This month Airbnb (ABNB) fell to all-time lows around the $110 mark. Since its IPO in late 2020, the online hosting marketplace platform has achieved both record free cash flow and operating profit. It could be argued that Airbnb went public during one of the most liquid financial markets in modern history. This set the perfect macro context and conditions (near 0% interest rate) for the biggest IPO of 2020. Now that the shares are about 30% below the opening price of the IPO, I would say the stock is hovering around its intrinsic value based on current forward guidance.
Airbnb had an impressive first quarter, with management guiding a bullish outlook for the second and third quarters, which are typically Airbnb’s busiest times. GBV (gross booking value) increased 67% over last year, and more than 102 million room nights and experiences were booked in the first quarter.
In the first quarter, management also saw more guests using the “I am flexible in search” feature which allows users to see more available nights than would otherwise be hidden in general searches. There were two billion flexible searches in the first quarter, up from 800 million searches.
Additionally, as demand picked up (obviously recovering from a weak base), there was an influx of supply (new hosts) adding their homes to the platform. Therefore, the supply is sufficient to meet the booking demand during the summer months.
On May 12, Airbnb released a set of new features, including “Airbnb Split Stays” and “Airbnb Categories.” One of the unique selling points of Airbnb’s model has been to inspire travel ideas. Now, site visitors can choose a specific category such as Treehouses, OMG!, Camping, and more. Although this innovative idea has not been tested on a large scale, it seems to be a significant added value for those who visit the site in search of unique stays or even travel inspiration during their research.
Additionally, Airbnb now offers better consumer protection in what Airbnb calls “AirCover.” These protective guarantees are likely to improve total conversion rates as they act as a safety net that is a top priority for travelers.
Airbnb also streamlined its host onboarding process, and the vast majority of new hosts received a reservation within the first three days of advertising in Q1.
Not only does Airbnb benefit from the network effect – more hosts = more options = more options = better user experience and more demand. Airbnb is enjoying a new work-from-anywhere culture where employees can travel and work remotely. Management argues that the trend is here to stay as it is an almost non-negotiable perk when hiring at many companies. If competing companies offer hybrid or flexible remote work options, they will be able to secure and retain better talent. It is not certain to what extent this trend will increase demand or if it will even have a noticeable impact above 1-5% of total turnover.
Free cash flow may not be so free
Management was pleased to report record free cash flow of over $1 billion in the first quarter. However, one function of calculating this metric includes adding stock-based compensation (SBC). In the case of Airbnb, $195 million was added back to calculate free cash flow in the first quarter. Most SaaS/tech companies pay larger SBCs to employees, but young tech companies are likely to see a greater dilutive impact as they scale.
This is something to watch closely as an investor in the future. The SBC for product development employees could become excessive (as in previous quarters) and as the SBC is a non-monetary item, it is treated as an add-on.
Although this is not a major issue compared to other tech companies like Palantir (PLTR), management does not have a share buyback program to offset the dilutive effect of SBC, as its capital return policy is geared towards business growth.
The table above shows product development expenses as a percentage of revenue. As a base case scenario, I expect these ratios to remain stable or potentially decrease over time as Airbnb evolves its platform.
High valuation, but also high growth
Airbnb has a market capitalization of $71 billion and an enterprise value of $65 billion. NTM EV/EBITDA is 27x, which might be excessive, but EBITDA is expected to grow by 52.3% and 24.8% respectively in FY22 and FY23.
Additionally, Wall Street analysts expect at least double-digit EBITDA growth every year through 2029. One thing to consider is that there are only a small number of analysts providing guidance as far into the future. Providing earnings guidance becomes exponentially risky for each year to come. Nonetheless, I think Airbnb’s valuation is warranted because of its long growth track and the fact that its business model is deflationary for consumers. Hosts usually manage their homes themselves and have almost zero labor costs compared to hotels. Some Airbnb listings are more expensive than hotels, but the variety of accommodations and locations available on Airbnb gives consumers many more options, usually at a lower cost.
Therefore, Airbnb can easily reach its current valuation. The biggest risk is that much of the growth has been priced into Airbnb’s stock price. If management reports anything other than earnings meeting or exceeding expectations, the market will immediately revalue the company. This could lead to a long-term decline as the market searches for concrete earnings forecasts.
What Wall Street Thinks
Based on the 28 analysts covering Airbnb, there are 13 buy and 15 hold ratings. The fact that Airbnb has no sales rating speaks to the company’s easily recognizable moat. The average target price given by analysts is $190.23 per share, indicating a possible upside of 79.06% from current levels.
According to a YPulse millennial travel preferences survey, Airbnb is their favorite place to stay when traveling. This shows both the shift in demand for Airbnb’s offering and the opportunity to capture more market share.
Airbnb has a strong economic divide and is establishing itself as the world’s leading travel brand. Additionally, Airbnb is an asset-light company with almost insignificant capital expenditures. Product development spending and marketing spending are quite high (44% of revenue in FY21), but Airbnb is still in the early stages of its global rollout. As a SaaS company, Airbnb is more inflation-protected than other capital-intensive companies. The biggest concern is the impact of inflation on consumer spending. Consumer sentiment is currently at its lowest since 2012, and while choosing Airbnb may be the money-saving option for consumers, the total volume of nights booked could suffer if a recession occurs.