As always, below represents my opinions and should not be construed as financial advise. Always do you own due dilligence. I welcome your feedback of my opinions.
· Company Description
o ELI5 the company’s business model
§ ABNB connects over 1 billion customers with its network of over 4 million hosts. Hosts develop a unique space all around the world for customers to stay. They are homes, cabins, castles, yurts, boats, villas and more. AirBNB also offers many hosting services.
· Company Soundness
o How does the company collect revenue? Does the company have a good or services that is purchased frequently or a regular interval?
§ AirBNB earns service fees. These are effectively commissions for connecting a customer with a host. AirBNB books are somewhat cyclical and seasonal. There bookings are correlated with the economy. AirBNB also receives the cash upfront when a property is booked and recognizes that revenue when the customer has checked in to their property.
o Do they operate with significant leverage?
§ Very little. They operate with $.43 of debt for every dollar of equity on their balance sheet. Additionally, their interest coverage is a massive 77x. Usually AAA rated names need to be over 20x (among other factors).
§ They ended the 3rd quarter with $7.5 billion in cash and cash equivalents and have access to an additional $1.0 billion line of credit.
o Is their balance sheet will suited for a downturn and why?
§ Given their conservative balance sheet I would say they are well suited given the cyclical nature of their industry. They have about 6 quarters worth of expenses of liquidity for a business that is cash flow positive currently.
§ Additionally, since cash is collected before the stay, they are able to operate with a negative cash conversion cycle meaning they get the benefit of cash for some time prior to paying expenses. While this would slow in a downturn, this does suggest a strong financial position.
· Can it be Replicated?
o Is there evidence that the company has defended its market position in the past?
§ Some. Connecting hosts and customers is not a difficult business to replicate on the surface. For example after AirBNB paved the way, new competitors joined the rank like VRBO, HomeAway and even Expedia is starting to book Airbnbs. Having said that, given AirBNB’s size, they are still the clear leader for this space.
o Is there evidence that market power is growing and that this will lead to strong financials?
§ Yes, this post covid travel boom has been a godsend to their business and FCF margins have grown to an all-time high of 40%. The previous highwater mark was 14% in 2018. Additional scale has been showcases as revenue per employee has moved up to $1.31 million and returns on assets have steadily climbed to 11%.
o What is the competitive advantage?
§ The competitive advantage is that hosts want to list where customers search, and customers want to search where hosts list. This creates a network effect. Additionally, this network effect is bolstered by host support agencies want to list on AirBNB to showcase their services due to the plethora of hosts. Finally with their scale and margins, I feel they will be able to out invest competitors in new solutions to cement their advantage while still having strong financials.
§ They also have brand strength given AirBNB is not only the company name, but it is what people call this kind of vacation.
o Would $10 billion of capital be enough to re-create the company?
§ As this industry has and continues to mature, I feel you would be hard pressed to start from scratch given the dynamic of the network effect I mentioned above.
§ Having said that, we will likely see consolidation of hosts over time giving then more bargaining power. For example, should a host buyout/merge with 1000 other Airbnb properties they might be able to host a site strong enough to list the sites themselves and bypass AirBNB all together. This is a much more capital-intensive model and would likely take significant time. Were basically talking about going full circle here and ending up with a hotel chain of different locations ironically.
o Are parts of the company not able to be recreated with capital? Which parts and why?
§ The Brand. Its difficult to get to the point of Kleenex, Google it and AirBNB it. Being the first mover in this industry likely will give them a long runway.
o Are there competitive threats on the horizon?
§ Yes, smaller hosting sites and as I mentioned host consolidation and therefore increasing their bargaining power.
· Growth
o Is there a 90% chance that earnings will be up 5 years from now?
§ I would say yes. AirBNB’s fastest segment is long term rentals as fully digital employees opt to hop around month to month. While there will likely be some pull in for work from home, I don’t think the trend will be eliminated.
§ They are at that sweet spot too where they are likely small enough to growth through a recession but are large enough to be profitable.
o Is there a 50% chance earnings will continue to grow in excess of 7% per year after the 5 year period?
§ Yes, while AirBNB is fairly mature in the US, they are fairly small abroad giving them a long run way for many years.
· Watch List Decision
o Do you honestly know enough about the industry and company to make an investment decision?
§ I believe I do.
o Bottom Line: Based on your answers is the company well insulated from economic and competitive shocks while able to grow for many years to come?
§ Yes, I think their conservative balance sheet and network effect will keep them well insulated from competition over the coming years.
· Valuation
o Value the company
§ Revenue for 12/31/22 is forecasted at ~$8.3 billion
§ Revenue for 12/31/25 is forecasted at ~$12.645 billion
§ Revenue for 12/31/28 is forecasted at ~$17.644 billion
§ This implies a 3-year revenue CAGR from 22 to 25 of 15% per year
§ This also implies a 3-year revenue CAGR from 25 to 28 of 12% per year
§ YTD Shares have an annualized growth rate of 2.84% per year
§ Since going public shares have increased by 4.39% per year
§ Going forward, given the wider margins and higher revenue per employee I would expect less total dilution per year. Given this is hard to project, I am going to assume 0 to 2.5% per year
§ As of 10/14/22 they have 642,377,183 shares outstanding. By 12/31/25 they would be expected to have 642.37 million to 693.908 million shares.
§ In terms of FCF margins this is also difficult to predict given the small data set and covid period both during and after. We are likely at peak margins which are trending as high as 40%. It appears the lows have been around 20%. I am going to assume margin ranges between 25% to 35% for a midpoint of 30% to reflect higher overall margins from scale, but acknowledge we are likely at a peak.
§ In terms of FCF yield, in 2025 projects today say 3 years from then the company is expected to grow at 12% per year. Given the variability in their revenues from the economy, I feel that a FCF yield of 4% to 8% is probably appropriate. This is in-line with Expedia’s FCF yield prior to 2020
§ Estimated FCF per share in 2025 4.55 (12.645 rev * 25% margin / 693 shares) to 6.89 (12.645 Rev * 35% margin / 642.37 shares)
§ With a FCF yield of 8% on the low FCF per share and a 4% yield on the high FCF per share we get a 3-year valuation between $56.88 to $172.25 for a midpoint of $114.56
§ With a current price of $89.57 this implies a 3 year CAGR of -13.50% to 23.28% per year with a midpoint of 8.19% per year.
o Would it be a prudent investment to buy the company at current levels?
§ Its probably a little elevated. A price of $80 would imply a 12% return on the midpoint. Given the cyclicality of the company, that is probably a fair price given the current expectations.
§ With a minimal public track record, this is a very difficult company to value hence the wide range in outcomes.
Sources:
Shareholder Letter Q3 2022: https://s26.q4cdn.com/656283129/files/doc_financials/2022/q3/Airbnb_Q3-2022-Shareholder-Letter_Final.pdf
10-Q Q3 2022: https://s26.q4cdn.com/656283129/files/doc_financials/2022/q3/45c8d785-ef1f-43fd-a676-fb15f8a1e5e7.pdf
Other Data: https://finbox.com/NASDAQGS:ABNB https://finbox.com/NASDAQGS:EXPE
Currently Long
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