Airbnb, Inc., together with its subsidiaries, operates a platform that enables hosts to offer stays and experiences to guests worldwide. The company’s marketplace model connects hosts and guests online or through mobile devices to book spaces and experiences. It primarily offers private rooms, primary homes, or vacation homes. The company was formerly known as AirBed & Breakfast, Inc. and changed its name to Airbnb, Inc. in November 2010. Airbnb, Inc. was founded in 2007 and is headquartered in San Francisco, California. The company is publicly listed on NASDAQ under the ticker “ABNB”.
Our considerations
Airbnb is the popular service used to book apartments, houses and experiences around the world. As one can easily imagine, this company was heavily affected by covid restrictions, as the entire travel industry. However, travel demand is likely to increase dramatically this summer as most of the restrictions worldwide have been eased, and this increased demand will likely continue through 2023, bolstering Airbnb’s revenue growth.
One thing that the pandemic did to the industry, other than damages, was changing people’s travel goals, with more individuals planning trips just to spend some time with loved ones, explore local areas, and travel for personal well-being. Furthermore, the growing adoption of a flexible work culture seems to be providing more travel opportunities to individuals as well, which is something that could dramatically change the global travel industry in the next few years. If we consider the recent events, such as “The Great Resignation”, we can see that one of the most important factors in choosing a job has become the flexibility or the lack thereof. As a result of these trends, than favor spending more time with family and friends, explore the world and maintain a good health status (both mentally and physically), more people are quitting their jobs, prompting employers to raise salaries and offer more flexible working arrangements in order to attract new talent. In January, the CEO Brian Chesky said that remote work arrangements will give birth to a new segment of working travelers, resulting in increased bookings and, therefore, revenue for the company. Brian is on a nationwide tour, staying in Airbnb locations just to improve the customer experience, and showing the world that it is possible to travel and work at the same time. It’s worth noting that Brian is not the only person that is using Airbnb’s offerings not just to travel, but to live.
We can see that Airbnb is well prepared to take advantage of the future of flexible work and travel. Furthermore, the company anticipates increased travel demand in the summer and is currently working to improve its offerings in order to capitalize on the surge in demand and the expected increase in bookings. In the last two years, people have prioritized traveling for personal well-being, and this trend should continue in the next couple of years as well. Although business travel will also pick up this year after almost two quit years, most of bookings growth will come from private travelers who are willing to make the most of their flexible work arrangements and want to spend some more time with their loved ones.
Speaking of financial results, the company is growing strong. In 2021, Airbnb saw record growth in its top-line metrics, as consumers returned to travel after lockdowns had kept them at home. Indeed, nights and experiences booked grew by 56%, gross booking value (GBV) grew 96% and revenue grew 77%. Furthermore, in 2020 Airbnb laid off 25% of its workforce and the resulting cost savings where maintained through 2021, achieving its first positive NOPAT margin since going public. However, based on management’s guidance, we shouldn’t expect further improvements in margins during 2022. Indeed, the management not only pointed out that forecasting quarters out remains challenging due to covid related uncertainties, but it also recommended comparing 2022 to 2019, meaning that 2021 was exceptional as much as 2020. That’s actually understandable, as in 2021 consumers travelled more to compensate for the previous year.
The recent conflict in Ukraine and the general turmoil that involved the European countries are going to be an headwind for international travel demand, however the company has already showed its ability to thrive in difficult periods during the pandemic, so we shouldn’t worry to much about it. At the moment, Airbnb is working with hosts to provide housing to up to 100,000 refugees fleeing from Ukraine for free. Also, the company is allowing people to donate money to Ukrainian citizens by booking Airbnb rentals that, obviously, will never be used. While this is irrelevant for the valuation of the company, it’s important to keep in mind that Airbnb puts its money where its mouth is, supporting important social causes. Companies that do well for their customers and society in general tend to do good for shareholders too.
Speaking of valuation, considering that the company is growing fast and could potentially change the global travel industry permanently, we don’t think the current market price is too far from the fair value. Indeed, as we will show in greater details in the section dedicated to the valuation, estimating an average revenue CAGR of roughly 29%, we estimated the company’s fair value to be $151.66 per share. While our estimates suggest that the company is not a great deal at the moment, Airbnb’s business is highly innovative and disruptive, and it may be worth to keep an eye on over the coming months. Always remember that a good company may not be a good investment, though.
Business
Airbnb operates a global marketplace, where Hosts offer guests stays and experiences on its platform. The company’s business model relies on the success of Hosts and guests who join Airbnb’s community and generate consistent bookings over time. As Hosts become more successful on the platform, and as guests return over time, the company benefit from the recurring activity of the community.
Airbnb’s revenue consits of service fee, net of incentives and refunds, charged to its customers. Both Hosts and guests are considered as customers. Fees are different for stays and experiences:
- For stays, service fees, which are charged to customers as a percentage of the value of the booking, excluding taxes, vary based on factors specific to the booking, such as booking value, the duration of the booking, geography and Host type.
- For experiences, the company only earn a Host fee.
Basically, all of Airbnb’s revenue comes from stays booked on its platform. There is a difference in timing between when a booking is made and when the company recognizes revenue, which occurs upon check-in: prior to that moment, collected service fees are recorded as unearned fees.
Competitors
Airbnb operates in a highly competitive environment. As it seeks to expand its community globally, the company faces competition in attracting hosts and guests:
- Regarding hosts, Airbnb competes to attract and retain them to and on its platform to list their homes and experiences. The company competes for hosts based on many factors including the volume of bookings generated by guests, ease of use on Airbnb platform, the service fees the company charges, host protections, such as those included in AirCover and Airbnb brand.
- Regarding guests, Airbnb competes to attract and retain them to and on its platform, as guests have a range of options to find and book accomodations and experiences. The company competes for guests based on many factors, including unique inventory and availability of listings, the value and all-in cost of host offerings on the company’s platform relative to other options, Airbnb brand, ease of use of the platform, the trust and safety of the platform, and community support.
In this sense, the current competition for Airbnb include:
- Online travel agencies (OTAs), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com), Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity), Trip.com (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner), Hopper, Meituan Dianping, Fliggy (a subsidiary of Alibaba), Despegar, MakeMyTrip, and other regional OTAs;
Internet search engines, such as Google (including its travel search products), Baidu and other regional search engines; - Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, Hometogo, Holidu and Craiglist;
- Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels;
- Property management companies, such as Vacasa, Sonder, Inspirato, Evolve, Awaze and other regional property management companies;
- Chinese short-term rental competitors, such as Tujia, Meituan B&B and Xiaozhu;
- Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka and KKDay.
However, Airbnb is in a good competitive position thanks to the breadth and depth of stays and experiences offered on the platform, its global scale and geographic reach, the strength and loyalty of Airbnb’s host and guest community, the brand, the organic traffic and, most improtantly, the functionality of the platform.
While online travel agencies like Booking and Expedia are trying to compete against Airbnb, this has a superior brand presence and gets over 90% of the traffic directly. On the contrary, travel agencies need to spend large amount of money in advertising to get the same amount of traffic. While this could obviously change in the future, and therefore has to be kept under attention, we can say that Airbnb is not suffering much from competition pressure. This may also be the reason behind the higher revenue growth rate of Airbnb, compared to Booking and Expedia.
Our valuation
We evaluated the company using our discounted cash flow model. The model relies on the past 5 years worth of financial statements data in order to estimate the future growth of the company. Each company is valuated in a slightly different way, and in this specific case we estimated the future free cash flows for the next 10 years by estimating line by line each of the three main financial statements. We made some assumptions in order to valuate the company:
- The terminal growth rate is 5.40%;
- The total shares outstanding are 2,108.55 millions;
- The effective tax rate will be constant at 23.40%;
- The United States 10-year treasury bond yield will reach 2.30% by the end of 2022;
- The risk premium is 6.00%;
- The average revenue CAGR over the forecast period will be 29.87%.
We used those assumptions to model the weighted average cost of capital, which resulted equal to 11.18%, and to estimate the future revenue growth and free cash flows. We estimated a fair value of $151.66, meaning that according to our valuation there is a possible downside in the stock price of 9.39%. Therefore, we give the company a “hold” rating. A lot of factors could influence the valuation, including but not limited to economic policies, markets development and real economic growth: therefore, we will update this valuation at the start of the next quarter.
