I’m giving Airbnb (ABNB) a hold rating and leaning towards a buy rating. The company has a high valuation in anticipation of long-term growth. We do not have accurate growth data for the company as COVID-19 occurred amid the early stages of the company’s growth. I want to look and see what the Feb 15 earnings data looks like, albeit affected by Omicron, and maybe even a year or two more to better assess the company.
Airbnb stands for Air Bed and Breakfast and is a technology company based in San Francisco. Airbnb, commonly used to book alternative travel accommodations, was named to CNBC’s 50 Disruptor Companies list for 2020. After being founded in 2008, it later IPO’d On December 10, 2020, at $68 per share, which makes the company have a market capitalization of just over $40 billion. The excitement for the stock was so great that the eventual opening price was over 100% of that originally set price, reaching a staggering $146 per share. The high starting price eventually led to an end-of-day price of $144.71 and a market capitalization of $86.5 billion. In the same year, the company generated $3.3 billion in revenue.
Based on companies last deposit with the SEC, the company has $6 billion in cash and another $1.9 billion in marketable securities. On the other side, the company has total liabilities of $9 billion, including $2 billion in long-term debt. Last quarter, the company posted $2.2 billion in revenue and just $1.4 billion in expenses, giving it a net profit of $0.8 billion. As long as the company doesn’t dive too far or too long into net quarterly losses, I don’t see why it would need additional funding outside of the need for capital for a merger and acquisition (M&A).
The image below shows Airbnb’s revenue over the past year. Fourth-quarter EPS is expected to be released after hours on February 15 and is estimated at $0.05.
The company’s fourth quarter for 2020 was at the height of the pandemic. While not great, investors can easily justify this quarter. Since then, I have been impressed with the growth in profits; the company slowly climbed out of negative earnings while battling COVID-19 concerns and even beat expectations while positive for the third quarter of 2021. The fourth quarter of 2021 is estimated to be barely positive. However, this is due to Omicron’s massive spike in COVID-19 cases. Overall, I think the EPS trend is very positive.
Airbnb stock price
Although Airbnb has had its ups and downs over the past year, its current closing price of $155.56 leaves it about 7.5% above its initial IPO price. The company’s current market capitalization sits at just under $94 billion.
Market Cap Comparisons
As mentioned earlier, Airbnb sits at a market capitalization of $94 billion. By comparison, Marriott (MAR) has a market capitalization of $53 billion and Hilton (HLT) $40 billion. These combined market caps are less than Airbnb’s market cap.
Marriot is a massive company around the world that franchises and licenses its brands for others to use with their hotels. Like Marriott, Hilton has a similar business model of operating certain franchises and licensing its brands to other hotel operators. These two companies would be considered the conventional method of travel accommodation. They both offer accommodation, whereas Airbnb provides connectivity and doesn’t have to deal with the high running expenses of physical locations. The comparison is similar to that used for Uber. Uber connects a driver to a passenger while a taxi company manages the entire fleet.
For a comparison of direct competitors, Expedia (EXPE) has a market cap of just under $28 billion and Booking (BKNG) has a market cap of $100 billion. The two companies own Airbnb’s three main competitors. HomeAway and Vrbo are owned by Expedia, and Booking owns Booking.com.
Like Airbnb, Booking is a technological travel agency. Unlike Airbnb, Booking is much more diverse. Booking is in far more businesses than Airbnb, including restaurants, travel methods, and vacation experiences. Like Booking, Expedia operates in various markets within the traditional travel industry, including corporate travel and cruises. However, these companies outside of the three previously mentioned competing sites are much more closely tied to the conventional travel industry, which can be a plus or a minus depending on how you look at it.
Although both Booking and Expedia are travel technology companies, I don’t think either is a great direct comparison as they are in industries other than accommodation, their focus is spread across multiple brands and they are more tied to traditional travel methods.
What about Airbnb?
Airbnb, in essence, has built an industry. Because of this, their name is almost synonymous with booking a stay somewhere other than a hotel, similar to how Google’s name is with search. Additionally, Airbnb has very low overhead because it is a technology company and does not operate any physical location. Finally, Airbnb has experienced exciting growth over its lifetime, becoming a well-known stock. The question becomes: Will Airbnb continue to grow fast enough to justify its current valuation?
To answer that question, I turn to the company’s latest report letter to shareholders. What I appreciate about this letter is that the company includes Y/Y results and Y/2Y results to show the company’s growth coming out of the pandemic and the company’s growth through compared to pre-pandemic levels.
Some key business metrics for Q3 2021 are 79.7 million rooms booked, up 29% YoY and 7% YoY and 7% YoY, gross booking value of 11 .9 billion, an increase of 48% year-on-year and 23% year-on-year and 23% year-on-year. , revenue of $2.2 billion, up 67% year-on-year and 36% year-on-year, and adjusted EBITDA of $1.1 billion, up 120% year-on-year and 251% over one year.
A quick observation on these values is that the business is growing rapidly from the lows of COVID-19 and the business has a higher return rate per booking than before the pandemic, a good sign for the future.
The image below shows the estimated future numbers:
As mentioned in a recent article on the site:
We can see that ABNB is trading just under 14x 2030e earnings.
Based on the projected exit growth rate of 18%, I could see ABNB trading at a price to earnings growth ratio of 1.5x (“PEG ratio”), or about 27x earnings. This suggests only 100% upside over the next nine years, for annualized returns of 8%. ABNB’s strong margin profile arguably warrants a higher multiple, but 8% returns are not going to reduce it in the current environment. The key is to understand that the profit estimate for 2030 is only a net margin of 26% over the revenue estimate for 2030.
I think this author has done a very good job of summarizing the data. The author concludes that the net margin estimate is low because the company just had a net margin of 37%. I can’t entirely agree with this for two reasons: I want to wait for more data.
The first reason is that it will be difficult to maintain a high net margin. Competitors will continue to grow and do their utmost to drive users away from Airbnb. One of the most likely ways to do this is to reduce fees to have lower prices. If the lower prices affect the market enough, Airbnb will either have to lower the fees or do something else to stay competitive; any option will most likely reduce the net margin rate. Also, I wouldn’t be surprised if some major players in this space ten years from now have yet to emerge. Legacy lodging companies like Marriot and Hilton aren’t just going to roll over. There will be more and more competition for hosting in the future, which will make it difficult to maintain a high net margin.
The second reason is to see if the company can continue to release numbers like this on growth, net margin, and revenue in a post-pandemic environment. The company’s growth accelerated. While this event is beyond the company’s control, it still gives us a hazier picture of what the future holds than we otherwise would.
Current growth trends are good, but I want to wait and see what this last quarter of 2021 has in store for us, with an important caveat that it will be diminished because of Omicron. Also, I want to see the data over the next year to get a more accurate understanding of the true growth of the business. From these data points, I think it is possible to get a clearer picture of whether or not to buy the business and at what price. If the company has a big price drop, I will most likely open a position before that because I like the company.
I see three main risks to Airbnb’s growth.
The first is competition; competition can erode the company’s margins and market share; therefore, the business is not able to grow as quickly as expected.
The second is that the general market environment creates sub-optimal conditions for the stock price to grow. The market seems to be out of whack because companies valued at over a trillion dollars are trading like penny stocks. Likewise, if a bear market occurs, the stock price will suffer.
The third and final reason is a bad economy. If the United States, or the global economy for that matter, were to suffer, then Airbnb would see its numbers decline because people tend to travel less during bad economies. While I don’t think this effect would be as drastic as COVID-19, it would still be noticeable.
Overall, I like the company, which is why I’m leaning towards a purchase. Because COVID-19 happened recently, it really affected their growth numbers, and unlike most companies that have many years that we can look back on, Airbnb is a very young company. I await next year’s data as the effects of the pandemic continue to fade. For now, I’m sitting on the sidelines, but I’ll look forward to it and consider investing.