Airbnb: Profitable Growth At A Reasonable Price

Summary:

• Airbnb is undervalued relative to its earnings, growth trajectory, and market position, making it a compelling investment opportunity.
• Despite slower growth and macroeconomic headwinds, Airbnb retains a decisive leadership position within the homestay booking industry. The company’s future looks as bright as ever.
• Airbnb’s strong balance sheet and powerful network effects ensure its continued success and market leadership.
• The company’s consistent innovation, expansion, and share buybacks further bolster its attractiveness as a long-term investment.

Airbnb, Inc. (NASDAQ:ABNB) needs little introduction, having rapidly exploded in relevance from its inception through the present day. Over the last decade and a half, the company has disrupted the hotel industry by offering something different. A new “cottage industry” of millions of Airbnb hosts has sprung up, many of whom earn a full-time living operating Airbnb properties.

People of all ages and backgrounds know Airbnb as the top international booking platform for short-term homestay rentals. Its powerful brand, which has entered the popular lexicon as a synonym for homestay lodging, ranks #2 globally in the travel and leisure industry. Few businesses ever manage to achieve brand recognition and operating scale comparable to those of Airbnb. Despite its dominant market position and storied track record, Airbnb remains a relatively young growth company with significant untapped market potential.

Airbnb’s stock price has gotten ahead of itself in the past, resulting in years of sideways (and downward) price action. Despite its 13% rebound in the past month, Airbnb’s share price has dropped 39% from its February 2021 all-time high and is down 22% in the last 6 months on concerns of slowing growth and a weakening macro environment. In my view, the current valuation gives rise to the opportunity to invest in a wonderful company at a more-than-fair price.

Operations

Airbnb operates an online marketplace for (mostly short-term) lodging in 220 countries. Airbnb hosts list their own properties on the platform, and consumers can browse the listings, view property descriptions, photos, and guest reviews, and select a rental to book. Airbnb’s power lies in its network effect; as the clear top dog in its operating industry, the company attracts the bulk of both listings and bookings in an ever-intensifying flywheel. Airbnb’s massive economies of scale and transaction-fee revenue model set it apart from most rivals not only within its operating niche, but within the global hotel industry as a whole.

Despite operating a property booking service, the company itself has minimal exposure to real estate assets. With a capital-light business model, Airbnb’s main asset is its namesake booking platform, which generates its revenues in the form of transaction fees. In its present form, Airbnb can be best characterized as an e-commerce platform connecting sellers (hosts) and buyers (guests).

This is something the company could possibly change in the future. If Airbnb were to acquire and operate rental properties (or lease them out to other operators), it could potentially supercharge its revenues and profits while accumulating greater book value over time. For now, however, the company is content to remain the middleman collecting service fees on transactions between hosts and guests. This is very much in line with current trends in the hotel industry, in which many of the largest chains have largely been offloading their properties to third-party operators.

Profitable Growth

Airbnb has long posted earnings growth far exceeding market averages. Though the pace of growth has slowed meaningfully, this continues to be the case. Revenue grew by 17% YoY in 2023, a meaningful slowdown from prior years. By Q2 2024, the most recently reported quarter, top-line growth had further slowed to 11% YOY. This drop-off in growth has contributed to panic-selling in recent months, and understandably so. However, the company’s long-term growth story remains largely unchanged. Airbnb is far and away the leading player within the industry it spawned, and it does not seem poised to lose its dominant market position anytime soon.

Airbnb’s worldwide presence helps it grow on the back of global consumer spending growth, even apart from secular above-market growth in its industry. Airbnb has always enjoyed a significant first-mover advantage in its historically nascent industry, and 16 years after the company’s founding, there remains no obvious contender well-positioned to challenge this advantage. With the wind at its back, Airbnb appears poised to thrive for many years to come.

For what it’s worth, analyst estimates point to double-digit sales growth through 2028 and even higher EPS growth during that time (2024 aside). According to the 3 analysts bold enough to forecast through 2030, EPS is expected to grow to $11.77 that year, making for a forecasted 2030 P/E of 11.1 at current prices – with the company well-positioned for further growth from there. Again, for what it’s worth.

Reasonable Price

Relative to its operational track record, growth trajectory, and market position, Airbnb is evidently undervalued. With a TTM net income of $4.84B, the company’s P/E ratio is a very reasonable 17.2. While net income is expected to decline meaningfully this year amid global macro headwinds and new investments in growth initiatives, profitability is expected to quickly hop back on the growth track for the foreseeable future.

The company’s TTM sales are $10.5B, making for a P/S ratio of 7.9 at current prices. This may look steep on its face, but consider that Airbnb is a software/e-commerce business with a gross margin in excess of 80%. In light of its business model, the company’s lofty P/S ratio appears justifiable.

From an FCF perspective, Airbnb is richly cash-generative. TTM FCF is $3.2B on a GAAP basis (and $4.3B on a non-GAAP basis), yielding the company a reasonable P/FCF multiple of 26.0 (or 19.3).

In short, Airbnb is priced like any old company. This is despite its high-quality business model, strong margins, and decisive leadership position within a growth industry. While growth has slowed, it is not expected to dry up in the foreseeable future. With a middling valuation tied to above-average growth, I believe Airbnb can be expected to produce market-beating returns in the future.

Balance Sheet

Airbnb’s financial position is strong. While its book value and net cash position do not put a very meaningful dent in its market cap, the company has gobs of cash and comparably little debt. Total equity is $8B, TBV is $7.2B, and net cash is $9B. With current assets outstripping current liabilities by some $6.4B, the company maintains significant liquidity and financial flexibility.

Tangible book value has grown from -$1.6B to +$7.2B in the past 5 years. The company could comfortably afford to retire its $2B of long-term debt (borrowed during the pandemic) with cash on hand. That said, interest expenses have been negligible (in the low single digits) since those liabilities were refinanced in 2021 as convertible debt, which perhaps explains why a bit of debt remains on the balance sheet.

Moat

Airbnb may have the widest moat in the travel industry. To be clear, its competitors are numerous and formidable, ranging from rival booking platforms like Booking.com and Vrbo to multinational hotel chains (many of which have similarly transitioned to asset-light business models). That said, Airbnb’s strong brand image, widespread user adoption, focused business model, and powerful network effects place it head and shoulders above any competitor in its market niche. While Booking.com ranks ahead of Airbnb in brand value, Airbnb’s moat is arguably much stronger due to its unique network effect and the critical necessity of its platform to the functioning of its operating market.

Innovation & Expansion

Airbnb initially gained fame with a reputation for providing cost-conscious travelers with inexpensive lodging in other people’s homes, often a spare bedroom or guest suite within the host’s primary residence. It’s safe to say that the company has progressed tremendously since its early days, with a fast-growing cottage industry of professional hosts and continued operational optimization to the benefit of both hosts and guests.

Innovating, optimizing, and “fine-tuning” the business and platform have been consistent hallmarks of Airbnb’s history. Co-Founder/CEO Brian Chesky is never complacent, and the company regularly devotes substantial resources to expanding, improving, and streamlining the company’s operations. Ongoing programs in this vein include significant investment in underpenetrated European markets and the recent launch of Airbnb Icons, which offers unique experiences related to iconic figures, landmarks, and images of pop culture significance.

On Airbnb’s most recent earnings call, CEO Chesky shared that the company “rolled out hundreds of new features and upgrades over the past two years” to make its platform “more reliable, affordable and an overall better service.” He also announced the impending launch of a new co-hosting marketplace that will match property owners with managers who want to operate the properties as Airbnbs. Co-hosting is already a common practice within the industry, and Airbnb is eager to connect potential co-hosts with each other in a bid to “unlock a lot more inventory.”

The Airbnb platform now features over 8 million active property listings, including luxury stays and experiences. Over 5 million people are now Airbnb hosts; that’s nearly one in 1,000 adults globally. These figures continue to advance rapidly, pointing to a continued runway for strong growth ahead.

Share Repurchases

As a moderately-valued company with mounds of excess cash, it’s only logical for Airbnb to repurchase its own shares. The company has been doing so at an aggressive pace, routinely devoting billions of dollars to buybacks annually in recent years. Management spent $3.5B on share buybacks in 2023 and $0.75B in Q2 2024, with $5.25B of authorized repurchase power remaining as of June 30, 2024. Despite issuing ~$1B of stock-based compensation annually, Airbnb has reduced its diluted share count from 680M in 2022 to 654M today. With the stock trading at a depressed valuation relative to its fundamentals, present-day buybacks should prove value-accretive in the future.

Risks

Hotels & Pricing

Many Airbnb listings are now managed by professional hosts with much higher expenses than someone renting out a spare bedroom or second home. The quality of Airbnb’s offerings has improved markedly, and prices have followed suit. This being the case, there is a perception that average Airbnb prices have risen faster than hotel room prices. While Airbnb built its brand in part on a reputation for low prices, the company has drawn criticism in recent years for no longer being a cheap option.

What I believe its critics miss, however, is that Airbnb continues to offer cheaper options than hotels for low-maintenance guests. The reason professional hosts are now dominating the platform is because there is a strong and growing demand for comfortable homestay lodging, even at a higher price point. Hotels offer a different experience than Airbnb, and they have been largely unable to eat into its market share even as homestay rental prices have risen.

Regulation

Airbnb and its hosts face a host of regulatory risks, including local ordinances that restrict short-term rentals in a number of localities throughout the world. These ordinances are typically fueled by housing and/or anti-tourism activism. New York City essentially prohibits the operation of short-term rental properties, Barcelona’s mayor is threatening not to renew any licenses to operate short-term rentals (which would amount to a full ban by 2028), and San Francisco only allows short-term rentals by full-time residents of the property. Airbnb scored a win in Berlin, however, when the city reversed its effective ban on short-term rentals in 2018.

Airbnb warns prospective hosts of various regulatory risks including zoning and building laws, permit/licensing requirements, building laws, landlord-tenant laws, and HOA-type restrictions. Any or all of these factors could impede the growth of the homestay rental industry, though compliance responsibility falls largely on the shoulders of hosts, not Airbnb itself.

The Macro Environment

Airbnb’s present slowdown in growth comes amid a weakened consumer spending environment. Consumer spending growth has slowed to a trend rate of ~2%, down from >3% a year ago. It was also recently reported that U.S. consumer confidence in September underwent the largest single-month decline in 3 years. A huge proportion of Airbnb’s sales are comprised of discretionary spending, making the company highly susceptible to consumer recessions. Airbnb stands to be adversely affected by consumer spending hesitancy, and this effect is likely showing up in the company’s depressed near-term sales growth figures.

The good news is that Airbnb is still growing impressively despite these headwinds, and it is reasonable to believe that growth could re-accelerate once they dissipate. Short-term macro fears will never dissuade me from owning shares of an outstanding business selling at a good price. Airbnb’s growth could further slow, and its share price could fall, but I have high conviction that the company’s long-term performance should more than justify its current price.

Market Saturation

There is of course a long-term risk that Airbnb and its competitors will fully saturate their operating market and exhaust the industry’s superior growth potential. As a relatively nascent industry growing closer to maturity, the homestay booking industry will inevitably experience slower growth in the future than it has in the past. Despite this inevitability, in my view, the industry still has a long way to grow. While slower sales growth has contributed to the extreme contraction of Airbnb’s price multiples since its IPO, I believe this contraction has turned Airbnb into a compelling GARP candidate at current prices.

Shareholder Dilution

Although Airbnb’s share count has steadily declined over the past 2 years, shareholder dilution still takes place in the form of stock-based compensation. In 2023, stock-based compensation totaled $1.12B, mitigating the impact of buybacks by nearly a third. That said, such compensation is minor relative to the company’s $80B market cap.

Conclusion

Airbnb looks like a compelling investment following the multiyear stagnation of its stock price. Despite the recent upward price action, the stock remains cheap relative to the company’s performance and potential. Airbnb is an industry leader with powerful network effects that relegate its direct competitors to second or third-tier status within the marketplace. While growth has slowed amid an organic slowdown and macro headwinds, it remains high relative to the company’s undemanding market valuation.

Airbnb is going nowhere. I believe its clean balance sheet and consistent profitability essentially remove the possibility of insolvency, and its dominant market position appears firmly entrenched. I would rather own Airbnb than try to compete with it using $80B. Such a well-funded competitor could undoubtedly eat into the company’s market share by spamming the international public with ads, but in my view, it would have a hard time overtaking Airbnb’s position or articulating a compelling reason for hosts and guests to switch platforms en masse. Airbnb’s network effect is just that powerful.

Much like Netflix, Airbnb essentially created a new industry from scratch and then went on to dominate it. Unlike in Netflix’s case, there are no major players backed by big money and stockpiled assets to challenge Airbnb’s first-mover advantage. Hotels can’t exactly recreate the Airbnb experience with their existing commercial properties and brands, and no other company has a comparable network of hosts and users. It’s pretty rare to see a tech giant of Airbnb’s caliber trade at market-average multiples this early in its life cycle, which factors into my expectation that Airbnb’s long-term performance should outpace the market average.

A wonderful company at a good price, Airbnb stands out among large-cap U.S. stocks for its understated valuation, formidable moat, strong growth potential, and stellar balance sheet. There is little not to like about the company in the long run, as there is little reason to doubt its continued success. Growth has slowed, but the long-term story remains intact. Airbnb is the clear leader within a growth industry, which should ensure to the company’s long-term benefit and prove its current valuation overly pessimistic.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABNB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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