Welcome to UncoverAlpha newsletter. The newsletter is primarily focused on sharing my analysis and insights on great companies in the tech and growth sector. The newsletter is free, so if you haven’t, you can Subscribe on the following link.
This article is sponsored by Commonstock
Commonstock is all about transparency. Follow your favorite investors and see their trades in real time. Link your favorite brokerage and add a memo as to why you bought or sold a security for your followers to see! See my trades and decision making process @rihardjarc on Commonstock.
If you are interested in sponsoring the next article, you can DM and reach me on Twitter @RihardJarc
Airbnb is another one of my portfolio companies. I will break down my investment thesis on why they are one of my portfolio companies and what I like or dislike about the company.
First of all, I don’t think I need to lose your time in presenting the basics of the company as most people know what Airbnb is. Airbnb has become a verb for finding a place to stay for vacation or even for working remotely lately. In fact, Airbnb stated on their S-1 form that approx. 91% of all traffic to Airbnb is either coming direct or through unpaid channels during the first nine months last year. That is a great data point that shows how well Airbnb has positioned its brand and how well people know it. For comparison, Airbnb’s competitor Booking Holding was reported to spend $1 billion in one quarter in 2018 just for Google ads. It is estimated that Booking was at least before the pandemic one of Google’s most prominent clients.
So let’s dive into Airbnb and why it is such a unique company for the travel, experience, and rental market.
Total Addressable market
First of all, we have to talk about its TAM. It is one of the biggest TAM’s out there. While TAM of itself doesn’t mean anything when you combine it with an innovative disruptor that executes and captures the market, your chances of getting a company that can grow big are high. Airbnb’s primary addressable market started with travel and people renting vacation properties. During the pandemic, we saw that Airbnb expanded its TAM to include the segment “living”. With "living," I mean renting out properties for a longer time – 28 days and longer, not to be on vacation but for living in it. The pandemic accelerated the remote work from anywhere trend, and all things indicate that a lot of it will also stay after the pandemic. Airbnb was the clear favorite for people looking to live in this way.
The third pillar to Airbnb’s amazing TAM is "Experience". The market for experiences represents what a person traveling might want to book besides the actual sleeping space (spa visits, sight-seeing trips, boat rides, etc.). While the Experience was an important segment for Airbnb before the pandemic, they put that segment on hold as people weren’t looking for much experience during the pandemic. But now we can see they are putting it back on the map, and it will be an essential driver of growth in the coming years.
And the fourth exciting element to their TAM is serving the Hotel industry as a service provider. First of all, Airbnb was a dominant player in the market of people renting out to people in the early days, but as it evolves with their extensive user base and reach, hotels can’t look the other way and ignore their enormous audience. Now we have to acknowledge that 90% of hosts on Airbnb are still individuals and that Airbnb is always going to stay a dominant platform for individual hosts. Still, the potential to grow and add clients like hotels when demand for specific locations is high and can’t be filled by individual hosts adds value to their customers and increases the TAM of Airbnb.
A few weeks ago, it was reported that Airbnb is testing out a new API-powered display that gives channel managers and distribution platforms the ability to load multiple rates plans for Airbnb properties. This creates flexibility for both travelers and hosts and potentially makes the platform more attractive to traditional hotels. This move is a big step and again competes with the offerings of its main rival Booking for helping and being also a service provider to Hotel and Hotel chains. When it comes to Hotels, it is 100% clear that even the big hotel chains do not have the brand power to attract such a large userbase of travelers as Airbnb can. And it only makes sense for hotels and hotel chains to partner with them and leverage their platform similar to what they did with Booking.
So as also stated in the S-1 filing of Airbnb, this is their estimation of the size of their TAM:
“We estimate our TAM to be $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences. For short-term stays, we assume an increase in trips per capita in line with expected travel market growth. For long-term stays, we calculate that we can address our estimate for the entire $48 billion global serviced apartment market and 10% of the $1.6 trillion global residential rental market, or $162 billion.”
So yeah, the number $3.4 trillion is a baffling number to digest, and I always take these estimates with a big grain of salt, but still, nobody can deny that they are addressing one of the biggest markets out there.
What get’s me even more excited than the TAM we just described is my view that they are not done yet. And with that, I mean the platform itself can offer so many other things to their loyal userbase. For example, I think Airbnb has a great opportunity in the coming years to become more social. That means to include more things where people can see what their friends visited, rated, how their trips, experiences looked like and at the end be a place where people can travel together and share their journeys. More on that in the Social potential of the Airbnb segment.
Airbnb is also in China
While most Western tech giants are banned from China, Airbnb operates in it(there). It started to operate in China about six years ago. At first, it faced big problems, and the adoption wasn’t quick as the market in China wasn’t ready for peer-to-peer hosting. Another problem soon emerged, and that was the competition. Many local Chinese companies adopted the Airbnb model and started offering the service. The market is now dispersed between companies like Tujia, Airbnb, Meituan Minsu, and Xiaozhu. With the market leader being Tujia. In early 2019 it was estimated that Airbnb had only 5-7% of the market. At that time, Tujia had 1.2M listing in China while Airbnb, at the same time, Airbnb had only 150k listings. But in late 2019, Airbnb’s efforts (mainly driven by the “localization” of the app) were starting to gain traction as it was rumored to have increased its market share by quite a lot. Localization efforts include introducing a Chinese name Ai-bi-ying, customer support in Chinese, partnership with Alipay, etc. Then the pandemic hit and put a hold on all things. But from the first data, it seems that Airbnb has solidified its brand in China and has retained a good brand reputation during the pandemic.
A strong presence in China is vital for Airbnb. Not only because of the direct revenue they can generate from that country, but also for the brand. Chinese consumers who travel the world familiarize with the brand, making them more likely to book accommodation on Airbnb when they travel abroad. The number of Chinese people traveling outside of China had been showing continuous growth until COVID-19: 107 million in 2014, 117 million in 2015, 122 million in 2016, and 310 million in 2019 (China Tourism Academy, 2017; 2020).
The pandemic changed the whole company
The pandemic was the most significant black swan event to hit the company. As the CEO Brian Chesky mentions in multiple interviews, it was one of the most challenging periods for any company that would face it as Airbnb did. Bookings dropped overnight by more than 80%; it was a total shocker. But what Airbnb got in that moment was a complete reset and refocusing moment for the whole company, and they took the opportunity with both hands and put it to their advantage. Looking back at the company's actions, they speak of the volume of how good Chesky handled the situation.
- Airbnb laid off 25% of their workforce
- They raised $1B in a new round in April 2020
- They reorganized their complete company structure
- They refocused on their key company offering, and they executed
While the layoff and gathering of capital might be something, many of the CEOs would think of a big important thing was the reorganization of the company structure and the refocusing. Chesky decided to reorganize the company from a division-led corporate structure to a more functional structure. It gave even more decision power & responsibility to Chesky and made it so that the best talents in the whole company were focused on solving one problem. With this change, the organization became more lean & effective. They now have one roadmap, aligned priorities for all the employees, decision time is shorter. The results of these changes in the last 12-18 months speak for themselves. Airbnb guided through the pandemic, launched more than 150 upgrades, delivered their first $1B EBITDA quarter, and went public via an IPO. This quote from Brian on the earnings call stuck out to me:
“I mean, we learned some very valuable lessons last year about focus. I remember once I was in college and my teachers told me, Brian, you can do everything you want in your life just not all at the same time. Yes, we certainly learned that less than last year. We had to scale back initiatives. But one of the benefits of all that, we took our very best people and we focused them only on a few problems, including recruiting more hosts, simplifying the guest journey, improving a world-class service and educating the world about Airbnb.”
We are already seeing and will see even more in the next two years that the pandemic made Airbnb stronger and increased its position in the market. To give you some signs that I am seeing that confirm this thesis:
As Chesky said himself, the organization is more creative, the decision cycle is shorter, and products & upgrades are shipping faster.
The company became much more profitable. The EBITDA margin in the last Q3 2021 was 50%, and not long ago, it was 30%.
In a recent interview for The Verge, Chesky mentioned that they are seeing fewer of their hosts cross-listing on other platforms than before the pandemic. This means people are using Airbnb more exclusively, and the competitors are losing share.
The pandemic opened up a new segment for Airbnb in long-term stay driven by the work from anywhere trend (stays longer than 28 days), as they now represent more than 20% of all the bookings on their platform (in Q3 2021). In my view, long-term stays are better than short-term, as people tend to be more connected to the local community if they stay longer, which brings an excellent opportunity for Airbnb to start offering Experiences and add additional revenue.
Cities start to welcome and call Airbnb to help them return tourism to their location. BIG SHIFT.
People in the pandemic started to travel and explore places they didn’t visit before ( more rural areas that weren’t frequently visited before). This means more supply for Airbnb as people do not travel to only the top tourist-attacked cities in the world. Hence more revenue for the coming years also from travel.
All the above signs show that Airbnb is the company that will benefit significantly in the years ahead because of the pandemic and the shift that happened in travel and living.
Cities have turned the table. Airbnb is welcome!
For years Airbnb had problems with regulators and cities trying to push them out. Individual hosts renting properties for tourists meant fewer properties available for locals for long-term rentals, which drove real-estate prices, especially in the densely populated and tourist-attracted areas, to increase dramatically. The hotels were also not happy with the new competition and pushed local legislators to help them out.
But guess what. The pandemic changed the table completely!
Because of the pandemic, many cities that lived off of tourism had a hard time. Cross-board travel was shut down, or limited people weren’t traveling that much, and the towns saw how dependant they are on travel and the income they get from tourists. They had the problem of under tourism.
And now, instead of looking at Airbnb as their enemy, they turned to them to help them reach more people and bring back the tourists. In the interview with Verge, Brian explained that many local cities reached out to them for help. The residents of these cities were afraid of their financial situation as they were dependent on the tourists. Many studies also found out that cities with Anti-Airbnb laws saw less housing development and lower property values, which again affects the owners of these properties that pay taxes.
So I think this shift in looking at Airbnb as your friend instead of your enemy will bring many benefits and will make Airbnb’s path with regulators and legislators much easier from now on.
And yes, as the pandemic unfolds and the world gets back to a normal state, we might again see similar attempts like in the past to try to limit Airbnb. Still, I think the experience learned in this pandemic will make many local legislators pause and think twice before pushing an important economic society empowerer such as Airbnb out of their state.
The social potential Airbnb has, and nobody is talking about
I know most people view Airbnb as a travel platform, but I have something else in mind. Another ample opportunity that Airbnb has is that it becomes more of a social platform, and I think you are already seeing some first signs of that. Airbnb rolled out a feature where hosts can talk to other hosts and share their experiences. The main reason for this is that new hosts can hear and learn about how it is like renting property on Airbnb, address their concerns, and get some helpful tips before starting this journey.
While this is a tiny step in the social segment, I think Airbnb will go deeper down this path and make the platform more social. I am thinking of features like travelers being able to follow other travelers and see where they went in an interactive way filled with their photos/videos of their trips and, of course, reviews of the places they stayed. I even see an “Airbnb travel influencer” category, where people will follow exciting travelers. The travelers will have their Airbnb profile full of their travel experience and their whole life-travel journey in one place. On the other hand, hosts will want to participate in this social experience and sway these influencers to stay at their properties. It could mean more bookings and higher prices for the properties an influencer will recommend. But this is just a glimpse of what I see down the road. As experiences develop and Airbnb gets into this segment, the social aspect will follow soon as it complements each other perfectly.
Now let’s move to the hard part—the valuation.
To get a sense of the valuation, I will compare the company to its two main competitors Booking Holdings and Expedia.
At first glance, here at the number of these companies. The most straightforward metric to compare them at first is the Price To Sales ratio on a Trailing Twelve-month (TTM):
Expedia – 3.75
Booking – 10.5
Airbnb – 23.7
If we look at these companies from a potential profitability aspect, we see the first problems. Recently Airbnb reported their quarter where they managed to make a $1B in EBITDA. That is an EBITDA margin of 50%. Looking at Bookings numbers, they are also in the 50% EBITDA margin camp. But Expedia is not there. Their EBITDA margin is way lower as they spend more on marketing and sales (it is more in the 10% camp). Even if they cut their R&D spending to zero, they would still be in the 25% range. This shows in my view that the platform's brand effect is not so strong as the other two competitors. I will exclude Expedia as I think Booking is a far better comparison.
What is essential for this valuation analysis is where these companies are in terms of revenue (on a TTM basis) compared to the “normal” year of 2019.
Booking has reached 61% of revenue from the year 2019
Expedia has reached 60% of revenue from the year 2019
Airbnb has reached 110% of revenue from the year 2019
We can see that Airbnb is a broader platform with its living segment and is less dependent on cross-border travel than the other two. It seems they even added to their market share in 2020.
The drops in revenue in the year 2020 because of the pandemic also show ABNB as a more resilient business:
Expedia revenue drop 2020 vs 2019 = 56.6%
Booking revenue drop 2020 vs 2019 = 54.6%
Airbnb revenue drop 2020 vs 2019 = 29.2%
Before we saw that Booking is the competitor, we need to compare it given the similar profitability levels. The next phase is for us to look at the growth rate. And to be entirely objective, let’s look at the growth rate of these companies before the pandemic to see how the market share was moving in “normal conditions”.
Airbnb in the last two years before the pandemic saw revenue growth in the range of 30-44%
Booking in the previous two years before the pandemic saw revenue growth in the range of 3.4-15%
Airbnb was growing around three times faster than Booking. We can estimate that given the similar profitability but better growth, business resilience, and bigger TAM (Airbnb also has the living segment), Airbnb deserves a 3-2x higher multiple than Booking. Currently, the market is pricing precisely that as Booking P/S is at 10.5 and ABNB is at 23.7
Now let’s look at my Airbnb revenue estimates for next year. My main hypothesis is that cross-border travel will return to 2019 levels and that the average price per night will be higher given all the inflation we are seeing. For a good glimpse of where the total current travel market is at, I am taking the 60% mark. The 60% mark is based on the current revenue being 60% of the 2019 revenue with Booking and Expedia because they are more dependent on cross-border travel and travel in general. With this estimation, the travel segment should grow 66% in 2022 vs. 2021 to reach 2019.
Now given that 20-25% of Airbnb bookings in 2021 were long-term stays, I will estimate that out of the $5.3B (TTM) in revenue in 2021- 22% (the mid-point) or $1.16B is the Living segment, and the rest ($4.14B) is the travel segment. This is just an estimation as Airbnb doesn’t give a breakdown of the numbers by segments.
Given my expectation of a 66% increase in travel bookings in 2022, I expect to see that $4.15B increase to $6.9B for the travel segment. For the valuation measurement, I will estimate that the other segment, the “living” segment, will stay flat at $1.16B.
Airbnb also noted on their last earnings call is that the average price per night was 30% higher than in 2019 because of two reasons. The first one is because of the mix of people booking more expensive and bigger properties and the second one because of an increase in prices (probably because of inflation). Now again, we don’t know how much each factor contributed to the overall 30% increase. I will estimate that the prices in 2022 will be 15% higher than in 2019, given the inflationary environment and that the booking mix between smaller and bigger properties will return to “normal” (similar to that of 2019).
If we calculate based on these estimations we get Airbnb’s revenue estimation for 2022 - ($6.9B + $1.16B) * 15% increase in prices = $9.27B in total revenue.
I also view Airbnb as a platform/software company as I believe that they will be able to maintain revenue growth of 30% or more in the coming years. They also showed us they could have a 50% EBITDA margin, and their TAM is not even near its full potential. So I think they should have similar valuation multiples as platform companies.
Given all the stated and the 10x Sales ratio of their competitor Booking with a much lower growth history, my internal multiple for ABNB given next year is 20x Sales, which would, given the revenue estimation, give it a $185B market cap or $291 per share.
Airbnb is one of those companies with all the qualities needed to have an important allocation in my portfolio. It is a scalable platform with an enormous TAM. It has a strong market position, cult brand, outstanding leadership with Brian at the helm, and keeps innovating new features and products every year. They are, in my view, still the disruptor of the industry and not the disrupted. I also think 2022 will be a great year for Airbnb as travel picks up and as people will want to go and visit places they couldn’t for the last two years because of the pandemic. I think there is actual pent-up demand for travel. We can see the first signs already from what management said on the last earnings call:
“And just to give you one anecdote or one data point on October 15, I believe it was that date that President Biden announced the reopening of the borders for international travelers come to the United States. Within one week of that announcement, we saw a 44% spike in nights booked for stays, crossing borders coming into United States on Airbnb for stays November 9 and later, which is when the borders would open.”
Airbnb also benefits from a trend that is here to stay, and that is work from anywhere. And in this category, Airbnb is the obvious choice. As management mentioned on the earnings call:
“We highlighted on the shareholder letter that 45% of our nights were from stays at least seven nights. You’re not going to want to stay in a hotel room for 28 nights, but those trends are continuing”
Not to mention the most significant asset they have – their brand. More than 90% of searches are unpaid organic because Airbnb is a verb. With this fact and the fact that their marketing is getting more effective and represents a less and less % of total revenue, I think we will soon see how profitable this platform can be.
I also have some GREAT PERSONAL NEWS. I am starting a new SHOW on a social podcasting platform called Callin. The show is called UncoverAlpha (yes, the same as this newsletter 😊). We will talk about company breakdowns from my newsletter, discuss earnings, answer live questions from listeners, and have exclusive guest interviews! The first show is on Monday, and we are going to be discussing this analysis of Airbnb and elaborating on the investment case of Airbnb even deeper. Feel free to join live, listen to the conversation, and even ask questions on Monday at 4:05 PM EST, right after the market closes. The link to the Show is here.
I own ABNB.
Nothing contained in this website and newsletter should be understood as investment or financial advice. All investment strategies and investments involve the risk of loss. Past performance does not guarantee future results. Everything written and expressed in this newsletter is only the writer's opinion and should not be considered investment advice. Before investing in anything, know your risk profile and if needed, consult a professional. Nothing on this site should ever be considered advice, research, or an invitation to buy or sell any securities.
EBITDA margins are inflated currently due to (1) elevated ADRs from temporary mix shift and (2) elevated take rates due to temporary booking window dynamics. 3Q is also the seasonal high for margins. The 50%+ you continued to mention is a bit misleading, and BKNG is actually far more profitable. LT margin targets are 30%+.