Romans Chapter 12 verse 12 states, "Be joyful in hope, patient in affliction, faithful in prayer."
I take the first part of this Bible verse as hope being an expectation, therefore that it should be joyful. I must admit that it is always a struggle for me to be patient during affliction, and while I strive to be committed to prayer, daily, I by no means am perfect. Collectively though, if I have Jesus in my life, I can stand firm on these principles and imbue them.
For investing, being patient in affliction resonates very well. It's been a very rough couple of months being an aggressive growth investor, and it's always good to get perspective on where I'm at, and where I'm going based on the portfolio's goals and objectives. Like anything that involves commitment, perseverance is a must.
Let's talk Airbnb, Inc. (ABNB). While I am in strong agreement with Cathie Wood's investing strategies and principles, I believe that she has left some companies off the table that merit some consideration. Today, I'd like to provide some perspective on Airbnb's Q1 2021 results and investment potential.
The schizophrenia in the markets is clear. The pundits continue to debate how companies hammered during COVID will re-emerge, while those benefitting the most will lose what they gained. We all know that this is much to simplistic of an approach and that many innovative companies witnessed exponential performance due primarily to their market leading capabilities. They will only growth further from this accelerated baseline, as is being confirmed during earnings.
For Airbnb, the company sits on both sides of the fence. On the one hand, the company is exposed to the travel industry and is part of the highly optimistic expectations for improving travel markets. However, Airbnb, has created a platform that also saw less dramatic impact, and faster recovery during the pandemic.
Q1 2021 results were very robust but not equally so. Clearly, the U.S. saw a surge with growth in the quarter generating nearly 40% performance, however, international results were still down 20%. Makes sense from management's commentary of a higher focus on less distant trips within domestic-focused areas. It also clearly shows that a larger part of Airbnb's international business is predicated on international travel, versus the U.S.'s domestic focus.
They key relationship for investors is with overall Revenue performance returning to growth, Airbnb witnessed some substantially strong financial performance. Historically, the company has generated a Free Cash Flow, FCF margin at around 20%. This of course was hammered during COVID with the company losing over $1.6 billion requiring a large debt raise.
During Q1 2021, Airbnb saw a return to robust performance with Operating Cash Flow, OCF swinging to positive by a $1 billion change, and FCF also moving positive by a greater than $3.2 billion change. Just as I've spoken about needing to deconstruct Cash Flow for companies like Coinbase Global (COIN) and Opendoor Technologies (OPEN), Airbnb similarly needs an adjusted FCF based on working capital adjustments being reflected in the Financing Activities section of the Cash Flows.
The companies change in Funds Payable and Amounts Payable to Customers needs to be factored for. On the Balance Sheet, B/S, these line items for Assets and Liabilities are 1:1, and during expansion of the business by Revenue growth, correlate with growth. As such, I recommend including this line item in an adjusted FCF metric.
Below are Airbnb's Last Twelve Month, LTM updated financials:
Revenue: $3.4 billion
Adjusted FCF/Margin: $1.6 billion/48%
Annual Nights and Experiences Booked: 200 million
Annual Gross Booking Value, GBV: $27.4 billion
Airbnb and DoorDash are very similar when it comes to modeling. Like DoorDash, for Airbnb I model Revenue be using Annual Nights and Experiences Booked and Average GBV Booked metrics to equate GBV. From there, also similar to DoorDash, its a net percentage of the total GBV.
With travel poised to increase, we should see sustained improvement for booked volume, and higher inflation for Average GBV Booked with an expanding net percentage of the total back towards pre-COVID levels. Cash Flow margins should revert back from the current surge as key metrics begin to normalize and growth stabilizes as well through the mid-term.
So what is Airbnb worth? Through 2021 and as of next year, Airbnb will have eclipsed Trip.com Group (TCOM), MakeMyTrip Limited (MMYT), TripAdvisor, Inc. (TRIP), Trivago (TRVG), Wyndham Hotels and Resorts (WH), InterContinenntial Hotels (IHG) by Revenue. Over the mid-term, the company is likely to have further eclipsed Hilton Worldwide (HLT), and will be looking to beat Booking Holdings (BKNG) and Expedia Group (EXPE) longer term.
From a valuation perspective, as Airbnb continues to succeed, the current premium valuation will remain into the future. On a Revenue/Sales multiple, Airbnb trades just less than 2 times higher than the next highest valued peers - Booking and Alphabet, Inc. (GOOG). From a Cash Flow perspective, I think it is fair to assume that Airbnb can be valued in the 50-60 times FCF per share multiple over the mid-term which could translate to annualized returns of 21% or so from today's Stock Price, SP level. This type of potential merits a premium and as the company continues to track towards $15 billion in Revenue over the mid-term with a continued stable adjusted FCF margin, the premium should be sustainable.