Airbnb (NASDAQ:ABNB) has been an incredible success story that has now had multiple acts. Its first chapter was more conventional. It was a truly disruptive company that upended its target industry.
It discovered a massive market opportunity in between the chain hotels and the youth hostels, creating a new marketplace for more informal and affordable lodging options.
As the 2010s wound down, it appeared Airbnb was ready for its triumphant debut to public markets. It was expanding into the business travel market while adding other ancillary services such as its Experiences feature. It seemed like Airbnb could become a super-app and achieve a massive valuation.
Then the pandemic hit, and it appeared that Airbnb could fail altogether. A New York Times article from mid-2020 headlined: Airbnb Was Like a Family, Until the Layoffs Started captured the sudden change in the atmosphere.
Previously, Airbnb was hailed as having one of if not the very best corporate cultures in start-up land:
“In many ways, Airbnb was the ideal example of a commitment culture company. Founded by Mr. Chesky, Nathan Blecharczyk and Joe Gebbia in 2008, the start-up grew quickly as an online platform that helped homeowners rent out rooms to travelers. Along the way to a $31 billion valuation, it built a reputation as the polar opposite of its sharing economy peers such as Uber, which prized ruthless competition, and WeWork, which collapsed under a partying culture and its founder’s self-dealing.
However, many observers feared that Airbnb’s move to fire 1,900 employees — a quarter of its workforce — during the pandemic would have a lasting impact on the company’s corporate culture.
It also appeared that it might have a big effect on the product. Airbnb cut staffing heavily, leading to major issues in communications with freelancers, payments, booking support and more. By mid-2020, with global travel ground to a standstill and Airbnb having to take emergency loans while slashing its payroll, it seemed like Airbnb’s story might come to an abrupt end.
And yet, that’s not what happened. At all. By the end of 2020, Airbnb had managed to right the ship. Not only did the company stop the bleeding, it actually got into strong enough condition to complete its long-awaited public listing in December of 2020. It was a remarkable turn of events.
And since then, ABNB stock has done alright too. It’s not been a big winner by any means. But it’s holding up much better than most other tech or tech-adjacent disruptive companies. Shares were essentially flat since listing in late 2020 until this May, when Airbnb finally gave in to the broader sector slide:
Regardless, in today’s dismal market for young innovative companies, the above chart is a big win. So let’s dig into what enabled Airbnb to make it through the pandemic, and whether the company’s unique DNA will allow it to prosper throughout the 2020s.
Back in 2018, founder Brian Chesky laid out a mission to make Airbnb a new type of company. Here is Chesky laying out the problem in a letter at that time:
Technology has changed a lot in my lifetime, but how companies run has not. Companies face pressures based on legacies from the 20th-century, and the convention is to focus on increasingly short-term financial interests, often at the expense of a company’s vision, long-term value, and its impact on society. You could say that these are 20th-century companies living in a 21st-century world.
So if other companies are still living in the 1900s, what is Airbnb’s alternative? Here is Chesky’s vision:
It’s clear that our responsibility isn’t just to our employees, our shareholders, or even to our community – it’s also to the next generation. Companies have a responsibility to improve society, and the problems Airbnb can have a role in solving are so vast that we need to operate on a longer time horizon […]
We want to design a company to meet the unique needs of the 21st-century. We want Airbnb to be a 21st-century company with two defining characteristics:
- We will have an infinite time horizon.
- We will serve all of our stakeholders.
Frequently, investors take this sort of talk to be just that. When times get tough, these sorts of principles often tend to be discarded. However, it seems that Airbnb was able to actually stick to its values even during the unprecedented downturn in the travel industry over the past two years.
The company maintained relationships with local communities, super hosts, and its remaining employees even when it was generating minimal revenues. And as soon as revenues started to trend upward even slightly, Chesky started speaking of Airbnb’s rebirth, its second act that would allow the company to recapture its initial aim to be a 21st-century company.
Why Airbnb’s Revenues Have Grown Despite the Pandemic
The original Airbnb focus was on securing tons of listings in large cities. Residents in places such as Barcelona and New York mounted substantial campaigns against Airbnb precisely because it was so successful in securing supply. Large parts of downtowns and historic areas moved from having long-term rentals to being converted for Airbnb stays.
During the pandemic, however, this flipped on a dime. No longer did people rush to stay in downtowns and historic areas. The threat of the virus loomed, and everything was closed in the center of big cities anyway. Instead, we saw an exodus out to nature.
This is where Airbnb’s unique business model really had a chance to shine. With a hotel, there’s almost no flexibility in the business model. A company is in for tens or sometimes even hundreds of millions of dollars for a destination hotel with event center and other such trappings. The location is what it is. There are few ways to quickly reposition such a large fixed investment.
Whereas Airbnb can, and did, encourage its staff to find more hosts in remote areas. Cities were out, instead, it was all about finding mountain homes, beachfront cabins, and other such lodging far away from crowded urban areas. Airbnb was able to pivot incredibly quickly, creating both new inventory for travelers and new income streams for property owners that were facing an economic shock thanks to the pandemic.
Airbnb’s DNA as a 21st-century company that could meet the community’s needs arguably never shined brighter. Meanwhile, the legacy hotel chains were forced to clumsily pivot to setting up remote work and long-term stay programs in some of their more desirable properties. However, if a legacy hotel is competing against Airbnb to sell remote work at a tourist location, Airbnb is going to win that market share most of the time.
It’s interesting. Airbnb had been seriously competing for business travelers even prior to the pandemic. It invested heavily in branding and sales to try to convince executives to let their workers stay in Airbnbs while traveling. However, the market was skeptical if Airbnb would be able to take much share; hotels had strong incumbent advantages already and that’s before you get to things such as loyalty programs which have long been a mainstay of the travel industry.
With the pandemic, however, it became commonplace to work from video calls and no one cared where employees were located. Airbnb’s pitch — stay and work for a month out of a tropical cabaña instead of your small urban apartment — never resonated better. And even Fortune 500 companies really started to spend on more flexible accommodations for their traveling employees.
This momentum showed up in the financial results as we exited 2021. In its Dec. 2021 quarter, Airbnb generated $1.5 billion in revenues and turned a $76 million operating profit. By contrast, in the last pre-pandemic quarter, Dec. 2019, it generated just $1.1 billion of revenues and lost $328 million on an operating income basis.
This is incredible stuff. Even with tons of international restrictions and traveler hesitancy, Airbnb posted more than 30% revenue growth over the same period of 2019 and earned a much bigger profit margin. Another amazing stat. In that quarter of 2019, Airbnb spent $644 million on SG&A to generated $1.1 billion of revenue. For the same period of 2021, SG&A declined to $568 million while revenues surged more than 30%. This is success beyond what anyone could have possibly dreamed when the pandemic first started.
Airbnb’s Breathtaking Q1 Results
Those above figures were just an appetizer for the company’s latest earnings report.
In Q1 of 2022, Airbnb announced jaw-dropping 70% year-over-year revenue growth, with its top-line revenues rising to $1.51 billion. This topped expectations considerably.
The company’s total nights and experiences booked also surged 59% year-over-year to 102 million. This was the first quarter in Airbnb’s history where it surpassed 100 million total nights and booked experiences. Clearly, Airbnb isn’t just making up for lost time from the pandemic, it has gone on to leave its 2019 numbers in the dust.
Airbnb’s guidance was also superb. It sees growth holding up at a similar rate in terms of nights booked compared with Q1. Airbnb expects overall top-line revenues to rise to roughly $2.1 billion. This is great stuff. However, I have one main concern about the current trajectory.
The Big Risk: Can Airbnb’s Pricing Structure Keep Working?
In the early days, a big part of Airbnb’s appeal is that it was cheaper, often dramatically so, compared to traditional hotels.
However, this price differential is no longer nearly so clear. The cost of an average Airbnb stay has gone up in recent years. It’s not always the headline rate that’s bad, but it’s the extra fees.
Here’s a house I was looking at, for example. The headline rate, $139/night, is reasonable for the area. However, with the cleaning fee and service fee, the final price goes up by a shocking 59% from what you see when looking in the initial search results.
In search, this looks like $139 per night. In reality, however, it’d be $221 per night if you actually booked it. That’s a massive gap, and gives hotels plenty of room to fight back.
It also creates market opportunity for newer entrants such as upscale hostel/traveler hotel chain Selina to cater to the digital nomads and remote workers at a more attractive price point.
Like Uber (UBER) and other prominent digital services, I have the feeling that Airbnb came in with pricing that was below market rates and established a strong brand and market share. Now that Airbnb stock is publicly-traded, however, management has to worry about investors as well and may be pushing pricing a little too aggressively to boost margins.
It’s a fine balance. Airbnb certainly has been able to get its pricing to stick so far, judging by its fine financial results in 2021 and this most recent quarter. And in the current inflationary environment, the price of everything is going up significantly, so customers may not have a price anchor of what a hotel room “should” cost. Airbnb’s aggressive fee structure may work just fine. But I’m nervous that they will start to ding the brand over time by leaning a little too heavily on service fees. Especially with hotels on the back foot and willing to work with pricing to stabilize their markets, Airbnb may find a more difficult competitive position in coming years.
A lot of people have said Airbnb’s gains in 2021 were just due to the pandemic. People wanted unique lodging in touristy or rural locations and Airbnb was the only operator that could quickly scale. As things return to “normal”, Airbnb’s business volumes will slide. That’s a perfectly fine bearish theory, however, I’m not sold on it. A lot of business travel has gone away for an extended period — if not permanently — and companies seem much more open to permanent remote work. Airbnb may not keep all of its pandemic-induced market share gains, but I wouldn’t count on the old pre-Covid model returning either.
All that to say that Airbnb may be temporarily overearning and overproducing compared to the baseline. But I don’t see 2019 as the right starting point either. The economic shifts of the last two years have, I’d argue, permanently benefitted Airbnb and harmed hotels to at least a moderate degree. The risk, however, may be in Airbnb trying to monetize this advantage too aggressively and give an opening to cheaper competitors.
Airbnb’s Valuation & Key Metrics
The main sticking point with ABNB stock now is its valuation. Since the share price hasn’t dropped even amid the tech sell-off, shares remain rather ambitiously priced:
Analysts see the company earning $1.91 per share this year, with that rising to $3.21 per share over the next two years. That’d be a 63 P/E on this year’s earnings, and 38x earnings on 2024’s results. That’s not particularly cheap.
It’s worth thinking about these estimates a bit more though. The company earned $1.22 per share in its Sept. 2021 quarter alone, and it lost just 3 cents in the seasonally weak Q1 whereas analysts had projected it to lose far more than that. There’s a lot of variability in Airbnb’s earnings and if Q1 is any guide, the company might be able to top expectations.
On the other hand, many people (or bears, at least) are expecting the travel industry to start to shift back toward pre-pandemic conditions. If that’s the case, it might not be reasonable to model out such strong earnings growth over the next two years, respectively. Also keep in mind that those earnings estimates are based on much more muted 20% top-line revenue growth rates.
Given how much Airbnb slashed its operating expenses during the pandemic, I’m skeptical that it will keep costs sharply contained as the global economy continues to reopen. So don’t bet on more margin lift on that front. And how much more can Airbnb lift pricing and fees without customer backlash? Assuming Airbnb is still playing the long game, this is not the time to try to boost margins in my view.
There are a couple of other factors that complicate the picture. Many people took up hosting during the pandemic as a necessary source of supplemental income as primary jobs and opportunities dried up. As the labor market has swung into shortage, the need for ancillary income streams has rapidly diminished. Thus, Airbnb may see a decline in interest in hosting. Also, sharply higher fuel prices are likely to put a damper on international travel to some extent as airfares soar.
Is Airbnb Stock A Buy, Sell, Or Hold?
Am I comfortable with the valuation for Airbnb at this current price? No, I’m no quite there yet. This is a company I’d be happy to own if the price were right, but for my own funds, this isn’t a valuation I can get comfortable with. The stock is expensive based on current earnings, and there are a couple of key questions that have to be answered before we have a clearer outlook on its intermediate-term outlook. I will add, however, I’m much more tempted to buy at $120 than I was at $150 a month ago.
Regardless, I believe Airbnb is a unique company serving a distinct market opportunity. It’s different from almost all the “disruptor” companies of late; if Airbnb disappeared tomorrow, millions of people in every corner of the world would be heartbroken. You can’t say that about many of the other highly-valued tech companies that have cropped up over the past decade.
And Airbnb’s distinct culture proved itself with flying colors during the pandemic. It would have been easy to write the company’s eulogy in mid-2020. Instead, Airbnb took the blows, made the hard moves, and rapidly pivoted its business model, incredibly coming out stronger for the experience. That should give investors confidence in Airbnb’s resiliency at a time when so many other former high-flying tech companies are imploding.
All this to say that I wouldn’t dream of betting against Airbnb stock or its management team. That alone doesn’t make it necessarily a great long-term investment. But it’s a company that I’ll be watching closely, and if the valuation ever aligns with its business prospects, I’ll be happy to become a shareholder.