Whats up Guys, Ben here & Welcome to Motivation 2 invest
Airbnb is an Online Accomodation booking platform which disrupted the hotel industry!
Why rent a hotel room? When you can rent an entire house, apartment or even treehouse that is Airbnb’s USP. Unique selling proposition.
Airbnb on the 9th December 2020 via a Direct listing they are expected to raise around $2 billlion at $30 billlion valuation.
Should you buy AIRBNB? Well in this video i’m going to reveal my Bull Case vs Bear Case for Airbnb & then I’M going to do a FORENSIC deep dive into the financials to reveal My Price target, which where I think the company is fairly valued (This has been a heavily requested video, so let’s dive in)
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Airbnb had 54 million active booking and 247 million guest arrivals in 2019.
Airbnb’s customers are very “sticky” with 69% of their revenue in 2019 generated from repeat guests.
Now this makes complete sense once you have booked a full apartment with airbnb why would you go back to renting a small hotel room for similar cost.
1. Revenue:
Now Airbnb’s Revenue grew at a massive 32% between 2018 and 2019.
However, due to the health crisis & Global lockdown’s Airbnb’s revenue unsurprisingly fell off a cliff!
They had a -32% decline year over year for the first 9 months of 2020. (Show screenshot from income statement)
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Now the we could say that once the gloal issue is solved Airbnb should recover to pre pandemic levels.
Now for my valuation model, I will believe that Airbnb will recover but there will be some scarring & thus I will give the company a conservative 20% growth rate on average over the next 5 years which is still very good & what i consider as a growth stock.
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However, Airbnb’s overall growth has been declining as a business over the past few years.
For example, in 2014 the company experienced a massive 69% growth rate, 112% , 66%, 73% and before dropping to the 30% region.
Now those are INCREDIBLY high growth rates in the past & no company can be expected to keep those as it grows in size
This could be due to three factors,
market penetration, competition & also due to political headwinds we saw Airbnb being banned in Many major cities such as BARCELONA.
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This is why I personally see Airbnb Investing heavily into growing their experiences business where you can have everything cookery classes to Airbnb Adventures around the world!
So this should be a great Catalyst for Airbnb which is why I’ll assume a 20-25% growth rate once the global issue is over.
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Now diving into Airbnb’s income statement we can it has been operating at a net loss for a number of years now.
Now this does make sense for a growth company has the company was reinvesting heavily into Sales * Marketing.
In addition to Product Development.
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3. Profitable EBITA Quarter
However, this quarter Airbnb has gone through a rigourous cost cutting program.
The Lockdown slump forced it to lay off 25% of its workforce in May, suspend marketing activities for the year and seek $2 billion (£1.5 billion) in debt emergency funding from investors, including Silver Lake and Sixth Street Partners, at a valuation of $18 billion.
The company also revealed it faces a hefty tax bill. It said that the U.S. Internal Revenue Service informed it in September it owed $1.35 billion, plus penalties and interest, over the sale of international intellectual property to a subsidiary in 2013. Airbnb said it would “vigorously contest” the tax adjustment.
The company also slashed marketing & thus their is light at the end of the tunnel!
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As Airbnb managed to turn their first ever Profitable EBIDTA Quarter of 24%! which is great considering the global issue is an achievement.
Airbnb also saw a surge of rentals in rural areas as many people escaped pandemic hit cities.
and with
90% of the firm’s visitors come through organic search engine traffic or direct, Airbnb strong BRAND has proven to be adept at avoiding the high and increasing acquisition costs associated with paid online marketing.
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Thus Sales and Marketing expenses as a percentage of total revenue has been dropping as revenues have fluctuated.
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Another Positive is the Online Travel market is expected to rebound past 2023 & Continue growing at a compound annual growth rate of compound annual growth rate (CAGR) of 13.16%.
So at the very least we could expect Airbnb’s growth to track the online travel market.
With airbnb actually growing much faster than their competitiors:
For Example between the years of 2017-2019
Airbnb grew at 86%
whereas Expedia & Booking holding only grew at approximately 20% each.
And as the travel market consolidates between the major players we could expect this to benefit airbnb & it’s unique offering.
Years 2017 -2019
Airbnb: 86%
Expedia: 20%
Booking holdings: 20%
So there is some tailwinds behind a recovery for Airbnb.
HOWEVER, What about the balance sheet??
Now i did a previous video on this & I did highlight 3 red flags so if you guys haven’t watched that video….then check it out.
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Diving into the balance sheet:
We can see Airbnb has $2.6 Billion in cash.
$1.83 billlion in Marketable securities
(these are short term assets which can be turned into cash quickly)
However, here is a red flag I noticed previously
FUNDS Receivable & Held on behalf of customers.
Now according to Airbnb,
We have $2.4 billion held for booking in advance of guests completing check ins.
Now the issue is if a customer cancels or I believe this also might include customer deposits which can be claimed.
Then a percentage of this is not actually airbnb’s cash.
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So for my calculation of the current ratio i’m only going to include half of that as an estimate to be conservative.
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Thus if we calculate the current ratio:
Total current assets -= 7, 212,208
Minus $1, billlion.
= Current Assets = $6,212,208
Curretn Liabilities = $4,384,056
= 1.4
(Thus Airbnb has 1.4 times enough current assets to cover their
short term liabilities which is those due within 12 months.
SO that is just about ok, usually I look for between 1.5 and 2.
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However, Airbnb also has long term debt of
1,811,302 + 380,079
of over $2 billlion , $2,191,381
So that does need to be taken into account.
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What is a fair value for Airbnb’s stock?
Well, the value of the company is
“todays VALUE OF A COMPANIES EXPECTED FUTURE CASH FLOW”
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Now Airbnb has a Trailing 12 months revenue of
$3,625 x 1.20^5 = $9,020
(our 20% growth rate for the next 5 years)
Thus earlier we discovered Airbnb can produce a free cash flow margin of 24% when it’s cuts costs on sales & marketing.
Thus applying
$9,020 x 0.24 (cash flow margin) = $2,164 in free cash flow.
—-The company is expected to go public at a valution of $35 billion.
$35,000/$2,164 = 16 (Price to Free Cash flow)
So you would be paying 16 times the companies FREE CASH FLOW IN 5 years.
Now that is still quite a high valuation which would put the share price at
between: $44 to $50.
I personally would like to see a share price of around $30 per share which would value airbnb at approximately $25 billlion.
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However, As we are in a booming IPO i expect that Airbnb price will spike when it IPO’s but if it does drop to this level then i may open a small speculative position.
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