In Focus: Airbnb, Bargain or Bust?
The last time I wrote about Airbnb (ABNB) was back in October 2020, shortly after the company filed its paperwork to go public. Not being one to chase overpriced and overhyped IPOs, I told anyone who would listen to get into Airbnb when it became public. Seven months after it's IPO the stock is trading well below it's high, but still above its IPO price. At this price level is Airbnb a bargain or a bust?
The road to being a publicly traded company has been rocky for Airbnb, which I wrote about here. To condense it, let;s just start with 2020. In late 2019, all signs pointed to Airbnb going public in early 2020, but then the coronavirus hit and stopped travel dead in its tracks, causing investors and analysts who anxiously awaited the Airbnb IPO to wonder if the company would make it out of the pandemic.
Chaos isn't a pit, chaos is a ladder - Petyr 'Littlefinger' Baelish, Game of Thrones
The management team of Airbnb survived the chaos of 2020 and was able to take the company public last December. After being priced at $68 per share, the stock closed its first day of trading at $144.71. By February of 2021 the stock price had traded to over $210 per share. Even though the world hadn't completely beaten COVID-19, investors bought into Airbnb because they saw the light at the end of the tunnel. Investors understood that on the other side of the pandemic was a pent up demand for travel and vacation, which would benefit Airbnb.
Since closing at $216.68 on February 11, 2021 the stock has been in a slide, and now trades at $150.23
What's Behind The Sell Off?
In mid February of this year, there was more negative sentiment surrounding the company than positive sentiment, which played a role in the sell off. Just a day after the stock closed at an all time high, Wolfe Research Partners downgraded the stock to Peer Perform from Outperform while stating the company's lofty valuation could not be justified.
Shortly after the downgrade, the company reported its Q4 2020 results, which saw revenue of $859 million beat Wall Street's expectations of $748 million, but the company lost $3.9 billion during the quarter, which was above the $3.1 billion that the Street expected.
In addition to the downgrades and the company’s Q4 2020 numbers not meeting expectations, investors
have had to rethink the reopening trade, the investments made in company’s that would benefit from life after COVID.
The Delta variant of COVID-19 has been a handful for places like the United Kingdom. Places like India and Brazil never seemed to get a handle on the original variant of COVID-19. Just a few days ago Brazil reported 65,000 new COVID-19 cases and over 2,000 deaths within a 24 hour period. In the United States, Los Angeles is seeing a rise in coronavirus cases. Last Thursday the L.A. reported 506 new infections, the most since mid-April.
Globally and nationally, we’re still fighting the coronavirus, which has been another pain point for Airbnb.
Oh, and have you noticed the increase in Vrbo commercials? For those not aware, Vrbo is Airbnb’s competition. The company has been around since 1995, but in 2019 got a makeover and a rebrand. Vrbo is owned by the Expedia Group (Expedia, Hotels.com, Travelocity, Orbits, Trivago).
Vrbo has been on a mission to get hosts and to make sure that the world knows they exist. Vrbo has aggressively gone after Airbnb’s top hosts in an effort to bring them over to the Vrbo platform, Vrbo has even offered to transfer a host’s Airbnb rating to the Vrbo platform. Besides going after Airbnb’s top hosts, Vrbo has increased its advertising spending from $72 million in 2019 to $103 million 2020. For anyone who wasn’t aware of Vrbo pre pandemic, the company wants to make sure that they are aware of them post pandemic.
Downgrades, earnings per share misses, a possible reopening delay, and a motivated competitor has done a lot to knock the shine off of Airbnb.
There is a bull case however for Airbnb. In May, Yahoo Finance reported analysts upgrades of Airbnb. The consensus among the 30 plus analysts covering the stock was that revenue in 2021 would come in at $5.4 billion, which if met would be a 63% increase from 2020’s revenue. The analysts did however cut their price target to $166 per share, which is only 10.6% higher than the current stock price. Needham on the other hand didn’t upgrade the stock, it maintained its buy rating on the stock with a $194 price target.
Airbnb currently has a $91 billion market capitalization, which trumps Hyatt’s (H) 8$ billion market cap, Hilton’s (HLT) $35 billion market cap, Marriott’s (MAR) $46 billion market cap, and Wyndham’s (WH) $6.9 billion market cap. Of those four major hotel brands, only Hilton and Marriott reported higher revenue than Airbnb in 2020, and all but Wyndham reported higher revenue than Airbnb in 2019.
Based on the income statements of Hyatt, Hilton, Marriott, and Wyndham, there’s an area where Airbnb holds an edge and others that the company needs to get under control to really be of value to investors.
On average the cost of revenue as a percentage of revenue for Hyatt, Hilton, Marriott, and Wyndham in 2019 and 2020 was 62% and 69% respectively. Airbnb’s cost of revenue as a percentage of revenue for 2019 and 2020 came in at 42% and 52% respectively. But what Airbnb saves in its cost of doing business it spends it in selling, general, and administrative expenses. For Airbnb SGA in 2019 was 48% of revenue and in 2020 SGA was 68% of the company’s revenue. The other four hotels on average spent 25% of their revenue on SGA.
Airbnb’s CEO Brian Chesky recently reflected on the company’s big advertising spend ($1.17 billion in 2020 and $1.6 billion 2019), and stated the company has no plans to spend that much on marketing again. It appears the CEO is keeping his word, as sales and marketing expenses for Q1 2021 decreased by 27% from where it stood in Q1 2020.
Improvement to Airbnb’s income statement and balance sheet will go a long way in making investors happy, but before pleasing investors the company has to please its hosts, which they’ve recently addressed.
Airbnb recently announced 100 plus innovations and upgrades to make the host and user experience better. The upgrades provide more flexibility to users, makes it easier for property owners to become Airbnb hosts, and provides better support for its hosts and guests among other things.
Bargain or Busts?
The travel industry is worth $3.4 trillion in revenue, Airbnb’s 2020 revenue represents less than a half of one percent of that $3.4 trillion figure. There’s a lot of room for Airbnb to grow, but with COVID-19 still lingering, Airbnb's immediate future looks hazy to some investors.
For me, I’m still all in on Airbnb for the long term. I’m not thinking about Airbnb capturing 2% of the $3.4 trillion travel industry, I believe they can capture .05% of the market over the next few years, and that alone could have a significant impact on the company.
Before COVID-19 I used to associate Airbnb with going away, going far away. I’m going to L.A. or Paris, or London, or Toronto and I want to have a long stay, I thought about Airbnb. Now, after dealing with COVID-19, I associate Airbnb with getting out of the city and going somewhere suburban for a few days, even it's in the same state that I’m in. I believe this is important to Airbnb, as it will allow them to stay in growth mode as the politicians work out who can travel to where and when.
When international travel does open up fully, I expect Airbnb’s growth to go into overdrive for a few reasons. One, I believe the pandemic has made people comfortable working away from work and companies comfortable with not physically seeing their people every day. I foresee a jump in the number of digital nomads, getting an Airbnb wherever they want and working remotely. Flexjobs, a website dedicated to helping people find remote work predicts 36.2 million Americans (22% of the workforce) will work remotely by 2025, which is an 87% increase from the number of people working remotely before the pandemic.
Lastly, I think when things are fully opened up, the population of people that I call the new millionaires, the people that made big crypto bets and big bets on bad names during the pandemic that paid off are going to spend that cash, and I think a sizable portion of it will be spent on travel, which will be another win for Airbnb.
Vrbo is coming, but I believe there is room for more than one company in this space. How I envision work and travel changing over the next decade benefits both Vrbo and Airbnb, and makes Airbnb a bargain at its current share price. I remain extremely bullish on Airbnb as a long term investment.