AirBnb ($ABNB) my investment thesis

Most people know AirBnB as the hospitality platform, where you can book rooms and experiences. It is a two sided market place with guests(demand) and hosts(supply).

I have been investing in the company since the IPO (I will keep buying as well) and am expecting to hold it for 10+ years. This is one of my best stock ideas of 2020-2030. Here is some background and research on why I love $ABNB.

AirBnB was founded in 2008 in San Francisco by Brian Chesky, Joe Gebbia and Nathan Blecharczyk.

Revenue totaled $2.5 billion over the first nine months of 2020, down 32% year-over-year.

How and why did they get started?

When the Industrial Designers Society of America (IDSA) conference came to San Francisco in 2007, overwhelming the city’s hotels, Joe emailed Brian with an idea to “make a few bucks.” He thought it would be a crafty way to subsidize their rent.

The team made three product decisions that shaped their future:

  1. Facilitating payments on-platform. Instead of sending guests to PayPal or another website, Airbnb handled payments themselves.
  2. Introducing ratings. Airbnb introduced a reputational system in which hosts and guests rated each other.
  3. Three-click booking. In just three clicks, anyone could book a place to stay.
Pando: Brian Chesky: I lived on Cap'n McCain's and Obama O's got AirBnB out  of debt
Chesky and Gebbia created and produced limited edition Cap’n McCain’s and Obama O’s cereals that they sold for $40 a pop. That hack netted the company $30K

How much money has the company raised?

AirBnB has raised over $6.4 Billion so far to fund the company.

Over $6.4 Billion since founding and over $1B during the IPO

What are the key milestones?

By 2011, Airbnb users had booked a million nights (or 2,739 years) through the platform. 

By January 2012, Airbnb hit 5 million cumulative nights booked.

In June 2012, the company hit 10 million.

In November 2016, Airbnb launched Experiences.

How big is the market?

$3.4 trillion. That’s the company’s estimate for their total addressable market (TAM). The reason Airbnb’s opportunity is so enormous is partially because it created a new category

80% consists of Airbnb’s core business, “short-term stays,” defined as those lasting 28 days or less. 

Airbnb expects an expansion in the short-term market from $1.2 trillion to $1.8 trillion. This growth is based on an increasing population and a growing travel market 

What is the business model?

Revenue comes from service fees, charged to customers.

In 2019, Airbnb raked in $5.3 billion in service fees on a Gross Booking Value of $38.0 billion – so its service fees accounted for 17% of GBV. That 17% cost is shared, though not equally, by the guests and the hosts.

The bulk of the fees fall on the guest, with “most guests” paying under 14.2%, and “most hosts” paying 3%.

What does the financial picture look like?

The company measures financial performance across a few key metrics. 

Gross Booking Value (GBV). This is defined as the dollar value of bookings on the platform

Revenue. This represents the amount brought in by Airbnb through service fees.

In terms of GBV, the company generated $38 billion in 2019, supporting a growth rate of 29% from $29 billion in 2018.

These GBV metrics equate to revenue of $4.8 billion and $3.7 billion in 2019 and 2018, respectively.

The first three quarters of 2020 saw both metrics take a hit, with Airbnb generating just $18 billion in GBV (down 39% YoY) and Revenue of $2.5 billion (down 32% YoY).

Quarterly revenue growth (or lack of it in 2020)

What are the moats?

  1. Brand recall: Despite slashing Sales & Marketing spend Airbnb’s acquisition remained strong. 91% of all traffic to the site came through direct or unpaid channels, supporting an organic growth story. When it is time to travel (or find a new experience), a large portion of guests instinctively navigates to Airbnb.
  2. On the other side host loyalty is best understood through retention data. Airbnb’s host revenue retention since 2014 sits at or above 88% by cohort.

Airbnb has demonstrated its model’s potential profitability, albeit in fits and starts. 

Who are the competitors?

Key competitors are:

  1. OTAs – such as, Expedia (Vrbo), and Tujia (China)
  2. Potential competitors from hotel chains such as Marriott, Hilton, etc.

What are the key metrics

  • 4 million hosts
  • 5.6 million active listings
  • 220 countries and regions, 100,000 cities, 55% hosts are women
  • 110 million guests cumulative in 13 years
  • 110 billion host earnings total in 13 years

What are the risks?

Airbnb hasn’t been profitable so far and has incurred net losses every year.

In the S-1, Airbnb reported net losses of $70.0 million, $16.9 million, $674.3 million, and $696.9 million for the years ended December 31, 2017, 2018, and 2019, and nine months ended September 30, 2020, respectively.

Another concern is the liability factor. Some cities have put a ban on single-night rentals to stop the renting of “party houses” for raucous events.

Revenue concentration: While no single city accounted for more than 2.5% of the company’s revenue, in 2019, 11.9% of the company’s revenue came from just 10 cities. 

The bear case for Airbnb’s long run operating profit margin is that travel is a category where you’re competing for a consumer’s business each time they book a trip. 

Why invest?

In the travel space there are few “great brands” – AirBnB could be one of those, besides Disney. Most airlines are hated, most hotels not loved and all OTA’s just ignored.

“Airbnb” has gone from brand name to a common noun in the same vein as using a “Kleenex” or drinking a “Coke”.

The management team – founder led, AirBnB has passionate committed founders with an ability to keep introducing new offerings to keep their hosts and guests happy is my bet.

It unlocks of a vast supply of new lodging inventory, previously unavailable and gives hosts an opportunity to make money off a latent asset. 

Cash float: Airbnb convinced travelers to part with 100% of their booking cost up front and then they pay out the required amount to hosts when the stay actually occurs. Airbnb therefore generates substantially higher free cash flow (FCF) than accounting profit. 

Comparable pre tax operating income:
  • Airbnb -10%
  • Expedia 8%
  • Booking Holdings 35%
  • Hilton 17%
  • Marriott 9%

What are my return expectations?

As a multiple of revenue, AirBnB is rich. Airbnb’s revenue is expected to rise by 30% to $4.33 billion by 2021. Let’s assume that its revenue rises an average of 30% over each of the next five years from that to 2026. That means sales will be 3.72 times $4.33 billion or $16 billion.

Therefore, if Airbnb stock ends up with a similar valuation as Uber, Square or other well valued marketplaces, its market cap will be 8.33 times $16 billion by 2026. That works out to $133.3 billion, or 59% more than the market cap of $83.89 billion.

#TickerRev GrowthEV/RevEV/EBITDA
AirBnB is richly valued to 2021 revenues at 21X with 37% growth