Airbnb: A disrupter in the hospitality industry.
Airbnb is the clear market leader in the growing home share industry. The latest numbers suggests that the home share industry by the end of May was up by 57,1 % compared to three years ago before the pandemic. Airbnb has a 74,6 % market share of that industry. Airbnb made their IPO in December 2020 and reached a share price of $212 in January 2021. It is now trading for less than half of that price. Is it time to buy?
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 skin in the game when it comes to the company. If you would like to see or copy my portfolio, you can read how to access it here. As always, I will keep this analysis unbiased.
Airbnb was founded in 2008 in San Francisco and was originally called AirBedandBreakfast.com. It was founded by Brian Chesky and Joe Gabbia 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 know Airbnb by now, but I will just make a short description of the company. They are booking platform where homeowners can list their homes for rent, usually for the short term like holiday. Airbnb doesn't own any properties themselves but receives a commission from each booking, both from the host and the guest, which is how they make money. Airbnb has built a strong brand moat by now, which is best explained by the management in 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 verb, you know it has a strong brand moat. Furthermore, management gave some other 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 had the word travel in it, also have the word Airbnb in it."
Their CEO is Brian Chesky. He is not only the CEO but also the co-founder of the company. I like when founders or co-founders are still in management, as they 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 as 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 in top 5 % of similar sized companies. in 2016 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, it was what he did when he decided to visit every host by then. He believes that a leader should continue to learn and grow and not be afraid to take bold decisions. He has also joined people like Bill Gates and Warren Buffet in "The Giving Pledge", which is a group of billionaires who has committed to give most of their wealth away. I believe that Brian Chesky is a great modern leader, and his high employee score as well as him joining "The Giving Pladge" suggest that he is a high character guy. On a personal level, I really enjoy his conference calls, as you can feel his enthusiasm through the call. He also has a lot of skin in the game as the highest 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 CEO.
I believe that Airbnb has a strong brand moat. I really like the management as well. Later I will do a discounted cash flow model to calculate a price for Airbnb but before I do so, let us just have a look at some key financial metrics.
Down below we see some key financial metrics Airbnb over the last three years. I don't want to give too much attention to 2020, as a company like Airbnb has been hit hard during the pandemic. Airbnb managed to grow their revenue by 24,7 % from 2019 to 2021, which is very encouraging. Especially because 2021 was also affected by the pandemic. One thing I really like is the high gross profit margin. Whenever a company delivers an 80,7 % gross profit margin, I'm interested. Of course, I would like to see operating income in positive numbers and a higher operating margin as well. Hopefully, it will be something we will see Airbnb delivering in the future. Net income is in negative numbers in all the years. However, it was positive in the third and fourth quarter in 2021 but the two first quarters drag it into negative. Net income was also positive in the first quarter in 2022. It is also nice to have positive EBITDA and EBIT in 2022.
Before we continue to the discounted cashflow model, I would like to investigate the risks and potential of Airbnb. One risk is regulations. We have already seen regulations in both Europe and United States, where cities have imposed restrictions on short-term housing rentals. It is because Airbnb can artificially inflate house prices in the most popular areas in the most popular cities, pricing out locals from owning houses in the areas. It is done because people have bought homes with the sole purpose of renting out the home on Airbnb. Competition. Both from direct competitors such as Expedia but also from hotels. Airbnb has grown their average daily rate by 30 % from 2019 to 2021, meaning that Airbnb is getting more expensive. It has worked so far but they might not be able to take a premium compared to their direct competitors. Hotels have also started to lower their prices to compete with Airbnb. Potential recession. If we see a slowdown in economic activity, we could see people choosing to skip their holidays to afford necessities. During the last recession in 2008 and 2009 people travelled less than leading up to the recession. History doesn't always repeat but it usually rhymes.
There are also potential for Airbnb moving forward. Management believes that their total addressable market is $3,4 trillion. It is way above the current 65 billion market cap. It will be divided into three different sectors, which are each a potential growth story for Airbnb. Short-term stays. It is what Airbnb is mostly known for and management believes that the addressable market for this segment is $1,8 trillion. Airbnb will grow this segment by adjusting their platform to be more flexible. They already have the "I'm flexible feature" when booking, which means that you get offered other and cheaper dates to book a place to stay but also offered places that are nearby your chosen city. Now they are launching "Airbnb categories". It means that instead of searching for specific cities, guest can now search for categories such as islands, national parks etc. These features means that guests will discover places, where Airbnb traditionally didn't have many bookings, which could result in more bookings and more profit. Long-term stays. Management believes the addressable market is $210 billion. Management has mentioned that it is long-term stays is their fastest growing category as it has tripled since 2019. In this segment Airbnb believes that they benefit from people in a larger scale can work remote. To adjust to people's need, they have added a feature called split-stays. It means you can split your stay in a city between two homes if you stay for a week or more. It means that the guests should typically see around 40 % more listings. Experiences. It means that Airbnb now offer experiences. 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 ramp up investment in this segment the next couple of years. In the conference in the first quarter in 2022, CEO Brian Chesky called experiences "a massive, massive opportunity".
I have now investigated the financials, risks, and potential of Airbnb. I will now look at the price by doing a discounted cash flow model. To do so I will need some numbers that you can see below. The numbers are the 2021 numbers, which I could find at Finbox. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 3 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. I decided to go with an option in the middle. The chosen discount rate of 12% is because it is usually between 9-12%. I decided to go with the highest one because of the current market conditions. Remember that all the numbers made 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 30 % year over year. It might be too high for some and too low for others. The EBUT growth forecast at Finbox is around 60 % over the next 5 years but that is included a very strong 2022. I feel more comfortable in the 30 %. I calculated with a growth in Depreciation & Amortization of 10 % a year. Finally, I decided to keep the Net Working Capital at the 2021 numbers at -2.553 because it is 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 to be $89.
Having investigated Airbnb, I find the company interesting. I believe they have a strong moat and has changed how we travel. I have great faith in management as well, and I feel very comfortable that the management will steer Airbnb into future growth. And while I think the addressable market might be a little to high, I'm bullish on experiences. I think it is a massive opportunity that will grow over the next couple of years, as management ramp up investments in the segment. However, there are also risks regarding Airbnb. Regulations are a risk, but I think Airbnb offering categories might help, as guests will discover new places. I'm not sure it is sustainable that Airbnb can grow their average daily rate as we have seen lately. On the contrary, I think it might need to come down a bit. All in all, I'm positive on the company but it is too expensive now. I will consider opening a small position if it gets below $70.
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