I work as a PM at a large tech company and as part of my job it’s important for me to understand major technology trends and tech companies. I put this post together to share some key takeaways I had from looking at Airbnb’s S-1 filing. If you found this post valuable and would like to read more please let me know. I’m thinking about writing like this more often if it’s something people get value from. Thanks
On Monday November 16th, Airbnb filed to go public. While a target IPO price has not yet been set, Airbnb looks to be aiming to raise about $3 billion dollars at an analyst-estimated valuation of $30 billion. This is up from Airbnb’s most recent valuation of $18.1 billion in April of this year when it raised a total of $2 billion in debt to cope with the Covid-19 crisis.
Airbnb is a remarkable company. What started in 2007 as 2 friends renting out airbeds in their apartment to attendees of a conference has, 13 years later, grown into a company operating in 220 countries with over 4 million hosts who have cumulatively earned over $110 billion. In 2019, there were 327 million nights and experiences booked on Airbnb. Nobody could have predicted those numbers in 2007. Airbnb has defined a brand new travel category and become a standard part of our vocabulary, much like Zoom. As they state in their S-1:
” “Airbnb” has become synonymous with one-of-a-kind travel on a global scale.”
But, while Airbnb is clearly a remarkable company, is it a good investment? That’s the question that this post aims to answer. Here are some key takeaways from an analysis of Airbnb’s recent S-1 filing:
(*Note: In case you’re wondering, an S-1 is the document that a companies files with the SEC when they plan to go public)
- Airbnb is a resilient business
The Covid-19 pandemic has had a huge impact on Airbnb’s business. Gross booking value (GBV) in March was down 127%. Due to cancellations and alterations, Airbnb actually lost money on bookings in March. However by August, GBV was only down 14% when compared to August 2019. This impressive recovery shows how strong Airbnb’s business is.
For the 9 months ending September 2020, Airbnb posted a revenue drop of 32% when compared with the first 9 months of 2019. While this is a concern, the cut to sales and marketing expenditure at the same time points to a business that is quite resilient – In the same time period that revenue dropped by 32%, Airbnb cut its sales and marketing spend by a massive 54%. The ability to cut sales and marketing spend by over half while only having a revenue drop of 32% (in the middle of a pandemic) points to a business that is highly resilient with strong brand and customer loyalty.
- Post-Covid travel patterns may benefit Airbnb
If we compare the gross nights and experiences booked on Airbnb to Airbnb’s gross booking value (GBV), we see an interesting pattern. Gross bookings in August are down 28% YoY while GBV is only down 14%. This means that the average spend on an individual booking has actually trended up this year! To further validate this point, long-term stays were down only 13% this year, compared to 81% for short-term stays. There was actually YoY growth for long-term stays from May to September. The importance of long-term stays is highlighted by the quote below:
“We believe the long-term stays category represents a different use case than leisure travel, and as a result, was not as impacted as dramatically by COVID-19.”
Long-term stays are a distinct competitive advantage for Airbnb and if trends continue they could drive a lot of long-term growth.
Airbnb has also highlighted a number of other categories that have performed particularly well this year. In particular, ‘domestic travel’, ‘short-distance travel’ and ‘travel outside top 20 cities’ have performed very well. For example, short-distance travel grew a whopping 38% YoY in September.
No doubt these trends will reverse somewhat as we exit the pandemic. However, it is unlikely they will reverse fully. If these trends maintain decent momentum, they represent a shift in travel patterns that uniquely benefits Airbnb and provides a significant competitive advantage.
- Strong customer retention and brand loyalty
One of the most striking figures from the S-1 is that 91% of Airbnb’s traffic is organic, coming from direct and unpaid channels. This is very impressive. Airbnb has built an incredible brand and clearly has strong brand loyalty.
“Our strategy is to increase brand marketing and use the strength of our brand to attract more guests via direct or unpaid channels and to decrease our performance marketing spend relative to 2019.”
Customer engagement and retention are also impressively high on the platform. In 2019, 68% of guests left a review of their stay. 69% of revenue generate in 2019 was from repeat guests.
Airbnb also has very strong retention among their host community. In 2019, 84% of revenue came from people who had hosted in 2018. This shows that the majority of hosts are staying on the platform and continuing to earn money through Airbnb.
- International expansion is a big opportunity
Airbnb’s revenue growth has slowed over the last three years. It grew by 32% in 2019, down from 43% in 2018. While slowed growth is never great, 32% is quite healthy.
It remains to be seen what the impacts of Covid-19 will be on growth over the next few years. However, there seem to be big opportunities for international expansion which would allow Airbnb to maintain (and possibly improve) its growth rate.
Airbnb believes that its total addressable market is a whopping $3.4 trillion. While you can always take these predictions with a grain of salt, it is clear that Airbnb believes that a big part of this market opportunity lies outside the US and Europe. They highlight international expansion as a key part of their long-term growth strategy:
*“*Expand our global network. We plan to expand our global network in the countries in which we already have a deep presence, as well as to expand into markets where our penetration is lower, such as India, China, Latin America, Southeast Asia, and tens of thousands of smaller markets and remote areas around the world.”
There are some encouraging signs that Airbnb has the potential to grow their international markets. They operate in 220 countries and importantly, 86% of their hosts are outside the US. International markets have also seen an increase in GBV and average nights per booking. In fact, Latin America has the highest average nights per booking of any region, at 4.1 nights. (North America is 3.7)
The strong customer loyalty previously mentioned, significant host presence in international markets (86%) and changing consumption patterns towards longer stays means that Airbnb has the potential to unlock a lot of value as they focus on international markets.
- Regulation is a big concern
Regulation is a big risk for Airbnb. 70% of the company’s top 200 largest cities (by revenue) have implemented some form of regulation on short-term stays. For example, London has put a 90 nights per year limit on short term stays for properties without specific planning permission to do so.
Airbnb make it clear in the S-1 that the evolving regulatory situation is a cause for concern:
“We are subject to a wide variety of complex, evolving, and sometimes inconsistent and ambiguous laws and regulations that may adversely impact our operations and discourage hosts and guests from using our platform, and that could cause us to incur significant liabilities including fines and criminal penalties, which could have a material adverse effect on our business, results of operations, and financial condition.”
Airbnb makes sure to point out that they are not dependant on any one city, region or country. For example, the US is the only country that represents over 10% of Airbnb’s revenue. While this may be true, the evolving regulatory environment does not seem to be going in Airbnb’s favour.
Please note that this is just an explanation of investing decisions for my personal portfolio and not a recommendation to anyone to buy/sell any stock.
To make a decision on whether or not to invest in Airbnb, I believe there are 3 important questions to answer:
- Does Airbnb have good upside potential?
- What year should conclusions be based on?
- What is a fair valuation?
- Does Airbnb have good upside potential?
Although there are regulatory concerns, based on the above analysis I believe that Airbnb has strong upside potential.
- What year should conclusions be based on?
The Airbnb S-1 is primarily focused on 2019 numbers. Airbnb believes that 2019 figures are the fairest reflection of the strength of the business. They believe that 2020 is a highly irregular year and that the company will rebound quickly post-covid. Investors should come up with their own conclusion on that but I agree with Airbnb that 2019 is a fair reflection of the business.
- What is a fair valuation for Airbnb?
This is where things get tricky. In some ways, Airbnb doesn’t have any direct competitors to compare against. They are similar to both OTAs (online travel agents) and hotel chains like Hilton but obviously quite different in a number of ways too.
In my opinion, an interesting comparison is with Uber. While not exactly the same, Airbnb and Uber have a lot of similarities. They are both semi-marketplaces (Airbnb is closer to a true marketplace). Uber connects drivers with riders while Airbnb connects hosts with guests. They have a similar business model in that they both take a % of each transaction on their platform.
Obviously there are quite a few differences. In particular, Uber drivers are far more commoditised than Airbnb hosts. Uber also has more direct competition (Lyft).
Looking at 2019 figures for the fairest comparison, Uber is currently priced at roughly 6.33 times 2019 revenue. If we go with the analyst expected valuation of $30 billion, Airbnb would be valued at roughly 6 times 2019 revenue. Uber grew revenue 26% YoY in 2019 while Airbnb grew 32%.
With all of this in mind and particularly considering that Uber’s model is less defensible, I believe that the analyst-estimated $30 billion valuation represents a very good price for Airbnb.
What’s my plan?
My plan is to wait and see what happens on IPO day. If analysts are wrong and the stock pops above $40/50 billion, I won’t be purchasing and will wait to see what Airbnb’s performance is like over the next few months. If the stock settles at or below $30 billion, then I will definitely be adding it to my portfolio.
What’s your plan?
Are you considering investing in Airbnb? What did you think of my analysis above? Anything I missed? Let me know your thoughts.
And please let me know if you found this post valuable and would like to read more. Thanks
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.