Okay, so let's talk about another stock that I know you've been eyeing lately... Airbnb. You probably use the app (as a guest or host) and have seen the stock setup look pretty good lately... so, the million dollar question, is it a good time to buy? Tough question... because, let me be honest with you, this thing ain't cheap... but let's analyze and see what we get to.
Airbnb's Business Model
The Airbnb business model is pretty straightforward. There's probably little I can say here that would be new for you.
Airbnb is basically a a marketplace of real-estate for short-term stays worldwide – an alternative to hotels. Since being founded in 2007 in San Francisco, Airbnb has hosted more than a billion people – a huge milestone.
The more hosts that join Airbnb, the more options there are for guests – who then join Airbnb. The more guests there are, the more they attract new hosts (or just become hosts themselves). Though the company does spend on marketing and product development, there is a lot of organic growth driving the model.
Airbnb seems to be growing in popularity with the Gen Z population – the future of travel – as well... being the preferred stay while travelling for them.
It's no doubt, an amazing company with great leadership. You can't help but respect Brian Chesky, the co-founder and CEO of Airbnb. The way pivoted during the COVID-19 pandemic to more domestic getaways and staycations was executed the best it could have been.
Overall I'm bullish on the business model and leadership.
The second quarter of 2020 was the biggest impact we've seen in businesses and the stock market (i.e. the peak of COVID last year). Airbnb's revenues were down -72% that quarter, and since then they're now past 2019 levels – which is a great sign. They've also posted a lower net loss in Q2 2021 (almost a profitable quarter). They also had positive adjusted EBITDA. Airbnb financials all point to the right direction of a "recovery stock".
We know the travel and hospitality industry was destroyed during COVID, and you'll see that in the valuation (which we'll get to) but how has the recovery been? I found their latest shareholder letter quite insightful, which is what I wanted to share with you here.
Overall, they seem to be having a choppy recovery throughout different regions of the world – depending on how the COVID is handled in each area. Nonetheless, there is a clear recovery happening; with, of course, the Delta variant being the wild card (or Joker, whatever you want to call it).
Valuing Airbnb is not an easy task, because of the unpredictability of the future profits and cash flows... but I know that's why you're here. The full valuation model is available to Premium Members of the Hawk Letter. You can play with the numbers and assumptions to come up with your own, and deep dive into mine.
In any case, from my valuation model I see Airbnb going to $2 EPS by 2024. It's very important to recognize this is a more realistic (rather than bullish scenario) which I think is being priced in... mainly for a few key reasons. (1) It assumes the model doesn't change. Airbnb simply takes home 10% of Gross Booking Value (GBV) as its done historically – though we know it can pivot into a lot more than just lodging (i.e. experiences); (2) There isn't a macroeconomic shift if the real estate or home ownership (i.e. more people do long-term stays than rentals); (3) The growth trajectory follows the pre-COVID path where growth rate was declining (i.e. 50% growth in 2017, 40% in 2018 and 30% in 2019). I don't have any reason to assume differently... unless you give me one. But, at this point, I don't have one.
Based on that, let's say we get an 80x P/E in 2024, we'd be at $160 per share... which is where are today. So basically, no upside. Doesn't sound like a great deal to me.
I also attempted a DCF, where I got a FV per share of $145. But, keep in mind, I'm only looking four years out – because that's how I like to look at my investments, instead of 10 years... but my numbers align with most analysts. So, it's unquestionable, that this stock is expensive.
As usual, I apply a weighted-average of the FV and target ratios to earnings, sales and FCF... I get about $170/share. The median analyst target in one year is $180. The upside from here (at $165/share) isn't huge.
As you probably guessed it, the upside risk/reward for Airbnb isn't huge by any means. That's if you take a really disciplined approach, and think that this is really a travel and lodging company. But, at the end of the day, it is a tech company and it is fairly valued... so there can be a huge potential upside if we tell ourselves a bigger story.
If the story is that Airbnb is more than a travel company, but an "experiences" company and can easily pivot and cross-sell into other areas (which they can) then the valuation gets interesting. And, that's pretty much the bet you'd be taking with this stock. It's not a bad bet, in my opinion. But, is there better out there?
We'd have to take a look at companies like Expedia Group (EXPE) (who owns a bunch of companies, including VRBO). Fun fact: they also own Bodybuilding.com. Not that this, or Booking Holdings (BKNG) – another alternative – is an apples to apples comparison to Airbnb, but they are worth considering because of more attractive valuations. They are also in growth mode, but not as high as Airbnb. Nor do they have the brand value that Airbnb has.
I love it when a company has the brand equity and value to the point where the name becomes a verb... like Google it, or Uber it... or, in this case, Airbnb it... I think that's a thing, right?. Well, it is now.
Anyways, in short I think it's a good play but it's an expensive one. The best risk/reward and entry point based on the charts is $130 level, as there is clear and strong support there. I would love to go in at that price, if we see it again. Since the market has been a bloodbath lately, we might... But, we may not.
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