Airbnb - is the Price Right?
Base case: $124 | Bull case: $218
Airbnb went public in December, 2020 and the stock opened at $146 (over double the IPO price of $68). It went on to hit $216 in February this year before returning to the $150 range recently.
Airbnb is still a fairly young company (just 14 years old), so it’s difficult to predict how the business will evolve over the next decade. The fact that investors have valued the company between $68 and $216 in the last six months, shows that people have wildly different expectations for the company.
As with my analysis of Peloton, I will outline a base case scenario as well as a bull case scenario below. The model is available here if you’d like to input your own assumptions.
TLDR: I’ll be a buyer of the stock in the $100 range.
Market Opportunity
To begin, I thought it would be helpful to understand how much is spent on lodging globally. Data on the U.S is easy to come by, but not so much for Europe or the rest of the world.
Global spending on hotel rooms was $550B in 2019.
COVID obviously decimated hotel revenues in 2020 and while there has been an uptick in spending in 2021, we’re nowhere near 2019 levels. Assuming the world returns to normal in 2022, I suspect business travel will never quite recover to its pre-COVD levels. I therefore model the size of the global lodging market at $500B in 2022. This is obviously a rather random guess, but seems in the right ballpark to me. I assume that this market will grow at 4% over the next decade – roughly in line with inflation.
Airbnb’s gross booking value (GBV), which represents the dollar value of bookings on its platform and is inclusive of host earnings, service fees, cleaning fees, and taxes, net of cancellations and alterations, was $38B in 2019. This was up from $29B in 2018. Based on Airbnb’s latest quarterly report I expect GBV for 2021 will be $45-$50B. With a potential meaningful rebound in travel in 2022, I model GBV of $60B in 2022. This represents 12% of the global lodging market of $500B that I’m modeling.
Here’s the key question – how much does this share grow over the next decade?
I’m personally not a fan of the Airbnb experience. I’ll take a nice hotel over an Airbnb all day. However, a lot of people I know, especially those with children, much prefer an Airbnb when they travel. I could therefore see Airbnb’s share of the lodging market double over the next decade, so I model a 25% share in my base case.
I could see it being even higher if the Airbnb experience becomes more consistent and the availability of lodging on their platform increases, so I use 30% of the market in the bull case.
The biggest risks to capturing this much of the market are as follows –
Limited availability of housing in areas that people may want to visit
Regulatory restrictions on how long and what type of accommodations can be listed on Airbnb
Cultural preferences that limit Airbnb adoption outside developed economies
Companies like Sonder are going to give Airbnb a run for their money in markets where people want an apartment vs a hotel room
Business Model
Airbnb earns its revenue by taking a percentage of the GMV. From 2017-2019, this averaged 13%. I therefore model 13% going forward.
Airbnb has yet to turn a profit, so its eventual operating margins are anyone’s guess. However, they should realize economies of scale as they grow, so I model operating margins of 20% in 2031 in the base case. To provide some context, Expedia had 8% operating margins in 2019, while Booking Holdings had 30% operating margins.
If Airbnb can get a handle on costs, I could see margins of 25%, which are modeled in the bull case.
Given Airbnb is a classic Silicon Valley firm with generous employee compensation, my sense is margins will be closer to 20%, maybe even lower.
Valuation
In the base case I assume a terminal value multiplier of 25x on 2031 net income. This seems reasonable for a company that is growing revenues at 8% with 20% margins. In the bull case, revenues will be growing at 11% and margins will be 25%, so I use a 30x multiplier (in line with the FAANG companies today).
Based on the above assumptions, a 20% tax rate, and a 3% discount rate, I arrive at a per share value of $124 in the base case and $218 in the bull case.
I include the bull case more as an example of what you’d need to believe to have paid $216 for the stock a few months ago. I personally feel even the base case scenario is going to require Airbnb to execute pretty damn well, so I’ll wait to buy the stock in the $100 area.
In the short term, I could see the summer of this year being an incredible four months for Airbnb. It seems like prices on properties are up 20-30% versus 2019 and people are desperate to travel, so I wouldn’t be surprised if Airbnb does better than my $45B forecast in GMV for 2021. Long term, however, I feel the assumptions in the base case are slightly optimistic, but achievable.