Airbnb Investment Thesis

Airbnb [NASDAQ: ABNB] is the well-known home rental platform that connects hosts who want to rent out their homes with people who are looking for accommodation in that area.

The platform is accessible via website and mobile app. Founded in 2008 by Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, Airbnb has grown into a global juggernaut, with more than four million people listing properties on the platform in more than 100,000 cities and 220 countries across the globe.

Guests can find an extensive range of properties listed on the Airbnb website, ranging from single room apartments and entire houses to yachts, houseboats, and even a castle.

Trivia: Airbnb is a shortened version of its original name, AirBedandBreakfast.com.

Airbnb’s platform offers an interesting alternative to booking a hotel as guests can find unique and personalized accommodation, often at an affordable price.  Last year, roughly 54 million people reserved stays through the company, generating $3.4 billion in revenue for Airbnb through the cut it takes on each booking.

For hosts, participating in Airbnb is a way to earn some additional income from their property, but with the hazard that the guest may cause some damage to the property. Travelers, on the other hand, can book rather inexpensive accommodation, though the risk is that the property may not live up to its billing. 

The Bull Case for Airbnb

Airbnb, an online booking platform that connects mostly private landlords with business and leisure travelers, massively suffered in 2020 as the pandemic brought all travelling and leisure activities to a standstill.

In a world dominated by Covid and severe travel restrictions, the firm suffered a steep decline in booking volumes and related sales last year. But, as things started to normalize, and global reopening picked up steam, there has been a marked improvement in the company’s revenue and bookings, signaling that the worst is over with the company, now in a rebounding mode.

Airbnb’s gross booking value, which is the total amount of dollars processed through its platform, and surge in Airbnb’s average daily rate in the 1st quarter (25% quarter over quarter) shows strong pent-up demand for travel.

Airbnb processed $10.3b of gross bookings in the 1st quarter which was 75% higher than in the previous quarter. The proportion of stays longer than 28 nights on Airbnb, globally, rose from 14% in 2019 to 24% in the first three months of 2021.

For guests aged 60 and above in the U.S., who were also amongst the first groups to benefit from vaccine rollouts, searches on Airbnb’s platform for summer travel increased by more than 60% between February and March 2021. The number of nights booked through its platform rocketed 39% in the 1st quarter with surge in leisure and business traveling.

Airbnb Rebounding From Huge Losses

As expected, 2020 turned out to be a nightmare for Airbnb, as the firm racked up huge losses during the pandemic.

With traveling and vacationing a definite no-no, there was no respite for platform operators like Airbnb, whose total loss for 2020 totaled a whopping $4.6b, and for every dollar the firm generated as revenue, it lost $1.36.

Things became so bad for the company that it had to raise $2 billion in emergency capital and cut 25% of its staff.  However, Airbnb fared much better than cruise line companies, airlines or hotels, all of which suffered much more than the 30% decline in revenue experienced by Airbnb. 

While 2020 was a year Airbnb would like to forget in a hurry, in 2021, Airbnb’s booking business is bouncing back with easing of travel restrictions.

After a year of psychologically stressful lockdowns, people are simply itching to be on the move again, which obviously will benefit the travel industry. Airbnb reported a 5% year-over-year revenue growth for the first quarter of 2021, and the management confirmed that this trend should continue into the rest of the year.

Airbnb Financials: Light At The End of the Tunnel

Airbnb’s Q1 financial results, riding on the back of a faster than expected recovery in the travel sector, shows Airbnb’s higher potential and growth prospects in comparison to its peers. The business is highly resilient and the company possesses all the potential to be a leader in the global travel sector.

Airbnb reported that the growth in revenue was primarily driven by Average Daily Rates (ADR) and fewer cancellations in comparison to the same quarter of the previous year (Q1 2020). Moreover, management said that the revenue would have been higher but for the company’s ongoing “extenuating circumstances policy” that allow hosts and guests to cancel reservations disrupted by COVID-19.

Some investors were concerned about the significant increase in net loss reported in Q1, which increased significantly to $1.2 billion, compared with $341 million in Q1 2020. However, as mentioned above, these were mostly one-time items.

All in all, in the long run, Airbnb has plenty of room to grow. The Global Hotel and Travel Accommodation market is expected to double from its current market size of $673.02 to reach a total size of $1052.8 billion by 2025. North America is expected to be the second largest region accounting for 27% of that market.

Let’s not forget that Airbnb, despite being a household name in the global travel industry, has presently captured less than 1% of its total addressable market. A strong rebound in international travel and Airbnb’s resilient business model and growth opportunities means the firm will continue to capture global market share and grow at a significant rate in the years to come.

The Bear Case for Airbnb

Ever since its inception in Silicon Valley in 2008 as airbedandbreakfast.com, Airbnb has continued to fascinate investors. The peer-to-peer home-sharing platform made an astonishing debut in December, widely exceeding expectations, even as other travel firms had a harrowing time surviving the pandemic. 

Airbnb shares rose to an all-time high of $220 in February, more than triple its listing price. But, since then, it has continued to slide, shedding some 40% from the peak it hit in February.

Airbnb was hit hard by Covid last spring, and the home rental platform had to cut 25% of its staff as it grappled with plunging travel due to the pandemic. Its booking level for the year 2020 was less than what it experienced during 2019. 

International travel plummeted, but people still booked accommodation for domestic holidays when local lockdowns eased. It helped Airbnb grow its revenue by 5% in the first quarter of 2021, even as airlines, hotels and package holiday operators continued to grapple with soaring losses.

Airbnb is volatile, which is not unlikely for high-risk, high-reward stocks. The stock has taken a dive from its peak, which means it could be a chance for investors to add it to their portfolio.

The pandemic battered economies and businesses around the world. But the worst sufferers were businesses that relied on people to leave their homes. As per the World Travel & Tourism Council, the travel industry suffered a $4.5 trillion loss last year due to the pandemic.

At first, it seemed like an existential threat for Airbnb. Pandemic-enforced lockdowns and travel restrictions saw Airbnb’s booking slide over 70% in April 2020.

At the height of the pandemic, Airbnb was forced to raise emergency cash and shed a quarter of its workforce. This was a “turning point” for the firm, ultimately allowing it to refocus on its core business, said CEO Brian Chesky, who called it the “most harrowing crisis of our lifetime”.

Airbnb ended the year with $3.4 billion in revenue, down 30% year over year, but still much better than what was the original prediction.

With increasing roll out of vaccinations and easing of travelling restrictions, Airbnb expects a “significant travel rebound” in 2021. The property rental platform’s first quarter revenue of 2021 rose 5% year over year to $887 million, handily beating estimates.

However, despite all the optimism, some industry experts are not convinced about a rebound. The reality is that the virus is still there, and despite a steady decline in fresh cases in the US, the country is still months away from reaching herd immunity — if at all.

Threats Loom Large For Airbnb

Herd immunity is the idea that if a sufficient percentage of a population becomes immune to an infection, the virus can be stopped in its tracks. For example, if 80% of a population is immune to a virus, four out of every five people who encounter someone with the disease won’t get sick (and won’t spread the disease any further).

However, there’s always the risk that deadlier new mutations may emerge, with the capabilities to dodge existing vaccines. Also, cases in countries like India are at an all-time high, and many poor countries in the world have not yet vaccinated even 1% of their populations.

In other words, Covid is not disappearing from the face of the earth anytime soon. And that’s certainly bad news for the economy or the travel industry, as it has the potential to disrupt cross-border travel.

“The Biggest Travel Rebound Of The Century”?

CEO Brian Chesky hopes the changes that Airbnb is witnessing in user behavior will help to underwrite “the biggest travel rebound in a century”. His company is already hiring again and will continue to do so, he says.

However, the future still seems to hold a lot of uncertainty for Airbnb. ABNB is definitely going to benefit in the short-term as people, eager to make up for lost time – reunions, weddings, long overdue vacations, will flock towards Airbnb in droves.

But the main question is, will travel now look more like 2019 or surpass it? Only time will tell. Also, Airbnb is facing increasingly stiff competition in the space it pioneered. New rivals include Vrbo and Holidu, while established platforms like booking.com and Tripadvisor have also diversified to offer remote working and nomadic living experience.

Additionally, the company also has to contend with the threat of increasing government regulations around the world. There are instances of governments proposing curbs like tourist taxes and new rules on gaining permission for private holiday rentals.

Airbnb Trading At Higher Multiple Vs Competitors

There are risks with Airbnb, as there always are, but whatever risks that are currently there look small in comparison to what the firm had to endure during the height of the pandemic.

Uncertainty regarding the pandemic, threats of vaccine-resistant virus strains, government regulations, and increasing competition, all means that it is unlikely for Airbnb to return anytime soon to high, double-digit growth. And that could be a cause for concern because the stock has built a reputation of being a hyper-growth tech play.

Even after its recent decline, Airbnb trades at 25 times 2020 revenue, whereas its biggest rivals Booking Holdings [NASDAQ: BKNG] trades at 16 times sales.

Long term, Airbnb could even be a pandemic winner if travelers, who preferred to stay alone or in small groups in an Airbnb during the pandemic, choose to stick with it. But, a decline in its short- and medium-term performance could seriously test investors’ patience.

Airbnb Stock Price Forecast

Analysts’ 12-month price forecasts for Airbnb Inc. range from a low estimate of 119.00 to a high estimate of $240.00.

On average, they anticipate Airbnb’s stock price to reach $167.32 in the next year. This suggests a possible upside of over 17 % from the stock’s current price.

Is Airbnb Stock a Buy?

As the world slowly moves away from pandemic shutdowns, and the economy gets ready to reopen, property rental firm Airbnb is reinventing itself to fuel growth by meeting the evolving demands of guests in a post-pandemic world. 

The company recently announced a major redesign of its website and introduced a host of features to entice travelers and potential hosts as international borders start reopening globally.

The revamp of its platform includes more than 100 new features or upgrades, all to make it more flexible and user-friendly, so that travelers can quickly find rentals near around dates, destinations and other matching criteria.

The primary objective of the upgrade is to offer more flexibility to travelers, and help drive demand and boost supply to not only fuel overall growth but also support a changing market. The upgraded site is also designed to offer travelers flexibility in search parameters such as dates and destinations, a faster checkout process and a “refreshed” cancellation policy among others.

The company predicts a big change in customer behavior, according to its CEO Brian Chesky. He believes people are increasingly using Airbnb for remote working opportunities, rather than just holidays.

Remote working is increasingly discussed in customer review and feedback, according to Airbnb’s report. This is an important factor as the move to remote working could provide an additional tailwind, and expand Airbnb’s TAM (total addressable market) further.

“We are seeing fundamental shifts in travel as the lines between travel, living and working are blurring and we are upgrading our service to make it easier for people to integrate travel into their lives, and for more people to become hosts,” said Brian Chesky, Co-founder and Chief Executive Officer of Airbnb.

The home rental platform said it has also simplified the process of on-boarding hosts, who can now become an Airbnb host in 10 simple steps.

With respect to risks, it is true that the company’s future still depends on many forces beyond its control. A major external risk is that of the pandemic having a continued impact on the travel and accommodation sector, thus negatively impacting Airbnb in the long run.

Another risk faced by the firm is of legislations across the world that could impact listings or rental of private properties.

Also, there is this threat of gig worker laws, which could compel Airbnb to reclassify its hosts as employees, in a fashion similar to what ride-hailing companies like Uber (UBER) and Lyft (LYFT) experienced with their drivers.

Airbnb Brand Sets It Apart

Airbnb’s resilience can be gauged from the fact that it has grown its revenue in its latest quarter, while its peers are yet to come out from the negative impact of the pandemic.

Also, Airbnb has established itself as a globally recognized brand, a feat its closest competitors like Booking Holdings or Expedia (despite being great companies in their own rights) have failed to replicate. This, in turn, will help Airbnb corner a bulk of accommodation-related bookings in the future.

Also, analysts believe the company is going to be a major beneficiary of the money people saved during the pandemic, a large portion of which is expected to go towards traveling with the opening of the company.

While it’s hard to envisage the stock market’s performance in the short- to medium term, there are “multiple secular tailwinds” which analysts believe should help push the company – and shares – forward. Airbnb stock has not had a very successful 2021 so far, which means the current price levels create a reasonable entry point for Airbnb stock for long-term oriented investors.

Airbnb Investment Thesis Conclusion

Airbnb was one of the most eagerly-anticipated IPOs of 2020. The online home rental company debuted on the stock market in mid-December, and widely exceeded expectations by raising $3.5 billion, in what turned out to be the largest IPO of the year.

The stock has not performed up to its potential in 2021, but this should not obliterate the fact that it is still one of the best stocks to consider in the traveling industry, more so when the pace of recovery has really picked up and people are ready to travel again. 

Airbnb recently reported first-quarter results that exceeded estimates on bookings and revenue, but fell rather short on earnings as vacationers returned to traveling, giving the company encouraging signs of resumption in travel activities.

Airbnb saw its Q1 revenue increase by 5% year-over-year to reach $887 million, while the company reported an adjusted loss of $1.95 a share against expectations of a loss of $1.10 a share. Net losses stood at $1.17 billion, while analysts were expecting losses to be around $362 million. Airbnb attributed its losses largely to repayments of debts incurred from significant loans it took on at the beginning of the pandemic.

All in all, Airbnb had a tumultuous 2020. The pandemic brought all traveling activities to a grinding halt, causing its private valuation to tumble by more than 50 % to $18 billion in April 2020. However, surreal as it may sound, the company came up with its IPO in December, and the shares jumped 113%, above its opening price, valuing the company at more than $100 billion. 

Frenzied investors purchased the company’s stock, even as some analysts cautioned about the perils of such unbridled optimism in the market. 

However, to be fair, Airbnb navigated the pandemic better than its rivals, as attested by its performance in Q1 2021. The company can draw heart from a range of positive business trends that it hopes will sustain as people get ready to travel again. 

First and foremost, Average Daily Rate (ADR) has been rising for Airbnb in comparison to two of the largest travel chains globally, Hilton Worldwide Holdings [NYSE: HLT] and Marriott International [NASDAQ: MAR], which were forced to cut rates and also abide by capacity requirements. ADR is the amount charged per night of stay. Also, Airbnb’s revenue jumped over 5% during the comparison period, while both Hilton and Marriott suffered a massive decline in revenue.

Covid was a rare phenomenon that compelled more people to choose Airbnb than Hilton. But then one can argue that the pandemic will not last forever, and people will not be opting for Airbnb in place of hotels for fear of infection. However, there’s all probability that people who have tried Airbnb during the pandemic may turn out to be its long-term customers.

Also, as vaccines become more widely available, and restrictions ease, there are signs that people are ready and willing to travel again.

To sum it up, the company has been resilient during the pandemic, and despite running into huge loss, and witnessing business done on its platform falling by over 35%, Airbnb has done better than the competition (mainly hotel chains).

The company recently reported Q1 earnings that confirm that business is returning back to pre-pandemic levels.  While its stock’s volatility could be a concern, Airbnb has a fascinating business model that promises to offer an ‘experience’ that entrenched players in the travel industry may find hard to duplicate. And therein lies its greatest strength.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.