, given their large user base and their ability to harness that by entering new related markets, such as experiences or alternative accommodation.
The second risk is the reputational or legal risks of the firm, in relation to various sporadic incidences that will take place globally and could somewhat be out of their control. More specifically and from our own knowledge of Airbnb hosting, the restrictions imposed by local councils and governments in an effort to curb unlicensed usage of private properties. There have been a huge number of lawsuits, legal challenges, and proposed tightening of regulations across the globe in response to a surge of new Air-Landlords. To date, it doesn't appear that these have materially impacted the firm's growth, but they have no doubt had some impact on revenues as landlords have to work harder to justify their Airbnb lets or reduce the number of days they are available. Ultimately, we feel this risk will be outweighed by the sheer volume of new hosts and travelers in the coming years. If restrictions are imposed on the number of nights a property can be let, this might just encourage landlords to consider further properties with less nights at each to bridge the gap.
Summarizing our growth thesis for Airbnb
While there are, no doubt, some risks to the bullish thesis, we feel that as far as holding a long-term compounding growth stock, with high potential and limited downside then Airbnb is as good a bet as any. Given the circumstances of the past 12 months, Airbnb is a stock that should benefit from some strong tailwinds, as the globe begins to travel in huge volume again in the coming years.
This article was written by
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