Travel by definition is going from one place to another for any given reason, and when traveling occurs, lodging becomes a necessity. Including today, hotels have been the primary destination for travelers; however, I believe Airbnb's (NASDAQ:ABNB) hosting may challenge traditional hotels in coming years. Airbnb is a technology company that connects hosts and guests. Hosts are people where they allow guests to stay at their homes for profit while the guests enjoy as Airbnb calls it "home away from home," and this model has significant advantages compared to the traditional hotels creating a beneficial underlying trend for Airbnb. The remote work culture is prompting more travelers to consider longer-duration vacations while the hassle-free check-ins and being in a house compared to a small hotel room has their benefits. Further, pent-up international travel demand dampened by Covid and Airbnb's unchallenged market leadership position, in my opinion, creates an investment opportunity.
Airbnb's hosting business model has advantages over a conventional hotel, and I believe the advantages offered by Airbnb will be the strongest and the biggest underlying trend behind the company's future growth.
Airbnb can be one of the best destinations for families on a vacation. They offer an entire residential house, apartment, or condo, which is generally more private and spacious than a hotel room. Families will not be sharing a small hotel room and a lobby with hundreds of other guests. Further, guests using Airbnb have their own kitchen, which is not offered in hotels rooms. Thus, for a large family, group of friends, or multiple families, Airbnb may be the better choice, and I believe that these advantages are one of the core reasons for the $3.4 trillion total addressable market.
One of the most important things for a growth company capitalizing in a new market is competition. Severe competition has the potential to materially damage the company's growth perspective; however, this is not the case for Airbnb. I believe that Airbnb has a firm leadership in the industry with unchallenged brand recognition.
The most prominent competitor of Airbnb is Vrbo owned by Expedia Group (EXPE), which is also a vacation home rental company. However, I believe that Vrbo does not pose a threat to Airbnb. As the picture below shows, according to the Google (GOOG) search trends comparing Vrbo and Airbnb, Airbnb has the majority search in all 50 states and has nearly 4X as many searches as Vrbo. I believe this critical data indicates that consumers are overwhelmingly likely to choose Airbnb over Vrbo.
Further, Airbnb like many other companies dominating its industry became a nun. I believe this is very powerful because it indicates that brand recognition is very high since the name of the company, Airbnb, became the word describing the service offered by the entire industry. For example, Google is an unchallenged leader in the internet search industry. People often say "I do not know. Google It" along with "I do not know. Search it up" proving Google's unchallenged power in the market. Similarly, travelers often say "let's get an Airbnb" instead of let's go get a vacation home rental. Such a phrase became so common that Airbnb's brand recognition and position in the market are nearly unchallenged today.
Pandemic has changed our lives and society forever, and each monumental change in society is always followed by an opportunity. Covid-19 brought faster adoption of digitalization in the form of remote work. Technological advancements allowed easy connectivity for companies and workers through many methods during the pandemic, and for some, remote work proved to be more beneficial for both the company and its employees. As a result, employees suddenly started to have the freedom to work from wherever they wanted, which resulted in longer vacations.
Airbnb calls this phenomenon a travel revolution. The company says that "for centuries, people have been tethered to where they work," which limited flexibility in vacations to certain times of the year. However, because the pandemic unlocked the remote work and ultimate flexibility, travelers are traveling at any time and staying longer. As a result, long-term stays longer than 28 days became the fastest-growing segment of Airbnb's business accounting for 20% of all bookings. I believe this secular trend poses immense opportunities for Airbnb as long-term stay travelers will almost always prefer Airbnb over a hotel especially if they have families.
During the pandemic, companies have realized that physically maintaining an expensive office was not necessary as workers preferred remote work. According to Airbnb, some largest companies have already adopted remote work including Amazon (AMZN), Ford (F), Procter & Gamble (PG), and PwC contributing to about 25% of the American workforce working exclusively from home. The trend of remote work, due to its benefit, will not be a temporary phenomenon seen during the pandemic as companies adopt hybrid and fully remote work. Therefore, as flexibility opens up new ways of traveling, Airbnb can benefit from a wave of travelers seeking a real home away from home.
Airbnb's growth was devastated in 2020 due to the pandemic travel restrictions; however, I believe that global sentiments regarding travel are finally turning positive in 2022, which may result in a pent-up international and domestic travel demand.
Covid cases in many countries are hitting their peak since the start of the pandemic including the United States. However, the fatality rate has been mostly stagnant over the past few months indicating that the new omicron variant is more transmissible but less deadly. Data from British health officials support this argument as the country reported that the "people with Omicron are less likely to need hospitalization." Thus, as the waves of Omicron cases pass, vaccination increases around the globe and Covid oral treatment pills get mass-produced, the Covid-19 pandemic will likely only be of a minor threat by the end of 2022 unleashing the pent-up travel demand benefiting Airbnb. WHO chief Tedros Adhanom Ghebreyesus made a statement reiterating that Covid-19 has a chance to end in 2022. Therefore, I believe 2022 will prove to be a period of exploding growth for Airbnb.
Airbnb's financial health shown on the balance sheet is great. The company has about $6 billion in cash with about $13.6 billion in total assets while the company had total liability of about $9.1 billion putting its total asset to liability ratio (L/A) at about 67%. The company also had long-term debt of about $2 billion; however, I believe this is manageable since the company's cash pile is three times greater. Further, because the company has been showing sporadic profitability depending on the time of the year, I believe Airbnb is nearing a period of time where they are constantly reporting profits; therefore, I believe that the current financial health is strong, and it is capable of supporting Airbnb throughout its operations.
The biggest risk to my bullish thesis is the valuation and the underlying macroeconomic trends. Airbnb may have a great business and great fundamentals; however, it is followed by a high valuation.
Airbnb is worth about $100 billion with a price to sales ratio of about 30, and although the company sporadically reports net income. In 2021 Q3, Airbnb reported $834 million in net income while previous quarters in 2021 had a net loss. This was due to a robust summer season, so for the time being, Airbnb's profitability may depend on the time of the year. Therefore, until the company's valuation shows consolidation, the biggest risk to my bullish thesis on the company will be a high valuation.
High valuation is an even bigger concern today because Airbnb is not yet profitable while the Federal Reserve is expected to raise rates. Tapering is expected to finish early by March, and the first-rate hikes are expected to start in March ending the easy monetary policy, which will most likely damage Airbnb going forward.
Airbnb has a unique story, and the idea of renting a home away from home is picking up creating a new travel revolution. The underlying trend of this longer-term travel supported by the wave and the persistent trend of remote work is creating a great bullish thesis. Further, the company's dominant position in the market followed by the potential end to the Covid restrictions releasing pent-up travel demand makes Airbnb a buy. However, as tapering ends and rates are expected to rise, investors should keep a watch on the company's valuation before making an investment decision.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ABNB over 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.