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Airbnb Crushes It - Buyers Beware

Romans Chapter 12 verse 12 states, "Be joyful in hope, patient in affliction, faithful in prayer."


This verse is very important to consider. I think that most of us would find it a good thing to be joyful in hope as it can be synonymous with a positive take of feeling happy or good and therefore, hopeful. But thinking about being patient during affliction is another story. This is important as God's word is paramount and I know personally the only way that I can be patient in affliction is if I rely on God and not my own desires.


For investing, patience is never easy, especially during times like we are witnessing right now. But just like going through any affliction in life, going through turbulent and difficult to navigate markets requires the same consideration of God's word.


Topic

I hold Airbnb, Inc. (ABNB) in the portfolio and it's one of the smaller weighted positions at 2.5%. My cost basis sits at just below $142 and I'm in no hurry to be a buyer after the company's results. In fact, I prefer to see ABNB's SP drop towards $110 or lower. This isn't out of greed, but based on valuation concerns. It's no wonder ABNB's trading has been choppy this year as the market has struggled as well.


Key Takeaways


Over the past year or more, I've seen some critical takes on ABNB, notably with comparisons to hotel peers like Hilton Worldwide Holdings, Inc. (HLT) or Marriott International, Inc. (MAR), OTAs like Booking Holdings, Inc. (BKNG) or Expedia Group, Inc. (EXPE), or even companies like Uber Technologies, Inc. (UBER) and Lyft, Inc. (LYFT), or DoorDash, Inc. (DASH).

All of these peers have varying business models, but if there's one thing that ABNB has above them all, it's the combination of robust Revenue growth and superior Cash Flow performance. After Q1 2022, ABNB's OCF witnessed strong inflection further with both OCF/Adjusted FCF north of 40%. This being generated by 70% YoY Revenue growth.


ABNB has eclipsed HLT for Revenue, which is likely to remain, and the short-lived OCF pandemic-impacted level has declined drastically for HLT below typical norms through 2021. For MAR, ABNB is positioned to overtake them on Revenue longer-term. In any case, even if ABNB's OCF Margin were to contract to 30%, it would still be double that of these top hotel industry peers, so like most newer technology innovators and platforms, there is a massive opportunity to compete against legacy peers. PayPal Holdings, Inc. (PYPL) potentially overtaking both Mastercard Incorporated (MA) and Visa, Inc. (V) over the mid-term despite a much lower TPV is a prime example of this and ABNB is no different, as the company will likely sacrifice some of its current Cash Flow Margin to continue to outgrow peers.

ABNB is also on the path to possibly overtake EXPE over the mid-term. EXPE was crushed after its earnings report, which from my perspective, wasn't all that bad. The challenge for companies like legacy hotels and EXPE is that they are still struggling to get back to pre-pandemic Revenue levels, while a more nimble and focused company like ABNB has already established a new all-time high for Revenue with a much quicker recovery and robust future trajectory. BKNG like MAR remains more elusive, but longer-term is at risk of being overtaken by ABNB, as even BKNG is taking longer to get back to pre-pandemic levels.


Companies like UBER, LYFT, and DASH all are focused on a different sector, but similarly a newer and innovative platform to serve customers. LYFT was decimated after its earnings report and UBER was down in sympathy. While I think UBER is clearly the better choice versus LYFT, it isn't looking like any of these companies will be competing from a Cash Flow perspective anytime soon, if ever. TNCs are at risk of the robotaxis model from Tesla, Inc. (TSLA) who already is positioning itself with traditional rental car companies as well. DASH has been linked to deal rumors, notably with Instacart and recently with LYFT. These markets are much more competitive as Cash Margins are weaker.


All this potential and execution by ABNB in my book justifies a premium above all of these peers. The key question is by how much.


Where Do We Go From Here


BKNG in my opinion is the closest peer to compare ABNB when it comes to future Revenue growth and Cash Flow performance, and BKNG is currently trading 8 times EV/Sales and 30 times OCF/Share. ABNB Currently is trading 14 times EV/Sales and 36 times OCF/Share. Over the mid-term, I do believe that BKNG will see these multiples contract as Revenue's continue to improve towards 6 times EV/Sales and 20 times OCF/Share.

As we look to the future, ABNB is poised to sustain its lead over HLT and potentially even eclipse EXPE who operates Vrbo (let's Vrbo bro!), while gaining substantial ground against BKNG and MAR. I believe that the premium above BNKG will be merited. However, is an EV/Sales multiple near 15 and an OCF/Share multiple near 40 merited today versus the mid-term future? Conservatively I don't think so, and thus my desire to see the SP drop further so I can lower my cost basis.


Over the mid-term, I feel it is much more reasonable for ABNB to trade up to 10 times EV/Sales and 30 times OCF/Share, again, as long as they execute and outperform their peers. My opinion is that ABNB's Revenue performance has been much more robust versus their peers coming out of the pandemic and the market has not been able to let go of this factor, inflating the current SP. The market currently has a lot of irrational valuation in it with some growth companies still sporting 20-40 times EV/Sales metrics, well beyond reason more so than ABNB.

Some investors may be concerned with the competitive market as to whether ABNB can continue to outgrow its peers. From my experience, there are many legacy companies that cannot compete to deter ABNB's growth whether hotels, or even companies like BKNG and EXPE that now fall into the legacy category as their older OTA business models are competing with their newer focus areas versus ABNB's laser-focus. This is a reoccurring theme across many areas, Opendoor Technologies, Inc. (OPEN) versus Zillow Group (ZG) being a very recent example of how a former innovator, may still be incapable of executing with respect to the next generational innovation opportunity. Big Tech has tried to become a one-stop shop in many ways, this simply isn't going to work much longer, similar to how globalism is falling apart.


The regulatory environment is another risk, but I see policy mirroring the consumer out of necessity. While today's policy leaders are detached from the future generations that will drive consumption, time is running out far too quickly for them to substantially restrict demand and momentum. This is not only true for ABNB, but also Crypto is another great example of this, as is the TNC shift. Ultimately, this is all indicative of a major shift away from traditional environments, that ironically are not meant to substantially change physical environments or even consider eliminating them. It's more about optimizing and reorienting time away from the controls of government, employers and utilitarian needs, to increase the efficiency of time spent with families and communities that is much more valuable.


ABNB has a very exciting opportunity on the horizon, but the company still needs to see some contraction in its valuation to improve the risk/reward profile. It will come, as the market continues to wrestle with all of these changes. What's clear to me since the pandemic started and today, is that the market has been egregiously wrong for a while now and it likely will continue to be over the short-term.





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