Airbnb: Beautiful And Dangerous
Summary
- Airbnb is a very unique company that enjoys many competitive advantages vs. competitors.
- However, as a stock, the high valuation and short interest are giving me pause.
- On fundamentals, the lack of profitability, lack of recurring revenues, and lack of regulatory certainty are also negatives.
Airbnb (NASDAQ:ABNB) is one of the most unique companies in the market today. Led by its co-founder, Brian Chesky, the company has a unique business model that is reimagining the hospitality industry. The company is growing much faster than its OTA competitors and enjoys many competitive advantages over them. However, there are many risks associated with owning Airbnb shares, chief among them are its high valuation and lack of revenue visibility.
Market
Airbnb services the global travel market, which is massive. The company estimates that its serviceable addressable market (NYSE:SAM) is $1.5 trillion, comprising $1.2 trillion for short-term stays and $239 billion for experiences.
Airbnb's key competitors include global OTAs (online travel agencies) such as Booking Holdings (BKNG) and Expedia Group (EXPE), as well as hospitality chains like Hilton Hotels (HLT), Marriott International (MAR) and Wyndham Hotels & Resorts (WH) and Hyatt Hotels (H).
Business
Airbnb is a marketplace for property rental, primarily for vacations, and home to roughly 4 million hosts located in 220 countries and regions around the world. Airbnb is like the Uber (NYSE:UBER) for sleeping arrangements, enabling anyone to host anywhere.
As Airbnb has scaled and evolved over time, the platform attracted professional hosts, including existing professional property managers whose inventory fits in well with the platform. In addition, Airbnb's offerings extended to long-term rentals (over a month) and experiences.
Airbnb enjoys three important competitive advantages vs. the OTAs and chain hotels.
First, Airbnb's differentiated and exclusive inventory, with over 5.6 million active listings, offers compelling treasure hunt and vacation experiences for its 54 million active users (as of 2019). ~90% of listers are individuals and over 70% of nights booked have been with individual listings. The vast majority of these listings are not available on OTAs. These listings include 90,000 cabins, 40,00 farms, 24,000 tiny homes, 5,600 boats, 3,500 castles, 2,800 yurts, 2,600 treehouses, 1,600 private islands, 300 lighthouses, and 140 igloos.
Second, Airbnb's open platform lowers the barrier of entry for hosts and creates hospitality supply in previously under-served or unavailable locations. In addition, it creates surge capacity for special events such as the annual Berkshire Hathaway (BRK.B) meeting in Omaha, which is famous for surge pricing and lack of accommodations at around that time of the year.
Third, the company enjoys a network effect and global scale which allows it to acquire traffic very efficiently across the globe. Hosts invest a lot of effort in building their reputation and relationship with guests on the platform, and play an important role in acquiring customers. This allows Airbnb to grow traffic mostly organically with incredibly low traffic acquisition cost, which is the biggest expense for all the OTAs.
The company makes money mostly through host fees and guest fees. The company typically charges the host 3% of the booking subtotal, which includes the nightly rate, cleaning fee and other surcharges. Unlike the OTAs, Airbnb also charges guests a fee ranging from high-single-digits to up to 14% of the subtotal. (Note: there are different fee structures for experiences and professionals.) The company's total take-rate is around 12-13% and trending up.
One of the company's most important innovations is designing a system that allows millions of strangers to trust each other. Hosts and guests communicate with each other before booking, pay through a secure payments platform, and post reviews after their stay. The company uses predictive analytics to flag and investigate fraudulent activity and suspicious behavior. Hosts and guests are also subject to online background checks before their first transaction on the platform and thereafter on an annual basis. Hosts are also provided liability insurance coverage of up to $1 million. All of these systems and protections make people feel safe.
Financials & Valuation
Airbnb is in hyper growth mode and is operating at a loss.
The company's 2020 gross bookings was $23.9 billion and is expected to grow 79.4% y/y in 2021 to $42.9 billion. This growth is expected to be driven by a 61% increase in nights and experiences booked, and a 13% increase in GBV (gross booking value) per night.
The company's 2020 revenue was $3.4 billion and is expected to grow 60% y/y in 2021 to $5.4 billion. Gross margin is high at 74% in 2020 and is expected to expand to 77.4% in 2021.
However, the company continues to operate at a loss and is expected to post an operating margin of -6.6% in 2021. If consensus estimate is right, the company will turn profitable in 2022 with a 3.4% operating margin. Similarly, 2021 EPS is expected to be negative $1.59 per share but 2022 is expected to turn positive to $0.07 per share.
At scale, Airbnb could reach the operating margin of its OTA competitors such as Booking, which posted a 35.5% operating margin in 2019. However, this is speculative and won't be achieved, if ever, until many years from now.
The good news is that free cash flow is expected to turn positive in this year, generating $654 million in 2021. In addition, the company has a strong balance sheet with ~ $5 billion in net cash.
Since Airbnb is not yet profitable, we will look at the forward EV/Sales multiple as is typical for hyper growth companies not yet generating a profit. The company went public in December 2020 trading at around 20 times forward EV/Sales, which trended up to a peak of ~28 times forward EV/Sales by February 2021. Then the growth sell off hit but the company is still trading at a lofty 14-15 times forward EV/Sales.
This is a massive valuation premium vs. the highly profitable BKNG, which is trading at 8.4 times forward EV/Sales. Airbnb's nose-bleed valuation is perhaps one of the reasons why short interest as a % of outstanding shares stands at 41%.
Risks
There are many risks associated with owning Airbnb.
Valuation is very high as discussed earlier, and the company's growth rate after 2021 remains highly uncertain. There is a lot of pent up demand for travel, but what happens after? If growth does not meet expectations, valuation could re-rate significantly lower.
The company remains unprofitable so its business remains a "show me story" in the minds of many investors.
Since the company was founded in 2008, it has faced continuous legal and regulatory challenges. The traditional hospitality industry has engaged in lobbying and political efforts for stricter regulation governing Airbnb's business. In addition, Airbnb has created a nuisance for neighbors, many of whom are pushing for more regulation.
The viability of Airbnb's business model will depend on various national and local regulations. Managing all of these regulatory complexities and legal challenges could prove to be too expensive to sustain.
As a two-sided marketplace for mostly small hosts and guests, the company may have a difficult time managing user experience. Poor individual experiences and Airbnb horror stories could turn people off to the idea of using the platform. I personally had a bad experience on Airbnb, filed a complaint, and didn't hear back at all from the company.
Airbnb may experience the same problem as eBay (EBAY): the market for unique items (or experiences in the case of Airbnb) may be far smaller than the demand for standardized listings and convenience -- i.e. the Amazon (AMZN) model.
Takeaway
Airbnb is a very unique company that enjoys many competitive advantages vs. competitors. I give the founders a lot of credit for creating something new. However, as a stock, the high valuation and short interest are giving me pause. On fundamentals, the lack of profitability, lack of recurring revenues, and lack of regulatory certainty are also negatives. As a result, I will watch from the sidelines.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.