This month Airbnb (ABNB) dipped to all time lows around the $110 mark. Since going public in late 2020, the online lodging marketplace platform has achieved both record free cashflow and operating income. It could be argued Airbnb went public during one of the most highly-liquid financial markets in modern history. This set the perfect macro-backdrop and conditions (almost 0% interest rates) for the biggest IPO in 2020. Now that shares are roughly 30% below the IPO open price, I would argue the stock is siting around its intrinsic value based on current forward guidance.
Airbnb had an impressive first quarter with management guiding a bullish outlook for Q2 and Q3, which are typically Airbnb’s busiest periods. GBV (gross booking value) was up 67% from last year, and there were more than 102 million nights and experiences booked in Q1.
In Q1, management also saw more guests using the “I’m Flexible” search feature which allows users to see more available nights than would otherwise be hidden in general searches. There were two billion flexible searches in Q1, which was was an increase from 800 million searches.
Furthermore while demand has picked up (obviously recovering from a low base), there has been an influx of supply (new hosts) adding their homes to the platform. Therefore, there’s enough supply to meet booking demand over the summer months.
On May 12th, Airbnb released a set of new features including ‘Airbnb Split Stays’ and ‘Airbnb Categories.’ A key unique selling point of Airbnb’s model has been inspiring travel ideas. Now site visitors can choose a specific category such as Treehouses, OMG!, Camping, and much more. While this innovative idea hasn’t been tested at scale, this seems like a significant value add for those visiting the site looking for unique stays or even travel inspiration while searching.
Furthermore Airbnb now offers greater consumer protection in what Airbnb calls ‘AirCover.’ These protective guarantees are likely to improve total conversion rates as they act as a safety net which is a top priority for travelers.
Airbnb also streamlined their host onboarding process and the vast majority of new hosts received a booking within the first three days of advertising in Q1.
Not only does Airbnb benefit from the network effect – more hosts = more options = more options = better user experience & more demand. Airbnb benefits from a new work-from-anywhere culture, where employees can travel and work remotely. Management argues the trend is here to stay as its almost a non-negotiable benefit when hiring at many firms. If competing firms offer flexible hybrid or remote working options they’ll be able to secure and retain better talent. It’s not certain to what degree this trend will add to the demand side or if it will even have a noticeable impact higher than 1-5% of total revenue.
Free Cash Flow Might not be so Free
Management was excited to report record free cash flow of over $1 billion in Q1. However a function of calculating this metric includes adding back stock-based compensation (SBC). In Airbnb’s case, $195M was added back to calculate free cash flow in Q1. Most SaaS/tech companies pay larger SBC to employees, but younger tech companies are likely to see a larger dilutive impact as they scale.
This is something to keep a close eye on as an investor going forward. SBC for product development employees could get excessive (like in previous quarters) and because SBC is a non-cash item, it is treated as an add back.
While this isn’t a major issue in comparison to other tech companies like Palantir (PLTR), management does not have a share repurchase program to offset the dilutive effect of SBC as their capital returns policy is focused on growing the business.
The above shows product development spending as a percentage of revenue. As a base case I expect these ratios to remain flat, or potentially decrease over time as Airbnb scales its platform.
High Valuation, but also High Growth
Airbnb has a market capitalisation of $71B and an enterprise value of $65B. NTM EV/EBITDA is 27x which might be excessive, however EBITDA is expected to grow 52.3% and 24.8% in FY22 and FY23 respectively.
Furthermore, Wall Street analysts are expecting at least double digit EBITDA growth every year into 2029. One thing to consider is that there’s only a small number of analysts providing guidance that far into the future. Providing earnings guidance becomes exponentially risker for each year into the future. Nonetheless I believe Airbnb’s valuation is justified due to their long growth runway and the fact their business model is deflationary for consumers. Hosts typically self-manage their homes and have almost zero labor costs compared to hotels. Some Airbnb listings are more expensive than hotels, but the variety of homes and locations available on Airbnb gives consumers significantly more options, typically at a lower cost.
Therefore Airbnb can easily grow into their current valuation. The largest risk is that a fair amount of growth has been priced into Airbnb’s share price. If management reports anything other than in-line or above expected earnings, then the market will immediately reprice the company. This could lead to a long-term drawdown while the market looks for concrete earnings guidance.
What Wall Street Thinks
Based on the 28 analysts covering Airbnb, there are 13 Buy and 15 Hold ratings. The fact that Airbnb has no sell ratings is a testament to the firm’s easily recognizable moat. The average target price given by analysts is $190.23 per share, indicating a possible 79.06% upside from current levels.
Conclusion
According to a YPulse survey regarding millennial travel preferences, Airbnb is their preferred place to stay when traveling. This both shows the shift in demand for Airbnb’s offering, and the opportunity for capturing more market share.
Airbnb has a strong economic moat and is cementing itself as the top travel brand globally. Furthermore, Airbnb is an asset light business with almost insignificant capital expenditure spending. Product development spending and marketing spending is quite high (44% of rev in FY21), but Airbnb is still in the early stages of scaling up globally. As a SaaS business, Airbnb is more protected from inflation than other capital intensive businesses. The biggest worry is the impacts inflation will have on consumer spending. Consumer sentiment is currently at the lowest point since 2012, and while choosing Airbnb could be the cost saving option for consumers, the total volume of nights booked could suffer if a recession unfolds.
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