Description

Airbnb, Inc (Ticker: ABNB)

Summary / Intro

Over time, my preferences in investing have moved much more meaningfully toward the quality of the business, a compelling long-term “big idea”, and the “obviousness” of that “big idea” more so than valuation, situation, or any other factors. Not that valuation or compelling situations don’t matter (they do), but my order of priorities has essentially flipped over time. The basic idea from my own personal investing experience - good things happen to good companies and bad things happen to bad companies. We can’t predict what the next year will look like, let alone the next 10 years and all sorts of things happen to companies that we didn’t necessarily expect. But you are more likely to get “lucky” with good companies than with bad. 

Sorry for the soapbox speech, but I think this is an appropriate way to intro this idea (and my other submission today). I think ABNB is a fantastic company, run by really great managers, doing really great things. I don’t approach this as a “COVID recovery play”, it’s not a “special situation”, and it doesn’t trade cheap on earnings. I don’t think any of those things really matter. Relative to the quality of the business in all respects - model, management, opportunity, etc. - I think ABNB is a bargain today. 

My write-ups in the past have had a ton of meat and were very long. Too much so. I’ve taken a more distilled approach here and I’m happy to continue the discussion in the comments. 

The quick summary pitch is that ABNB is doing something revolutionary in the accommodations business. Frankly, the fact that they’ve achieved the success they have without really having to buy any web traffic - particularly given the universe they play in - is a not-so-subtle hint to that effect. The management team is incredibly thoughtful and very talented - I highly encourage anyone and everyone to listen to some of Brian Chesky’s interviews, particularly from before ABNB was public or in the pre-IPO process. In particular, I’d encourage people to listen to his philosophy of the “7 star experience” (sometimes its referred to as “11 star experience”) to get an understanding of how he approaches building his business and dealing with customers. 

The bottom line is that the brand that ABNB is building around quality of experience and trust - combined with the organic traffic they drive - is something that can be applied well beyond the current core offering. Frankly, I think that ABNB could own travel / accommodations. While that may be ambitious, I don’t think you need to go that far. As I noted, good things happen to good companies. ABNB is one of those companies. 

What They Do

ABNB is a platform / marketplace for property rental, primarily (but not exclusively) utilized for vacations. The fundamental "purpose" of ABNB’s platform is enabling anyone anywhere to "host", such that it is the Uber for sleeping arrangements. 

As ABNB has grown and evolved over time, it has spawned new “professional” hosts, as well as drawn in many existing professional property managers (e.g., boutique hotels) who prefer the more exclusive nature and whose inventory fits in well with what is on ABNB and what ABNB users are looking for (i.e., the anti-chain hotel location and experience). As ABNB continues to evolve and grow, its services and offerings have extended into long-term rentals (i.e. month+) and experiences (i.e., “things to do” or a digital concierge service, typically highly localized, such as a neighborhood tour or photoshoot, etc.). 

Core Strengths of the Business

Differentiated and exclusive inventory – 90% of listers are individuals (not pros) and >70% of nights booked have been with individual listings. While there is no formal exclusivity, the nature of these listings is such that they aren’t appearing on other major travel hubs (read: OTAs). While the OTAs will boast of how they are expanding further into “alternatives” and taking advantage of this “trend”, ABNB’s listings (which are more-or-less “pure alternatives”) still far outweigh those of the OTAs for that category, in addition to being its own destination (no pun intended) for the category (vs. being lost within thousands of “standard” accommodation listings on OTA sites). Further, the inventory ranges broadly from plain-vanilla-hotel-esque to standard apartments to private villas to treehouses and castles, whereas typical OTAs are mostly aggregating plain-vanilla hotel rooms to the extent that their alternative listings are lost in the shuffle unless specifically sought out. This provides ABNB with differentiated and more nuanced (read: more interesting) inventory that’s near-exclusive on their platform.

Nature of service organically expands travel spend – this happens in 2 ways: 1) democratization of “hospitality supply” results in more possibilities, the absence of which would’ve precluded travel previously (e.g., going to an event in another city where all the hotels are booked). In other words, ABNB provides excess capacity when there is none for existing demand; and 2) the differentiated destination options that come with democratization of supply (e.g., villages or remote areas with no hospitality options period) makes previously difficult or impossible trips/experiences now possible. In other words, it creates demand that wasn’t previously there. Both of these factors expand travel spend globally, but basically exclusively via ABNB.

Durable, network-effected moat – the nature of ABNB’s business requires global scale as a starting point, not as an eventual goal, because while hosts can be scaled regionally, guests cannot (they come from everywhere). This is very difficult to recreate by itself and certainly when contending with 1) Onerous regulatory landscape that’s a city to city issue; 2) ABNB’s existing inventory of reviews, ratings, certifications, badges, etc. that increase trust and likelihood of positive consumer experience; and 3) ABNB’s existing traffic, which is almost entirely organic/unpaid and doesn’t rely upon (nor a factor of) paid SEO or advertising (i.e., throwing money at the problem doesn’t solve it, especially when ABNB isn’t throwing money at it themselves and doesn’t have to in order to maintain). 

This last point may even deserve its own section. If you follow the world of the OTAs, the great equalizer is that everyone in the space is incredibly dependent on buying traffic. It’s the biggest expense of all the OTAs. How efficiently traffic is acquired more-or-less makes or breaks the OTA model. While the ultimate goal / holy grail of the OTA world is to drive more direct traffic and bypass the Google toll (mobile apps being a key part of this), even BKNG - the Big Kahuna of OTAs - is still pretty far away from achieving this in any meaningful way. ABNB’s tremendous organic traffic, and thus meaningfully lower traffic acquisition costs, is hard to overstate as a meaningful competitive differentiator vs. anyone else in the travel world, period. 

How they make money

Host fees – typically ~3% of booking subtotal (nightly rate + other host-added costs, e.g., cleaning or extra guest surcharge); meaningfully higher for pros (14-16%) and experiences (20%). It should be noted, this is a major difference vs. the OTAs, who push most/all the fees to the host and nothing to the guest. Some might say that’s a “feature” of the OTA model (i.e., its “free to use” for the consumer). I view it as a bug - the OTA service is so commoditized that any individual provider can’t charge consumers because of how little incremental value they provide. ABNB is able to charge guests more than hosts precisely because of how much value they provide to the consumer looking for a great travel experience.

Guest fees – never more than 14% of booking subtotal; typically in the HSD/LDD range; guest fees don’t get charged for experiences or bookings with pros.

Margin structure - somewhat worse than “typical” internet or marketplace, with GM% in the mid-70s and a 4th opex category (operations and support) in addition to typical (R&D, S&M, G&A)

ABNB’s “take rate” is in the 12-13% range and has been rising. This is somewhere in between EXPE and BKNG.

Key Competitors

Global OTAs - BKNG, EXPE, etc.

Hospitality chains - H, HLT, MAR, etc.

ABNB alternatives / copycats - US-based: Vrbo (EXPE), Flipkey and Housetrip (TRIP), Vacasa, One Fine Stay, Kid & Coe; APAC-based: Agoda (BKNG), Bookabach and Stayz (EXPE); Europe-based: Casamundo, Halldis, Holiday Lettings and Niumba (TRIP), Wimdu

Key Management

Co-founder and CEO Brian Chesky – The main man and the leading force at the company. Investing in ABNB is very much about investing in him. Very likeable and compelling figure and thinker – not a typical silicon valley guy, very down-to-earth and mission-driven and very focused on thoughtfulness and design (he started his career in industrial design for a few years before starting ABNB). Not taking a salary or bonus as CEO – sole compensation is an RSU grant (12M shares) that vest based on TSR hurdles over a 10 year period. Owns just above 15% of the company (sold <1% of his position in the IPO, so still owns just above 15% post-IPO). 

Co-founder Joseph Gebbia – Was with Chesky every step of the way and is intimately involved, but Chesky is the “main” guy. Gebbia is not technically an officer – he chairs Samara, which is ABNB’s in-house design and innovation studio (so I guess he is something of a chief product officer or consultant on such matters?), as well as Airbnb.org (so he runs the charitable arm). The company is just as much his baby as it is Chesky’s, so I’d be concerned if he wasn’t there, but Chesky is running the show. Gebbia does receive a salary and bonus ($400K and 60% of base salary), but that’s been the same for a while. Can’t imagine it means much to him at this point. Owns 14% of the company (selling same amount as Chesky in the IPO).

Co-founder and Chief Strategy Officer Nathan Blecharczyk – Technically, he was brought in by Chesky and Gebbia, but that was super early days and was the tech guy behind everything (Chesky and Gebbia are industrial designers, not developers). Legitimately a co-founder and is also spoken of by Chesky as with him every step of the way, along with Gebbia. Runs strategy and is chairman of Airbnb China. Seems more involved than Gebbia at this point, but also seems like both of them are doing more high-level strategy stuff than day-to-day like Chesky at this point. Like Gebbia, gets the same salary/bonus, which is unchanged from previous years and, like Gebbia, also owns 14% and is selling the same amount of stock as Chesky and Gebbia in the IPO. 

CFO Dave Stephenson – he was an “IPO hire” in 2019. Was previously at AMZN (for 17 years) as CFO of their global consumer organization. He’s a mercenary in my mind – not necessarily in a bad way, but he’s just there, he’s not who I’m focused on. Same goes for other C-levels – all recent hires that look like accomplished execs for someone going IPO.

Valuation / Outlook

Lots of room on revenue - There is >$1T (could be as high as $3-4T) in global travel expenditures and ABNB’s current GBV is ~1% of that. Even “traditional” OTAs are single-digit % of that, so there is a lot out there to go after. Further, ABNB is still largely about accommodations, with only a small toehold in experiences and nothing going on in transport or other property services (long-term rentals, professional services, etc.). ABNB’s GBV could be 10x what it is today and they’d still be a small portion of global travel expenditures. Ultimately, as noted above, the “big idea” is that they share in the same wallet share as the OTAs - certainly taking some of that share - while also unlocking wallet share the OTAs aren’t touching right now, and almost exclusively at that. 

Margins could go meaningfully higher - ABNB usually generates cash, but they’re still running at “sub-scale” margins as the invest to continue growing into their massive opportunity. Longer-term, ABNB’s margin structure should at the very least be similar to OTAs if adjusting for the O&S expense line, so they should probably achieve >20% EBITDA% at scale. Frankly, they should be able to squeeze out way more than that given the huge difference in traffic acquisition costs probably more than offsets the O&S line at scale. 

Valuation is reasonable - Currently trading at 22x 2021 revs, but that’s a “fake” number in my view, given COVID. They did $4.8B in rev in 2019 so 2022 consensus is probably closer to a real number, which implies ~16x. Regardless, quite frankly, I’m not looking at ABNB on a 2-year timeline, but rather on much longer than that.  Globally, the long-term opportunity can sustain ABNB’s typical 30-40% growth levels for a decade-plus. But, you don’t need to even look that far out - 22x or 16x is quite reasonable for multiple years of revenue compounding at >30% revenue. This is especially so as margins should begin to more meaningfully scale.

Catalyst

Continue taking share of global travel spend and compound rev at >30% per annum

Scale margins

Enter adjacent travel / accomodations verticals