Airbnb Q4 2020 Analysis
Intro
Thesis
Key Stats
The Business
Bull Case
Conference Call Questions
Risks
Competition
Financials
Valuation
Conclusion
1. Intro
Hotels have dominated the travel industry for years, for which the offering has often felt limited in choice and inauthentic. Airbnb is in the process of paving a new roadmap for guests and hosts to be able to personalize and tailor their trip in order to get the best experience.
Coming out of the pandemic may prove to be an even greater strategic task than entering it – only time will tell. However we can make some predictions about the appetite for travel moving forwards, and I would argue Airbnb are in the perfect position to capitalize.
From a recent survey of American consumers we have learned leisure travel is the out-of-home activity Americans have missed the most—more than going to bars and restaurants or to sporting or other live events.
More than half of those surveyed (54%) said they either already booked, are currently planning to travel, or expect to travel in 2021. This includes 57% of 18- to 29-year-olds, and 60% of 30- to 49-year-olds.
Those surveyed said the type of travel they have missed the most is spending time with family and friends. After their own health and the safety of others, the top reasons for getting vaccinated are the ability to connect with friends and family (37%), followed by the ability to feel safe to travel (32%).
2. Thesis
The standard method of travelling is facing major disruption. Airbnb are offering a superior product with a brand already embedded into the common vernacular of most of the world.
The TAM is huge ($3.4 Trillion) – the travel sector is worldwide by nature. A successful disruption of the way we travel and live could prove to be a massive opportunity over the next decade.
The next year is a crucial period for Airbnb. If they can navigate out of the global pandemic with a clear plan of action for the coming years, and an ability to match the expected uptick in demand - then I am extremely confident Airbnb will be the top travel brand in the world over the next decade.
3. Key Stats
Without doing anything, traffic levels came back to 95% of the traffic levels of 2019 without any marketing spend. This revealed that the brand is inherently strong.
$5.9 Billion Gross Booking Value for Q4 2020 - (31%) y/y
46.3 Million Nights & experiences booked in Q4 2020 - (39%) y/y
$3.4 Trillion TAM
$(21) Million Adjusted EBITDA in Q4 2020 - (2%) y/y
4. The business
Most of you will already be well aware of what Airbnb does, so I’ll keep this section short.
“Airbnb is a marketplace that empowers homeowners and landlords to rent their properties to tourists and those in need of a night’s stay. Potential visitors can find unique accom and avoid staying in a hotel.
Property owners become hosts and make money by letting people stay in their homes. They list the property on Airbnb with pictures, and potential visitors browse the area for a place that works for them.
The model works for a basement apartment or a mansion in the Hollywood Hills. If there’s a demand for a place to stay, and the property is right for the potential visitor, the entire transaction occurs on the Airbnb platform.”
The fact this is a two-sided marketplace is an incredibly important aspect of the business model, the reason being that……..
Airbnb have enabled home sharing on a global scale. The company offers travellers a more authentic experience alongside some of the more nice offerings such as the ‘experiences’.
5. The bull case
I’ll go over X main reasons why I think AirBnb are in a great position moving forwards here.
The brand
This one can’t be understated in terms of value it brings to the company long-term. The Airbnb brand-name is used as a verb in common vernacular where other competitors aren’t. For example, no-one says ‘lets Expedia it’. You are much more likely to say ‘let’s AirBnb it’ similar to ‘google it’. This is powerful, and could be a major factor moving forwards in the long-term success of the business.
Similar, but not quite the same thing as brand, is trust. Airbnb aren’t a new invention – they have been operating for over a decade now, and have built up a good amount of trust in the community of travellers/explorers. You can be relatively confident the platform is going to correctly execute your order, and the right checks and balances are in place for that order to be up to a high standard.
As long as Airbnb continues to deliver a high-quality service, continues to engage a large enough supply of hosts to meet upcoming demands and controls costs in order to keep the service affordable – I would expect Airbnb’s brand to continue to flourish.
Low fixed costs/ good cash flows
The beauty of Airbnb’s business model somewhat lies in their ability to keep fixed costs down due to having no need to own the properties on their platform. That is part of why I love marketplace companies.
This feature of their business model allows Airbnb to keep prices as low as possible (i.e. not passing the majority of costs onto the hosts), which is great for the end user as it keeps the overall costs down. There will be opportunities down the line to improve the margins for Airbnb by passing on some of the costs of revenue to the hosts, however the current goal is to increase the number of hosts on the site.
Regarding cash-flows – the business model also enables Airbnb to hold a percentage of the total accommodation upfront, with payment to the host only when the trip actually takes place. The benefit of this system is Airbnb are able to generate healthy levels of FCF.
Large TAM
The global market for AirBnb is potentially massive.
“We have a substantial market opportunity in the growing travel market and experience economy. We estimate our serviceable addressable market (“SAM”) today to be $1.5 trillion, including $1.2 trillion for short-term stays and $239 billion for experiences. We estimate our total addressable market (“TAM”) to be $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.”
In my opinion, these figures may be somewhat ambitious. However, I can absolutely envisage Airbnb capturing a sizeable proportion of this SAM over the coming decade as I believe the company are only in the early innings of their company with plenty of room for growth.
Management
One of the most important aspects, in my opinion, is the management team and their track-record. Crucially, Airbnb is founder-led and is surrounded by a bunch of other extremely capable executives with a proven track ability to successfully innovate and deliver. Just to name a few…
Brian Chesky
Brian Chesky is the co-founder and Chief Executive Officer of Airbnb and sets the vision and strategy for the company. In 2007, Brian and Joe Gebbia became Airbnb’s first hosts. Since then, Brian has overseen Airbnb’s growth to become a community of over four million hosts who have welcomed more than 800 million guests across 220+ countries and regions.
Hiroki Asai
Hiroki spent 18 years at Apple and served as Vice President of Global Marketing Communications and Executive Creative Director where he was responsible for a variety of iconic marketing campaigns for a range of products, including the iMac, iPod, iPhone, iPad, and Apple Watch.
Ari Balogh
Prior to joining Airbnb, Ari was VP of Engineering at Google, where he was responsible for core infrastructure and data platforms, including the data and serving systems behind Google Search. Before Google, Ari was CTO at Yahoo!, where he led the 8,000+ engineering and product team and was responsible for all product development.
Dave Stephenson
Prior to joining Airbnb, Dave spent 17 years at Amazon, where he was most recently Vice President and CFO of their Worldwide Consumer Organization. Dave also served as CFO of Amazon’s International Consumer business and led finance across many areas of the company, including Amazon Web Services (AWS), North America Retail, and Merchant Services.
Changing attitudes towards ‘remote’
Similarities with Fiverr and the gig economy, remote working could likely lead to remote living which will likely act as a massive tailwind for ABNB moving forwards.
From the conference call…
“And probably the biggest difference we've seen is flexibility. A world with Zoom is a world where more people can work from home. In a world where more people have the flexibility to work from home, we're seeing more people say they can work from any home on Airbnb. And so we've seen a number of new use cases.”
Sticky two-sided marketplace
Similarly again to Fiverr, as the reputation and benefits to the consumer are more widely known, both buyers and sellers will flock to the site in order to capitalize on this opportunity. As with many marketplaces, there is somewhat of a ‘network effect’ taking place here where the more sellers (hosts) on the site means a better offering to customers, which means a better experience. The word of mouth from good experiences results in more users entering the platform, therefore increasing the demand for sellers on the platform. This flywheel is a powerful mechanism and can result in substantial growth.
Side income
As the popularity of Airbnb has increased over the years, normal people are beginning to see the financial benefit from offering a spare room in their house. This has been made even more prevalent with the rise in property prices in many of the major cities throughout the world.
In addition to this, it has opened up the ability for landlords to utilise property they would otherwise not have had the time nor inclination to do anything with.
‘Experiences’
Aside from the main business of short term lets, Airbnb have another aspect to the product named ‘experiences’. The aim with this is to provide more options and an overall better experience for the end user. The shareholder letter doesn’t break the Experiences figures down separately, however I would imagine this aspect to be only a small portion of their overall revenue.
In a response to Covid – AirBnb have released ‘online experiences’ which “allows users to find unique activities, led by one-of-a-kind hosts – all without leaving the home”.
Not as heavily impacted by the reduction in business travel
There is a general consensus that, for the most part, business travel will decrease significantly in the future – or at least not get back to the level it once was previously. This is due mainly to the habits formed and the technology developed over the past year in terms of remote working. Many jobs have seen huge benefits to home working in that productivity doesn’t suffer anywhere near as much as expected. In fact, in many cases productivity has improved as people are generally happier with the increased flexibility.
These factors will therefore likely lead to a decrease in overall business travel – which is likely to have an impact on many of AirBnb’s competitors who focus on hotels. Airbnb shouldn’t be affected by this as business travel isn’t exactly a major reason to use Airbnb.
6. Call Questions
Q1 2021 bookings above the level of 2020
Change in peoples behaviours due to remote working
“And probably the biggest difference we've seen is flexibility. A world with Zoom is a world where more people can work from home. In a world where more people have the flexibility to work from home, we're seeing more people say they can work from any home on Airbnb. And so we've seen a number of new use cases.
People are living more nomadically. Some people are taking longer-term stays, one or two months at a time in Airbnb. People are taking extended three-, four-day weekends, like many weekends in a row because they don't have to be in the physical office. And many people are snowboarding.They're like potentially living at somewhere cold, and they want to go somewhere warm, they have the flexibility to do that.”
Marketing
“In 2019, we had elevated spending of performance marketing. And then 2020 occurred, our business drops by 80% in eight weeks, and we pulled back all marketing, including performance marketing.
But something remarkable happened. Even before we started resuming our marketing spend, our traffic levels came back to 95% of the traffic levels of 2019 without any marketing spend. And what this revealed is that our brand is inherently strong. It's a noun and a verb in pop culture.
And so we don't intend to ever again spend the amount of money as a percentage of revenue on marketing in the future as we did in 2019. In Q4, 90% of our -- more than 90% of our traffic was direct or unpaid, and we think that will continue in the future. Our marketing plan, therefore, our strategy is the following: a full-funnel marketing approach. The top of the funnel is actually PR.
We got more than 0.5 million articles in last year, in 2020, and we had as much share of voice as most of the other major travel companies combined. And that's how we really built the brand of Airbnb more than anything, probably, is PR. Second is brand marketing. We think of brand marketing as education and an investment.
And so ‘Made possible by Host’s is an investment in hosting. And then performance marketing, we don't treat performance marketing like other travel companies. We think of it as like a laser. It's not a way to arbitrage users. It's a way to laser in on where we want to acquire guest or host in key markets where we have a supplier demand mismatch. But make no mistake, our efficiencies, we're going to hold to a much higher level than 2019 or years prior.”
Summer bookings?
Sounds like people are still cautious.
“I mean, one thing I can say is that people are booking in shorter windows. So the greatest growth we're seeing in the business right now are booking windows in less than 30 days.
And typically, kind of pre-COVID, you're right, we'd be seeing much more of the bookings now ahead for the summer travel season, and that is delayed relative to kind of historic patterns. We're seeing some bright spots. We've seen a little bit of a bright spot in the U.K., driving some summer travel bookings here in Q1. But I don't have any more color that I can give to you on summer expectations.
We just know that we want to be ready for the travel rebound when it occurs. We just don't know exactly when it will occur.”
Hotels as a strategy?
“We made an acquisition of HotelTonight. I'm very proud of the acquisition. I'm very glad we made it. It's a great team, a great app. It's one of the most-loved hotel booking apps in the world. And we were investing quite heavily in this product.
Now, when the crisis happened, we had to scale back certain investments. And one of the investments we scaled back was our investment in hotels. So scaled it back entirely. We still are investing in hotels, just not as much as before.
The way we think of hotels is the way essentially we think about property managers on Airbnb. Airbnb is a community of 4 million hosts. 90% are individuals, and they are who we prioritize because that's where our guests speak. Our guests want something that's one of a kind, and this is typically offered by our individual host.
But that being said, we never want Airbnb guests to come to Airbnb and not be able to find something they're looking for. So we think that hotels, in addition to property managers, are really important for our strategy in filling in our network gaps. Again, we don't want anyone to come to Airbnb and lease because they couldn't find a place to stay. So hotels are important.
And as we know, most hotels around the world are below 50% occupancy, so we know they're in need of demand, and Airbnb certainly can provide that demand for them. So that's what we're doing with experiences and hotels, both part of our strategy in the future.”
7. Risks
Profitability
The company is yet to be profitable. Accumulated deficit of $6.0 billion as of 31st Dec 2020.
Local regulations
Some cities aren’t a fan of the Airbnb model and believe it leads to increased antisocial behavior and higher rent prices. Airbnb could see a large number of legal challenges as they expand into new territories. The hard part will be keeping the local lawmakers on their side.
Ongoing impact of covid 19 and people’s willingness to travel
If travel doesn’t pick back up as anticipated over the coming year, Airbnb could be in a troublesome position as a business.
Revenue growth rate slowing – expected to continue to slow.
Failure to retain hosts/add new hosts, or hosts provide substandard service – business operations could suffer negatively.
Highly competitive market due to large TAM
I personally believe Airbnb’s model is differentiated enough from the other business models within the industry to have any significant competition in their particular area.
8. Competition
Airbnb are often compared to the likes of Booking.com and Expedia when it comes to the global booking sites for holiday rentals/hotels/apartments etc.
“Our competitors include:
Online travel agencies (“OTAs”), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com); Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity); Trip.com Group (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner); Meituan Dianping; Fliggy (a subsidiary of Alibaba); Despegar; MakeMyTrip; and other regional OTAs;
Internet search engines, such as Google, including its travel search products; Baidu; and other regional search engines;
Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, and Craigslist;
Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels;
Chinese short-term rental competitors, such as Tujia, Meituan B&B, and Xiaozhu; and
Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.
We believe we compete favorably based on multiple factors, including the differentiated breadth and depth of stays and experiences offered on Airbnb, our global scale and geographic reach, the strength and loyalty of our host and guest community, our brand, organic traffic, our platform functionality, including community support, payments, and host protections, and the extensibility of our platform.”
9. Financials
The past year has been nothing short of a nightmare for AirBnb, a business based almost entirely on the ability for human beings to travel, connect with each-other and share experiences came to a sudden halt in March 2020.
The reason I preface the section with this fact is because we need to contextualize the numbers in order to look at them with a certain expectation in mind. I’m not expecting any crazy numbers for this year/quarter, but lets see how they hold up.
Revenues
Early on in the pandemic, the company forecasted 2020 revenue to likely be less than half of 2019. However, revenue decreased only 30% to $3.4 billion (a $1.4billion fall).
Q4 revenue of $859 million was down ‘only’ 22% year over year
Gross Booking Value per Night and Experience Booked up 6% y/y to $123.69 (a huge achievement given the circumstances)
Profitability
Net loss in Q4 2020 was $3.9 billion, representing (452)% of revenue, compared with $352 million in Q4 2019.
Includes $2.9 billion of stock-based compensation expense, as well as $103 million of stock-settlement obligations, which represent employer and related taxes associated with the IPO. It also includes a mark-to-market adjustment of $827 million related to warrants issued in connection with a term loan agreement.
Adjusted EBITDA in Q4 2020 was nearly $250 million better than Q4 2019 despite a $250 million decrease in revenue
Overall, it’s hard to make any insightful comments on the financial performance for this quarter/year. We expected AirBnb to take a huge hit with regards to their top line due to the inability to operate, so these results don’t come with a huge surprise. I’m more interested in the steps being taken moving forward…
Increase marketing and communication spend to further elevate the brand and increase awareness.
Increasing R&D spend to…
Recruit more hosts & simplifying the recruitment process.
Simplify the guest journey
Scaling operations to meet the potential customer rebound.
10. Valuation
In this section I’ll have a go at valuing AirBnb in comparison to other similar companies within the industry.
High multiple
AirBnb are currently sitting at a market cap of $109 billion – far and above what anyone thought the company would be trading at. Aswath Damodaran, in this video, articulates better than I will ever be able to the reasoning behind a fair valuation of the company – which he believes to be around the $35 billion range, with above $40 billion market cap being too expensive.
It’s impossible to understand the reason why the market has priced Airbnb at this level. The company is great and has a bright future, however a P/S ratio of about 31 is admittedly high. Especially considering the relative valuations of similar companies – Expedia (4.52) + booking.com (13.95) + Trivago (4.73).
A tweet from @mukund I saw just today is a clear, concise analysis of the potential downside.
In my eyes, and in many others, the stock is somewhat overpriced. However, it’s important to note that value is subjective and not by any means the main driver of price. Many other factors impact a stock price.
Lock up expiry coming in the near future
In the upcoming months the lock-up for Airbnb shares expires, meaning we will likely see some level of sell off which could, in turn, lower the price. This is definitely a risk and something one should take into account if considering to buy the stock.
It would be futile for me to try to predict the price movement one way or the other. The market is unpredictable.
All of this is just an added layer of information you should use when deciding whether to buy or not.
Nothing is certain, and trying to predict future price movements based on upcoming events is often not worth your while.
11. Conclusion
When looking at a company, I try to ask myself several standardized questions, for which the answers give me a good indication of whether this is a good investment for the long-term.
Is it relevant? I.e. do YOU use the product? Do you know anyone else who uses the product? Is there evidence of a growing user-base? If yes to some/all of these questions then the likelihood is the product is at least somewhat successful.
Within my circle of friends/family, I think almost everyone I know has used an Airbnb at some point in the last couple of years and has had only good things to say about it.
Is the company differentiable from its competitors? I.e. are they doing anything special/different to the competitors in the market? Do they stand out in any way
When booking a place to stay, nobody say ‘let’s book an Expedia’ or ‘let’s book a booking.com’, they do however use Airbnb as a verb – ‘let’s get an Airbnb’. I know this isn’t a smoking gun when it comes to Airbnb’s cultural relevance – however, it’s a good indicator of the power of the brand.
Is the business model sustainable? I.e. are there any inherent risks to the business model that could see the current success dwindle over the coming years?
For Airbnb, this is a tricky one. A large chunk of their business is to do with operating in large cities. Even to date, there has been instances of entire cities making Airbnb illegal. I believe this is absolutely still the case in some instances, for example – Paris, Barcelona, Berlin are just a few who have tightened restrictions.
Airbnb has a large moat – possibly one of the largest in the travel industry. I have every confidence the company will continue to dominate over the next 5-10 years.
Cheers,
Innovestor
Thanks. Very informative. Keep up the good work!
Love the article, thank you so much.