Airbnb is the clear market leader in the growing home-sharing industry, while it holds the second-largest market share in the online travel booking agency sector. Airbnb has developed such a strong brand that it has become a noun and verb used worldwide. A market leader with a strong brand is usually a good investment, but the question is whether now is the right time to buy Airbnb shares. It is what I will investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
This analysis will be a bit different from what you are used to read in my blog. Airbnb did their IPO in December 2020, meaning I don't have access to the historical numbers dating back longer than that. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to easily get the numbers you need from various companies.
Before I start with the analysis, I should mention that I do not currently own shares in Airbnb or any of their competitors, meaning that I have no vested interest in the company. If you would like to view or copy my portfolio, you can find instructions on how to access it here. As always, I will keep this analysis unbiased. If you want to purchase shares or fractional shares in Airbnb, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
Airbnb was founded in 2008 in San Francisco and was originally called AirBedandBreakfast.com. It was founded by Brian Chesky and Joe Gebbia, who came up with the idea of putting an air mattress in their living room and turning it into a bed and breakfast. Later, Nathan Blecharczyk joined as well. All three co-founders are still part of the business. I believe most people are familiar with Airbnb by now, but I will provide a brief description of the company. They are a booking platform where homeowners can list their homes for rent, typically for short-term stays like holidays. Airbnb does not own any properties themselves but receives a commission from each booking, both from the host and the guest, which is how they generate revenue. Airbnb has established a robust brand moat, as articulated by the management during a conference call: "Airbnb is a noun and verb that is used all over the world." Once your company name has turned into a noun and a verb, you know it has a strong brand moat. Furthermore, management provided additional insights on the popularity of Airbnb: "Since the pandemic started, there have been more than 1 million articles written about Airbnb, and 55% of articles that included the word 'travel' also mentioned Airbnb."
The CEO is Brian Chesky. He is not only the CEO but also the co-founder of the company. I prefer it when founders or co-founders are still involved in management, as they are usually more concerned about growing their business than their wallets. Brian Chesky is also the majority shareholder, as he owns 11,8 % of the shares. He isn't the typical CEO because he has studied architecture and industrial design. He has been listed among Fortune Magazine's top 20 of the World's Greatest Leaders, and according to Comparably, his employee rating puts him in the top 5% of similar-sized companies. In 2016, I was named an Ambassador of Global Entrepreneurship by President Obama. He is known as a bold and humble leader. When he first started Airbnb in 2008, he was advised to get to know every one of his customers. Hence, that was what he did when he decided to visit every host at that time. He believes that a leader should continue to learn and grow and not be afraid to make bold decisions. He has also joined people like Bill Gates and Warren Buffet in "The Giving Pledge," which is a group of billionaires who have committed to giving away most of their wealth. I believe that Brian Chesky is a great modern leader. His high employee score, as well as his participation in "The Giving Pledge," suggest that he is a person of high character. On a personal level, I thoroughly enjoy his conference calls because his enthusiasm shines through during the calls. He also has a significant stake in the game as the largest shareholder. And finally, he managed to grow Airbnb from an air mattress to what it is today. I feel very comfortable with Brian Chesky as the CEO.
I believe that Airbnb has a strong brand moat. I really like the management as well. Later, I will create a discounted cash flow model to calculate a price for Airbnb. But before I do that, let's take a look at some key financial metrics.
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Below, we will examine some key financial metrics of Airbnb over the last three years. One positive aspect is that Airbnb has successfully increased its revenue each year over the past three years. The revenue growth has declined, but it isn't that surprising given the circumstances. In 2020, the pandemic significantly reduced travel, impacting the numbers in year 2021. Although the world began to open up for travel in 2021, the effects of the pandemic still lingered, affecting 2022 numbers as well. Gross profit margins have been high and have increased every year in the past three years. Operating margin, EBITDA margin, and EBIT margin decreased in 2023 compared to 2022. However, 2023 was a challenging year for most companies due to macroeconomic factors. Thus, I am not concerned, but I would like to see Airbnb manage to increase margins again in 2024. Management seems confident that we will see incremental margin expansion in the long term as revenue from hosting guest services and experiences increases.
Before we proceed to the discounted cash flow model, I would like to explore the risks and potential of Airbnb. One risk is regulations. We have already seen regulations in both Europe and the United States, where cities have imposed restrictions on short-term housing rentals. Airbnb can artificially inflate housing prices in the most sought-after areas of popular cities, making it difficult for local residents to afford homes in those areas. This phenomenon occurs because people have purchased homes specifically to rent them out on Airbnb. Airbnb has mentioned in its annual report that there may be more cities and countries that will impose restrictions on short-term housing rentals. Competition. Airbnb operates in a highly competitive environment and faces significant competition in attracting hosts and guests. Hosts have a variety of options for listing their spaces and experiences, both online and offline. It is also common for hosts to cross-list their offerings. Guests have a variety of options to discover and reserve spaces, hotel rooms, serviced apartments, and other accommodations and experiences, both through online and offline channels. Increased competition could lead to a decrease in demand for the Airbnb platform from hosts and guests, slowing down their growth and potentially having a significant negative impact on their business, financial condition, and operational results.
Macroeconomics. In its annual report, Airbnb mentions that its financial performance is subject to global economic conditions and their impact on levels of discretionary consumer spending. Thus, if we observe a slowdown in economic activity, we might see individuals opting to forgo their vacations to prioritize essential expenses. During the last recession in 2008 and 2009, people traveled less than they did leading up to the recession. History doesn't always repeat, but it usually rhymes.
There are also potentials for Airbnb moving forward. Solutions for individual markets. Different countries have varying expectations, and Airbnb makes individual adjustments for different markets. Actions they have taken include implementing installment payments in Brazil and Latin America, and enabling the use of Naver Login in Korea. These adjustments have resulted in the Brazilian market now being double the size it was pre-pandemic, and management believes that it is going to double again. Airbnb is currently focusing on Switzerland, the Netherlands, and Belgium, but management has stated that they will continue to expand it to more countries. Expanding beyond the core business. Airbnb wants to expand beyond its core product of providing accommodations. Management has always believed that Airbnb was destined to offer more than just a place to stay. One example is that Airbnb offers experiences where guests can book experiences with locals, and Airbnb takes a commission. Management believes that the addressable market for experiences is $1,4 trillion and wants to increase investment in this segment over the next couple of years. Furthermore, management believes that experiences and other services have the ability to drive incremental revenue and margin over time. Most people still book hotels. According to management, for every person who stays in an Airbnb, nine people stay in a hotel. If Airbnb could convince just one of those hotel guests to stay in an Airbnb, they would double the size of their business. The reason people book hotels is that they are comforted by the reliability and consistency of the hotel experience. In order to attract these people, Airbnb has launched Guest Favorites, which comprises 2 million of the best listings on Airbnb based on ratings, reviews, and reliability data from 500 million trips on Airbnb. Since Airbnb launched Guest Favorites in November 2023, they have observed a shift in bookings towards properties designated as Guest Favorites. Thus, management believes that they will attract people to Airbnb who have never considered them before.
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I have now investigated the financials, risks, and potential of Airbnb. I will now analyze the price by using a discounted cash flow model. To do so, I will need some numbers that you can see below. The numbers are for 2023, which I found on Finbox. However, the perpetuity growth rate and the discount rate are numbers I have determined myself. The reason I chose a 3% perpetuity growth rate is that it typically falls between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. I decided to go with the lower option in the middle. The selected discount rate of 12% was chosen because it typically falls within the range of 9-12%. I decided to choose the highest one due to the current market conditions. Remember that all the numbers used in these calculations are in millions.
I also need to determine how much EBIT, Depreciation & Amortization and Net Working Capital will evolve over the next couple of years. I decided to use an EBIT growth of 20% year over year. It might be too high for some and too low for others. However, it is the EBIT growth forecasted at Finbox over the next 5 years. I calculated a 5% annual growth in Depreciation & Amortization, as forecasted by Finbox. Finally, I decided to keep the Net Working Capital at the 2023 level of -2.680 because it is at a record high. I haven't found a smart way to share all my spreadsheet here but once I did my calculations, I found that the intrinsic value of Airbnb is $152.
After researching Airbnb, I find the company intriguing. I believe they have a strong moat and have changed how we travel. I have great faith in management as well, and I feel very comfortable that the management will steer Airbnb towards future growth. Macroeconomics may affect Airbnb as people will travel less, but macroeconomics will eventually improve. Therefore, I consider it a short-term risk. Regulations are a risk as they can disrupt Airbnb's business model. Airbnb mentions that no single city represented more than 1,3% of their revenue. Therefore, for it to pose a significant risk, we would need to see many cities implementing regulations. Competition also involves risks. I believe that most hosts will choose Airbnb because it is a market leader. However, they will probably also cross-list their offerings. There is a lot of competition for guests, and while there have been some complaints that Airbnb was getting too expensive, it is still cheaper to stay at an Airbnb than at a hotel. Guests still prefer hotels, but if Airbnb manages to attract some of these guests to their platform, it will present a significant growth opportunity. Airbnb has also successfully made tailored adjustments for different markets, leading to great success. Airbnb has just started doing that, and if they can replicate this success in new markets, it can also act as a growth catalyst. Finally, Airbnb aims to be more than just a place to stay. Experiences and other services will expand the addressable market for Airbnb and increase margins. I believe there are many things to like about Airbnb. They are a market leader with excellent management and numerous growth catalysts. I would still like to receive a discount when investing in Airbnb. Therefore, I will buy shares if Airbnb falls below $100.
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