I give Airbnb (ABNB) a hold rating and lean towards a buy rating. The company has a high valuation in anticipation of long-term growth. We do not have precise growth data for the company because COVID-19 happened in the middle of the company’s early stages of growth. I want to watch and see what the data looks like from earnings on February 15th, despite them being affected by Omicron, and maybe even a year or two more to better evaluate the company.
Airbnb stands for Air Bed and Breakfast and is a technology company based in San Francisco. Airbnb, commonly used for booking alternative travel lodging, was named to CNBC’s Disruptor 50 companies list for 2020. After being founded in 2008, it later IPO’d December 10th, 2020, at $68 a share, making the company have a market cap of just over $40 billion. The excitement for the stock was so great that the eventual opening price was over 100% of this initially set price, coming in at a staggering $146 per share. The high starting price eventually led to an end-of-day price of $144.71 and a market cap of $86.5 billion. During that same year, the company generated $3.3 billion in revenue.
Based on the companies last filing with the SEC, the company has $6 billion in cash on hand with an additional $1.9 billion in marketable securities. On the opposite side, the company has $9 billion in total liabilities, with $2 billion being long-term debt. Last quarter the company had $2.2 billion in revenue and only $1.4 billion in expenses, thus making the company have a net income of $0.8 billion. As long as the company does not dip too far or for too long into net quarterly losses, I do not see a reason they would need to do additional financing outside of the need for capital for a Merger & Acquisition (M&A).
The below image shows Airbnb’s earnings over the past year. The fourth-quarter EPS is set to come out after hours on February 15th and is estimated to be $0.05.
The company’s fourth quarter for 2020 was in the prime of the pandemic. While not great, investors can easily justify this quarter. Since then, I have been impressed with the earnings growth; the company slowly climbed out negative earnings while battling COVID-19 concerns and even beat expectations while being positive for the third quarter of 2021. The fourth quarter of 2021 is estimated to be barely positive. However, it is explained by the massive spike of COVID-19 cases from Omicron. Overall, I think the EPS trend is very positive.
Airbnb Stock Price
While Airbnb has experienced some ups and downs over the last year, its current closing price of $155.56 leaves it about 7.5% above its initial IPO price. The company’s current market cap sits at just under $94 billion.
Market Cap Comparisons
As mentioned previously, Airbnb sits at a $94 billion market cap. In comparison, Marriott (MAR) has a market cap of $53 billion, and Hilton (HLT) stands at $40 billion. These combined market caps are smaller than Airbnb’s market cap.
Marriot is a massive company worldwide that operates franchises and licenses its brands for others to use with their hotels. Like Marriott, Hilton has a similar business model of operating some franchises and licensing its brands to other hotel operators. Both of these companies would be considered the conventional method of travel lodging. They both offer a place, whereas Airbnb provides a connection and does not have to deal with the high operating expenses of physical locations. The comparison is similar to the one used for Uber. Uber connects a driver to a rider while a taxi company runs all the 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 hold Airbnb’s three main competitors. The sites HomeAway and Vrbo are owned by Expedia, and Booking owns Booking.com.
Like Airbnb, Booking is a technology travel company. Unlike Airbnb, Booking is much more diversified. Booking is in many more businesses than Airbnb, including restaurants, travel methods, and vacation experiences. Like Booking, Expedia is a company in various marketplaces throughout the traditional travel industry, including corporate travel and cruises. However, these businesses outside of the three competitor sites previously mentioned are much more intertwined with the conventional travel industry, which can be a pro or con depending on how you look at things.
While both Booking and Expedia are travel technology companies, I do not think either is a great direct comparison because they are in other industries than just lodging, their focus is spread across multiple brands, and they are more intertwined with traditional travel methods.
What about Airbnb?
Airbnb, in essence, built an industry. Because of this, their name is almost synonymous with booking a stay at a place other than a hotel, similar to how Google’s name is with searching. Additionally, Airbnb has a very low overhead because it is a technology company and does not operate any physical locations. Finally, Airbnb has seen exciting growth during its lifespan, becoming a well-known stock. The question becomes, will Airbnb continue to grow fast enough to justify its current valuation?
To answer this question, I turn to the company’s most recent shareholder letter. Something about this letter that I appreciate 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 compared to pre-pandemic levels.
Some key company metrics from the third quarter of 2021 are 79.7 million rooms booked which is up 29% Y/Y and 7% Y/2Y, gross booking value of $11.9 billion which is up 48% Y/Y and 23% Y/2Y, revenue of $2.2 billion which is up 67% Y/Y and 36% Y/2Y, and an adjusted EBITDA of $1.1 billion which is up 120% Y/Y and 251% Y/2Y.
A quick observation about these values is that the company is growing quickly from the COVID-19 lows and that the company is having a higher return rate per booking than before the pandemic, a great sign for the future.
The below image shows estimated future numbers:
As mentioned in a recent article on the site:
We can see that ABNB trades just under 14x 2030e earnings.
Based on the projected 18% exit growth rate, I could see ABNB trading at a 1.5x price to earnings growth ratio (‘PEG ratio’), or around 27x earnings. That suggests only 100% upside over the next nine years, for annualized returns of 8%. ABNB’s strong margin profile does arguably warrant a higher multiple, but 8% returns aren’t going to cut it in the current environment. The key is to understand that the 2030 estimate for earnings represents only a 26% net margin relative to the 2030 estimate for revenues.
I think this author did a very nice job summarizing the data. The author concludes that the net margin estimate is low because the company just had a 37% net margin. 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 tough to maintain a high net margin. Competitors will continue to grow, and they will do everything they can to draw users away from Airbnb. One of the most likely ways to do that is by lowering fees to have lower prices. If the lower prices affect the market enough, Airbnb will have to either lower fees or do something else to stay competitive; any option will most likely reduce the net margin rate. Additionally, I would not be surprised if some major players in this space in ten years have not emerged yet. The legacy lodging companies like Marriot and Hilton are not going to just rollover. There will be just more and more competition for lodging in the future, making it hard to maintain a high net margin.
The second reason is to see if the company can continue to post numbers like this on growth, net margin, and revenue in a post-pandemic environment. The growth of the company hit a speed bump. While this event was out of the company’s control, it still gives us a more blurry picture of what the future holds than we would have otherwise.
The current growth trends are good, but I want to wait to see what this last quarter of 2021 holds, with an important caveat that it will be decreased because of Omicron. Additionally, I want to see the data over the next year to get a more accurate understanding of the company’s true growth. From these data points, I believe a clearer picture can be made of whether or not to buy the company and for what price. If the company has a significant price drop, I will most likely open a position before then because I like the company.
I see three main risks to the growth of Airbnb.
The first is competition; competition can eat away the company’s margins and market share; as a result, the company is not able to grow as fast as expected.
The second is that the general market environment creates suboptimal conditions to grow in share price. The market seems to be in haywire because companies valued over a trillion dollars are being traded like penny stocks. Similarly, if a bear market occurs, this will cause the share price to suffer.
The third and final reason is a bad economy. If the United States, or global economy for that matter, were to suffer, then Airbnb would see decreasing numbers because people tend to travel less during bad economies. While I do not think this effect would be as drastic as COVID-19, it would still be noticeable.
Overall, I like the company, which is why I lean towards a buy. Because COVID-19 happened recently, it really affected their growth numbers, and unlike most companies that have many years we can look back on, Airbnb is a very young company. I am waiting for the data over the next year as the effects of the pandemic continue to wane. For now, I am sitting on the sidelines, but I will watch eagerly and consider investing.
This article was written by
To stay up to date on my work across all platforms, follow my Twitter @realjacobbraun. I research and invest in various companies, mainly in biotech and technology. I would label myself as a speculative value investor. I thoroughly research my trades to find undervalued businesses, but I invest in a highly speculative field, making me a speculative investor at my core. I primarily focus on companies with less than a 3 billion dollar market cap to allow myself plenty of growth. Additionally, I will use leverage, particularly around binary events in patents, drug trials, and FDA decisions. As an author, I hope to enlighten readers on the value plays I find and guide them on some of the moves I am making and my opinion on the market as a whole. I am not a financial advisor, and any financial decisions by an individual should be made at their own risk.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.