Is Airbnb in Turmoil?
People "hate" the company. Local governments work to suppress it. They just keep growing.
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Airbnb is a company I would love to own. Obviously, at the right price.
That “right price” got a little closer this week:
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The stock fell after management discussed shrinking lead times and slowing growth in North America. Shrinking lead times mean people are not willing to throw out money for vacation rentals until closer to the vacation date.
Investors didn’t like this, so the stock fell.
Bookings keep growing. Over the long term, Nights and Experiences Booked have grown at north of 20% per year. Growth has slowed down to closer to 15% post-COVID and 9% year-over-year last quarter.
Gross Booking Value (GBV, dollars flowing through Airbnb) has grown at a 30% rate since 2015 despite a pandemic:
I think Airbnb is a great business:
Persistent above-average growth
Founder-led who is focused on a “mission” as well as profits/shareholders
A widening moat that is easily trackable. The more supply listed on the platform, the harder it is to replicate. The more customers spend on Airbnb, the more valuable it is to that supply. A network effect that can expand for a long time. Wonderful.
A brand that has become a verb
A lot of investors hate Airbnb. I am excited about this fact. My conviction that I am right is pretty high and keeps getting proven quarter after quarter.
You hear a lot of similar bear theses on Airbnb:
“Who wants to stay in someone’s home anymore? Hotels are better in every way.”
“Governments are cracking down on them. Locals hate them and will drive them away.”
“What’s stopping a host from sidestepping the platform? The business model is fragile.”
“Who wants to pay for an overpriced stay with cleaning fees after I cleaned myself?”
If you asked someone five or ten years ago, they would have the exact same concerns. And yet, the business has grown its GBV at a 30% annual clip since 2015.
Now, why is that?
My conclusion is that these bear cases are overrated and/or incorrect. Follow the numbers, not your feelings.
Airbnb is too powerful for local governments to kill them. Too many hosts rely on them for income, and too many consumers love using the platform (myself included). Similar to Visa/Mastercard/American Express, this power only grows the more money is sent through its platform.
This summer, Paris saw a huge increase in Airbnb supply for the Olympics. It helped more people attend the event without paying exorbitant hotel prices or (I’m assuming) staying far away from the city center. What a terrible company ruining the local economy!
Look, no company is perfect. But I think Airbnb is one of the best businesses in the world with a good manager. Check and check.
Now, my third item on the investing checklist is valuation. Is Airbnb cheap today?
It has a market cap of $73 billion. The company has a ton of cash on the balance sheet, but a lot of that comes from holding customer deposits. So, I will use the market cap to be conservative.
Earnings before taxes — which includes net interest income on customer deposits — was $2.3 billion over the past 12 months. This is a 22% profit margin. Given the nice net interest income dynamics and fantastic unit economics, I think Airbnb’s EBT margin can approach 30% without any herculean assumptions.
On the 22% profit margin (the actual figures), Airbnb trades at a P/EBT of 31.7. Assuming a 30% margin, that comes down to a P/EBT of 23.
I think it gets into my buy zone at a P/EBT under 20. This would require another significant drawdown from the current price of $115 and/or earnings growth, but I am willing to be patient. I like the other stocks I own better than Airbnb at current prices.
20x earnings is more than I would usually pay, but I think Airbnb has a long runway to grow its GBV, has optionality with the creative R&D/product development team, and has plenty of room for profit margin expansion.
This is one I will be keeping up on every quarter. If the narrative gets worse and worse, it might be time to take the plunge on Airbnb.
But I don’t think that day is today.
Brett
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Great take. Bold Founder & CEO, growing Brand Value, expansion into new verticals, outstanding free cash flow margin, and constantly increasing take rate make me bullish on the stock in the medium/long run. If the regulatory noise with local governments can find a peaceful resolution, I can see some upside here. Time will tell!