Between the enthusiasm that markets have been showing both towards Internet growth plays and (more recently) towards companies seen as reopening plays, Airbnb should get a post-IPO valuation comfortably above the $18 billion valuation it received in an April funding round, and perhaps also above the $31 billion valuation it got in a 2017 funding round.
Key positives for Airbnb's story:
- The company was seeing strong double-digit growth before COVID hit. Revenue was 32% in 2019 to $4.81 billion, while gross booking value (GBV - the total value of bookings on Airbnb's platform, minus cancellations and alterations) rose 29% to $37.96 billion. (source: Airbnb's IPO prospectus)
- Though Airbnb is still seeing revenue/bookings declines, demand has improved a lot since March/April, with annual declines now much smaller than those seen by the likes of Expedia (EXPE) and Booking (BKNG) . Gross nights and experiences booked were down 21% annually in August and 23% in September, after being down 72% in April. Net of cancellations and alterations, they were down 28% in each month.
- From all indications, there's a considerable amount of pent-up consumer travel demand that will start to be unleashed once COVID vaccines are widely available. And Airbnb's bookings skew more strongly towards consumer travel relative to corporate travel than those of many travel industry peers.
- Long-term, assuming COVID is firmly put to rest, Airbnb has several secular growth drivers. These include the steady growth of global travel spend; continued share gains for online travel bookings in general and home/apartment bookings in particular; and rising interest in long-term stays at alternative accommodations (a trend that could possibly get a boost from an uptick in remote work).
- Airbnb can claim a fairly high level of customer loyalty, both among hosts and guests. 84% and 69% of its 2019 revenue respectively involved stays with hosts who had used Airbnb in prior users and stays with guests who had used Airbnb in prior years.
- Airbnb was cash-flow positive before COVID hit, generating $97.3 million worth of free cash flow (FCF) in 2019 in spite of major spending hikes. The fact that the company is paid by guests at the time a booking is made, but only recognizes revenue at the time of check-in, means that FCF should generally be above net income in the future.
Things to be concerned about:
- Much like Uber, Airbnb's cost structure -- one in which R&D, payment-processing fees, cloud hosting, customer support and Google (GOOG) ad buys are all major expenses -- is likely to keep a lid on future profit/FCF growth. On a GAAP basis, cost of revenue, operations and support, product development and sales/marketing respectively equaled 25%, 17%, 20% and 34% of 2019 revenue. Sales/marketing spend was boosted in part by the fact that Airbnb has had to up its search ad spend as its organic Google traffic declined due to Google's integration of paid travel search features within search results.
- While Airbnb's brand and network effects effectively guarantee it will remain a major force in alternative accommodations for a long time, the company does face a lot of competition from Booking and Expedia's home/apartment rental listings. Airbnb also faces indirect competition from Google's paid travel search options for vacation rentals, which Booking, Expedia, TripAdvisor (TRIP) and others support. These competitive pressures could impact everything from Airbnb's market share, to its take rate, to how much it spends on ads and promotions.
- Though Airbnb has less corporate travel exposure than many peers, some exposure does exist. And corporate travel will probably take longer to fully rebound than consumer travel following the broad availability of COVID vaccines, given that many businesses and convention organizers will likely choose to play it safe.
- If corporate travel remains depressed for an extended period of time, that's likely to spell continued downward pressure for hotel prices. And that in turn would spell ongoing price pressure for Airbnb and other home/apartment rental providers.
On the whole, I think the good outweighs the bad here. Though not without blemishes, Airbnb is a market leader with powerful network effects, multiple secular growth drivers and a history of good execution. And it's not hard to foresee business looking a lot better for the company 12-18 months from now than it does today.
But at a time when many investors are throwing restraint out the window when it comes to placing buy orders for companies like this, it's also worth keeping in mind some of the top-line and bottom-line challenges Airbnb still faces.