New Issue Airbnb's Shares Pricing In Strong Recovery and Then Some
publication date: Jan 12, 2021
author/source: Brian Nelson, CFA
Image Shown: Airbnb is losing money hand over fist while as it grows into its substantial market opportunity. Source: S-1.
By Brian Nelson, CFA
Rental platform Airbnb (ABNB) has been a part of the latest series of IPOs that have soared out of the gates recently. Shares went public at $68 per share December 10, and now the equity is trading at more than $148 per share at the time of this writing. For those that don't know the story of Airbnb (AirBed & Breakfast), the concept started in 2007 when, after discovering that every hotel was sold out during an international design conference in San Francisco, the founders started renting airbeds in their apartment to conference attendees.
Thirteen years have now passed, and Airbnb has over 4 million hosts that offer places to stay from private rooms, cabins, and farms to the most luxurious accommodations (even castles and private islands). Its hosts that range from schoolteachers to artists and beyond across ~100,000 cities have been wildly successful, raking in over $110 billion in income since Airbnb's inception while serving over 825 million guests. Much like Uber (UBER) and Lyft (LYFT) have done with ridesharing and people in other's cars, Airbnb, to a very large extent, with all of its success to date, has provided a solution to make strangers feel comfortable staying in each other's homes (86% of hosts are located outside the US).
The company's business model is asset-light and capital efficient, and it makes money by charging customers a service or host fee as a percentage of the value of the booking. In the near term, Airbnb will continue to be negatively impacted by the COVID-19 outbreak, which has hurt its business along with that of the traditional hotel/hospitality and leisure industries, but with the potential for vaccines for COVID-19 to become more widely available sooner than expected, we anticipate business to fully recover. Airbnb estimates that its serviceable addressable market ("SAM") is $1.5 trillion, which is broken down into 80% for short-term stays and the balance for experiences (guests might want their host to show them around town, for example). Its total addressable market ("TAM"), including long-term stays and other opportunities is estimated at $3.4 trillion. For context, Airbnb generated $4.8 billion in revenue during 2019.
Image Shown: Airbnb has a net-cash rich balance sheet following its initial public offering. Source: S-1.
Let's talk more financials. Airbnb is losing money hand over fist on a GAAP basis at the moment, and net losses continue to increase, magnified by the current difficult pandemic-induced economic environment. However, the company has generated cumulative positive free cash flow of $520 million during the period 2011 through 2019, and during 2019 alone, it hauled in $97.3 million in free cash flow. The company's operating cash flow has primarily been driven by growth in accrued liabilities (increased spending and headcount growth), unearned fees (increased bookings), and stock-based comp. Through the first nine months of 2020, however, the company burned through $520 million in free cash flow (ironically, all of its cumulative free cash it generated during the past 10 years or so). On a proforma adjusted basis (considering the impact of the IPO), the company has ~$5.7 billion in cash and ~$2 billion in long-term indebtedness (~$1.8 billion in long-term debt, net of the current portion).
Airbnb has demonstrated the capacity to self-sustain by generating strong free cash flow in the past (and it has a huge market opportunity), but at a current market capitalization of nearly $90 billion, however, a lot of the recovery and future market opportunity is priced into shares. The company has a broadly-recognized brand name, but it still may take some time before the category of elder millennials (and older) as well as larger families are able to take full advantage of the platform (to be fair, some may still not know that Airbnb is pronounced Air-B-N-B and originated from the phrase AirBed & Breakfast).
Over the long run, we expect Airbnb's technology (and network effect) to continue to disrupt the traditional hotel and lodging industry (and we fully expect its fundamentals to bounce back from the COVID-19 crisis, much like they did following the Great Recession of 2008/2009), but we also anticipate competition to intensify, both from new entrants and from the traditional hotel/lodging and e-commerce booking incumbents, including Booking (BKNG) and Agoda. The cyclical nature of its business won't ever go away either, as travel and leisure spending will inevitably ebb and flow with the broader global economic cycle. The massive cash burn through the first nine months of 2019 is worth re-emphasizing.
Though we're excited to see this new issue hit the market (obviously, a lot of investors were excited, too, based on its share price surge), we're going to stay on the sidelines for now. There's nothing wrong with Airbnb or its long-term opportunity, but its shares are simply hard to value (given the subjectivity embedded in estimating its long-term equity value composition, which inevitably results in an extremely wide range of fair value outcomes). Said another way, we think Airbnb belongs in the "too hard bucket." From our perspective, its shares should be viewed more as a trading vehicle at this time, as opposed to an investment opportunity.
For investors seeking capital appreciation potential, we continue to like ideas in the Best Ideas Newsletter portfolio, especially 10-rated Facebook (FB) on the Valuentum Buying Index. Despite many saying that the stock market is in a "bubble," we disagree with that assessment, and we remain bullish on the stock market in the long run. The S&P 500 continues to trade within our fair value estimate range at the time of this writing, "2020 Won't Soon Be Forgotten," and we expect market strength to continue with large cap growth and big cap tech leading the way. To discover more companies that are disrupting their respective industries, please view our Disruptive Industry stock report coverage here (log-in required).
Uber Technologies' 16-page report (pdf) >>
Booking Holdings' 16-page report (pdf) >>
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Brian Nelson owns the SPY, SCHG, DIA, QQQ, VOT, and IWM. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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