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Airbnb (NASDAQ:ABNB) disrupted the traditional accommodations industry and now dominates the space. Their resilient, lightweight business model allows them to adapt to an evolving travel industry. The Airbnb marketplace has reached a massive scale, facilitating strong network effects and learning-curve advantages. Even with possibly slowing growth, the company has geared itself towards value-creation with widening margins and returns on capital. The recent drawdown has put ABNB stock on sale for long-term investors.
Airbnb started as an alternative accommodations platform seeking to upend the “one-size fits all” travel industry. Their unique, mission-driven business model created a new category of travel that enables one-of-a-kind experiences for guests across the world.
Travel remains one of the largest industries in the world. According to PR Newswire, the Global Leisure Travel market size was valued at $4.4 trillion in 2021, with an estimated CAGR of 5.7% to 2027. Keep in mind this doesn’t include business or commercial travel. Airbnb, though relatively new, is currently the largest travel company in the world by market cap. In the company’s S-1 filing, they estimate their serviceable addressable market (‘SAM’) and total addressable market (‘TAM’) at $1.5 trillion and $3.4 trillion respectively.
ABNB S-1 Filing
With $46 billion in gross booking value (‘GBV’), Airbnb’s market penetration is only 3.1% of SAM, presenting a sizable runway for the future.
The Travel and Experiences industry is seasonal and cyclical by nature. Peak travel seasons fall in the summer and holiday months, with lower activity the rest of the year. During economic expansions, consumers tend to spend more on travel and experiences. As we saw with the COVID-19 pandemic, the opposite is also true. One advantage to Airbnb’s home-sharing model is greater resilience against business cycle contractions and exogenous events like the global pandemic. Airbnb benefited from the travel rebound more quickly than peers as home-sharing allowed guests to travel while safely distanced. This also drove elevated demand in the rural category of accommodations. Below is an industry map illustrating the dynamics of supply and demand dynamics within Travel and Experiences.
Industry Map – Created by Author
The supply side of accommodations consists of home-sharing hosts (alternative) and hotel rooms (traditional). While demand is made up of the guests renting these accommodations. Both supply and demand can be further categorized by geography, length of stay, type of traveler, etc.
Airbnb led the pack within home-sharing but now competes for hosts against several smaller startups, subsidiaries, and international firms. The most notable of which is Vrbo, a subsidiary of Expedia. Competition for guests is much more fierce. Hotel chains and Online Travel Agencies (‘OTAs’) like Expedia (EXPE) and Booking Holdings (BKNG) are the powerhouses within the industry. Several of these OTAs have begun offering alternative accommodations to compete directly with Airbnb. Internet metasearch engines such as Kayak and Trivago also compete in the space.
The suppliers of alternative accommodations are hosts. Hosts hold a moderate level of bargaining power as their options for listing their homes have increased in recent years. Airbnb faces less competition for hosts than for guests but relies heavily on them for supply.
The buyers (guests) have significant bargaining power due to the hundreds of accommodations they can choose from. Companies can compete for guests either by cost or differentiation.
For alternative accommodations companies like Airbnb, the substitution threats are hotels. Alternatives by definition have differentiated themselves from commoditized hotels. There is debate whether hotels or alternatives offer cheaper prices for guests.
The barriers to entry for starting an alternative accommodations company are relatively low, with many small startups in the space. But their threat is almost nonexistent due to the size and market share of the leading firms like Airbnb and Expedia. These larger firms have significant scale advantages.
Rivalry is intense in the accommodations industry for both guests and hosts.
Airbnb is a disruptive innovator of traditional accommodations like hotels. It created a completely different value chain and business model, which drove its radical early success. Airbnb dropped the commoditized hotel B2C model and replaced it with marketplace model between hosts and guests. This marketplace model allows guests to have unique travel experiences almost anywhere in the world, for any length of time. Many guests and employees are even living on Airbnb. Airbnb’s business model and platform are what drive its two main competitive moats, network effects and learning-curve advantages.
Airbnb platform lends itself to strong network effects on both sides of supply and demand. As the number of hosts and dwellings on the platform expand, so do the number of guests. The cycle then repeats itself, with more guests (demand) driving more new hosts (supply) seeking to try Airbnb. Airbnb’s global brand awareness also enhances these network effects, with their app consistently placing in the top-5 most downloaded travel apps in many countries. Their website also averages close to 80 million visits each month, second only to booking.com. This traffic is the fruit of managerial initiatives for expanding brand awareness. CEO Chesky explains:
We’re not really focused on buying customers. We’re focused primarily on investing in our brand and educating the world about what makes Airbnb unique. So, we think of marketing primarily as education. And I think this explains why 90% of our traffic or more is direct or unpaid. Airbnb is a noun and verb used all over the world, and it was really not advertising, but PR and word-of-mouth that built our brand.
On the supply side, Airbnb had 6 million active listings and 4 million hosts across 220+ countries at the end of Q1 2022. Airbnb reported that 80% of hosts come directly to sign up. Features such as a simplified listing process and length of stay flexibility help keep hosts on the platform. The company’s massive supply and ability to attract and retain hosts enable it to dominate the alternative accommodations market.
Airbnb also has learning-curve and scale advantages. The company has grown rapidly over a decade reaching near $50 billion in gross booking value in 2021 and building a global network along the way. It would be extremely difficult for smaller competitors to match Airbnb’s footprint and marketing reach. Airbnb is reaching a large enough scale to focus on reducing sales & marketing spend but still experience elevated sales growth.
Airbnb was able to capture much of the reopening travel demand in 2021 and is positioned to benefit from emerging industry trends in the wake of COVID-19. These trends include increasing popularity of work-from-anywhere, a rebound in travel demand in the Asia Pacific region, increasing cross-border travel, and rapid growth of long-term stays. Nevertheless, analysts are expecting slower topline growth for Airbnb as overall travel demand normalizes.
Even so, Airbnb has been able to beat analyst revenue estimates every quarter since their IPO. The company has an effective monetization strategy for its platform, with their take-rate (% of revenue collected from a booking) increasing steadily each year to 12.8% in 2021 from 11.4% in 2014. In addition, Airbnb’s average daily rate increased 37% to $168 in Q1 2022 from 2019. Strength in these two areas enable the company to exceed analyst expectations in my view.
Even with potentially slowing growth, Airbnb has dramatically improved its margins, profitability, and cost structure. Gross profit margin has expanded from the mid-70s to the low-80s the last 5 years, both TTM operating profit and net income margins exceeded 10% and returns on capital were above 10% after being negative in 2021. In addition, the company’s levered free cash flow margin was near 40%.
This improvement is driven by a tightening of operating expenses and more disciplined investments, allowing the company to start benefiting from significant operating leverage and expand free cash flow. Airbnb is beginning to bridge the gap between growth and value.
Price-implied expectations analysis estimates the level of expected performance embedded in the current stock price. Instead of relying on multiple assumptions to forecast cash flows like a traditional DCF, expectations investing captures the expectations implied by the current stock price by inverting the DCF. To do this, we use the market’s consensus forecast for sales growth rate, operating profit margin, and incremental investment rate and assess their reasonableness using historical figures. In addition, we calculate the cost of capital (WACC). Here are the consensus figures I chose and other inputs.
Created by Author
These are then used to calculate the present value (PV) of expected free cash flows, PV of residual value, and shareholder value per share. Lastly, the model finds the market-implied forecast period (MIFP): how long the market expects a company to generate returns on investments above the cost of capital. This is found by lengthening the forecast period as many years as it takes to arrive at today’s stock price.
Created by Author
For ABNB, this results in a MIFP of 9 years. Next, we test a high and low scenario for sales growth on the output of the model, then estimate probabilities of each scenario occurring. This gives us an expected value and margin of safety estimate.
Created by Author
In my view, ABNB will exceed analyst expectations based on a few factors. First, Airbnb is led by visionary and long-term focused management. They have proven their ability to capture ever-changing trends in travel and continue to invest in new growth verticals such as Experiences. Improving take rates and ADR are additional positive signs. Financially, Airbnb is benefiting from operating leverage and an improved cost structure which will drive operating margins greater than 20% in my view. Finally, I believe ABNB’s formidable moat enables the company to generate returns above the cost of capital for at least a decade or more. Therefore, I gave the upside case a 50% probability, resulting in an expected value of $117.61.
A few risks to take note of are regulation, lockdowns in various countries, and increasing competition. Home sharing has faced regulatory headwinds over the past decade, with several local governments taking Airbnb to court. Airbnb hosts often deal with required licenses, municipal codes, special taxes, and other local laws. Lockdowns continue in a few select countries, specifically the Asia Pacific, but I expect they will subside and not materially affect Airbnb in the long run. As discussed earlier, competition in intense but Airbnb’s unique offering shield it against sizable competitive encroachment in my view.
Airbnb is poised to continue gaining market share in the accommodations industry. The company’s competitive moats, network effects and learning-curve advantage, allow them to protect their significant leadership position. Management is focused on the long-term success of the company. Even if growth slows, Airbnb is beginning to create solid value for shareholders through wider margins and increasing returns on capital. I rate Airbnb as a Buy and see prices under $100 as attractive for long-term investors.
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Disclosure: I/we have a beneficial long position in the shares of ABNB either through stock ownership, options, or other derivatives. 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.