Septum Insights : Airbnb & Market Outlook

What do we call a two-sided platform where actors can switch sides?

Publishing investing articles on a periodic basis for mass readership is new to me. I started because I feel it is a much better way to communicate with the investor community. Investing intelligently require diligence and investment in time. It also requires looking at same information from multiple angles. What seems obvious at first may not be the real truth. The great investors look beyond the obvious and sees what average investors are not seeing. Therein lies the opportunity to make above average returns. My writing will focus on investing insights gleaned from analyzing detailed information available to me about a company. It will not focus on providing a summary of all available information about a company as I believe that can be obtained from many publicly available sources and sites.

Today I will cover a company that I believe is a phenomenal long term growth story and a platform play that is operating as a leader taking market share from competitors in a very large Total Addressable Market (TAM) globally that is measured now in Trillions of Dollars. But before that, let me cover my current take on markets and the stocks I hold in my core portfolio.

Market Outlook

With the passage of recent stimulus bill and optimism about more stimulus in future, markets do seem to operate in a bullish regime. Dark Pool indicators are bullish , Options Markets are relatively bullish in terms of calls vs puts buying and macro indicators are supportive of a continued bull market. I do expect a 5-10% Nasdaq correction at some time in near future given historical precedents but I also believe that any significant dips will get bought by the market players and corrections will be perceived as opportunities by equities investors this year.

My portfolio composition of top stocks has stayed stable over last 6 months with TDOC ( earlier LVGO) , SE ,ROKU and PINS as my top convictions. ROKU, SE, PINS has done extremely well during last 6 months while TDOC has stayed flattish after a major dip post merger with Livongo. Other major positions are SKLZ, NET, DDOG, GDRX, SHOP, PTON, PLTR. I also hold RKT, FB that have stayed flattish during this time. I have been increasing my GDRX position recently as I think the stock is still misunderstood and undervalued after the dip that happened when Amazon announced its Online Pharmacy. I also took a new position in SNOW before the recent spike. Finally I took a position in ABNB this week and looking to add further if there are dips below 140.

From DarkPool Scores standpoint that Septum generates internally , I see SNOW, GDRX, ROKU, CRWD doing well with high bull scores recently and noticed TDOC registering an increase on Friday. TDOC has consistently scored low in Dark Pool Scores and had a few days of spikes only to fall back. I am hoping we see bullishness in Dark Pool scores going forward as happened on Friday.

ABNB Stock Analysis

I share my insights on Airbnb ( ABNB) based on my due diligence on the stock. Every stock investing decision should be personal and based on one’s own risk profile and profit expectations. So insights and thoughts shared here is not investing advice.

What I really like about Airbnb (ABNB)

1. Strong Tailwinds Post Covid : Airbnb’s business  has been impacted by Covid severely. However, this is not expected to last long. Vaccinations are in progress and expected to pick up pace. Covid infection incidents rate is expected to go down after the peak period in Winter. Travel is expected to pick pace in Summer or even earlier. Airbnb is going to increasingly benefit from this tailwind coming from normalization in long distance leisure travel. Barclays estimate that $170B in typical travel bookings went unspent in FY20 due to Covid-19. There is a lot of pent up demand for leisure long distance travel that will manifest itself strongly in 2021 and 2022. So Airbnb is the antithesis of a pure Covid Stock.

2. Best Positioned to Meet Demand Spike Post Covid : This renewed demand in Travel will benefit the Hotel Industry and the OTAs (Online Travel Agencies) like Booking Holdings ( BKNG) and Expedia Group (EXPE). However hotels have a fixed capacity issue and structural disadvantages in scaling rapidly with a big spike in travel demand. There is an upper ceiling for hotel rooms available in each location. Airbnb operates as a platform model that can scale faster than hotels with increased demand as more hosts join the platform being attracted to the rising demand with higher rental prices. Any business that can scale up the available inventory fast to meet the demand spike and cater to the varied tastes of the guests by providing properties in different locations will be a huge winner in the post Covid era travel boom. Airbnb becoming a category leader in the Alternative Accommodations space is best positioned to benefit from this boom .

3. Huge Total Addressable Market (TAM) : Per Credit Suisse, total travel expenditures in 2019, were $6.3 trillion or ~7% of global Gross Domestic Product(GDP). Just like Healthcare which is a big part of GDP, travel is an equally lucrative area to invest in category leaders especially if they are gaining market share. Airbnb estimates that their serviceable addressable market ( SAM) currently is $1.5 trillion.They estimate that their total addressable market ( TAM) is $3.4 trillion. These are huge numbers and Airbnb has been a category defining leader with growing market share. I see Airbnb in early stages of taking advantage of this massive global TAM with years of growth ahead of them. Moreover the alternative accommodations market size,  where Airbnb is the undisputed leader, is itself expected to grow at a rate of 7% CAGR  in the coming years by some estimates. Needham analysts are even more bullish on the growth and expect the private alternative accommodations market to “expand 5-10x  from its current size as Airbnb democratizes the travel industry”. Thus the estimated huge TAM and its corresponding  growth coupled with increasing market share by Airbnb makes it a compelling bet in this space.

4. Strong Brand Name Drives Low User Acquisition Costs: Airbnb is not just the name of a company anymore. It is also used as a verb. “We’re Airbnb-ing in Paris” is one example given to use of Airbnb as a verb even in some english dictionaries nowadays. This is synonymous to us using the word “Google” nowadays. When the brand value becomes so strong, the brand awareness spreads organically and by word of mouth. Airbnb saves a lot of its user acquisition cost because of that. As per Wedbush Analysts : “Our consumer survey of over 1,200 potential travelers points to Airbnb as the clear #1 brand in alternative accommodations, and as such, the company that stands to gain the most from what appears to be untapped interest in this type of travel”.   As per Needham Analysts : “ABNB comes to the public markets distinguishing itself as the first major online travel property that is not overly reliant on Google for traffic.” As per Airbnb IPO prospectus, they show how effective it is for them - “Most of our guests discover Airbnb organically, with approximately 91% of all traffic to Airbnb coming through direct or unpaid channels during the nine months ended September 30, 2020.” 

5. A Platform Markets Model Better than Two-sided : Two sided Platforms consisting of buyers and sellers are great. They are asset light and once they bring in the producers (sellers) on one side and consumers (buyers) on other side, the business is sticky and very profitable. There are network effects as a community builds on top of this and additional producers and consumers are attracted to it creating a virtuous cycle. This is how Amazon or Etsy built their platform bringing in ThirdParty Sellers on one side and consumers of their products on the other side. This is how Shopee ( Sea Limited) is currently becoming a formidable platform in South East Asian Countries. I see Airbnb even better than a 2 sided platform where we not only have hosts and guests on each side, we also have them interchanging their roles and giving business to each other in opposite roles as well. Thus when Airbnb gets a new guest and he/she experiences the value of Airbnb hosting through self-experience, that guest has a good chance of being a host in future because a lot of these guests also are owners of properties that they can rent out on the platform. Needless to point out, that Airbnb benefits every time a transaction happens irrespective of who the guest or host is in the transaction. A guest acquired on the platform and then becoming a host also helps in increasing the available inventory of properties on the platform which is a key differentiator for companies in this category.

6. Provides Superior Guest Experience than Hotels : Airbnb enables guests to enjoy many benefits that are not available to them if they choose to stay in hotels. For example guests can choose to stay in local neighborhoods as part of the local community, can choose to be hosted by staying with the host during the stay , stay in a variety of unique places with Airbnb offering the broadest variety of spaces be it luxury villas or igloos or treehouses or boats or castles. Guests often feel at home with available amenities and spaces available in a home including kitchen, living room, backyard etc. Oftentimes the additional value comes with little additional cost compared to a hotel stay. As Airbnb mentions in their IPO prospectus : “Based on our survey data, a majority of guests tell us they choose Airbnb to save money while traveling, as listings on Airbnb often provide greater value through more space and amenities than options like chain hotels that typically provide only single rooms.”  Also this is what Airbnb mentions in their prospectus that shows why guests find the platform so valuable : “We have helped millions of people satisfy a fundamental human need for connection. And it is through this connection that people can experience a greater sense of belonging. This is at the root of what brought people to Airbnb and is what continues to bring people back.”  Regarding the local experience, the result of this survey of hosts by Airbnb mentioned by them is notable : “..hosts who made recommendations, 87% said that they recommend local restaurants and cafes to their guests, and 82% said they recommend businesses that are locally owned.”

7. Large Global Expansion Opportunity : Airbnb has established its presence in 200 countries globally. However, the expansion opportunity globally is still in early stages in many large countries. There is also a network effect globally as more guests and hosts with their properties from different countries  are added to the platform. The network effect exists because several guests like to travel internationally and use Airbnb to book properties in the country they wish to visit. The global expansion creates even more stickiness to the platform as many guests can only find properties they want, exclusively on Airbnb platform. Here is what Airbnb talks about regarding their global expansion - “We plan to expand our global network in the countries in which we already have a deep presence, as well as to expand into markets where our penetration is lower, such as India, China, Latin America, Southeast Asia, and tens of thousands of smaller markets and remote areas around the world.”

8. Lines Blurring between Remote Work and Remote Living : The huge trend towards Remote Work Globally that was further accelerated several fold by Covid not to return back  to old ways is undeniable. The rise of Zoom and other  remote business collaboration tools and demand for security tools that enable remote work, shows how  the world has changed forever. Companies have cancelled brick and mortar leased office spaces and adopted them to a more globally present employees. Remote work also enables work from anywhere which can be a person’s own home or working from another remote place. Thus remote work also accelerates the trends of remote living and work from anywhere. This accelerating trend will act as a big tailwind for Airbnb in the coming days as it is the very platform that enables remote living ( short term stays or long term)  and is the category leader in its space with increasing market share. Here is what Airbnb says in their IPO Prospectus : “We believe that the lines between travel and living are blurring, and the global pandemic has accelerated the ability to live anywhere. Our platform has proven adaptable to serve these new ways of traveling.”

9. Rising Housing Prices Drives Need for Extra Income Bringing New Hosts  : As housing becomes more expensive, there will be additional needs to offset the high cost of home ownership with additional supplemental income using platforms like Airbnb. This becomes even more acute during a recession when unemployment is high and mortgages need to be paid. Airbnb talk about it in their prospectus here : “And just as when Airbnb started during the Great Recession of 2008, we believe that people will continue to turn to hosting to earn extra income” or here “In a 2019 survey of hosts that we conducted, half of our hosts told us that the supplemental income they generated helped them afford to stay in their homes.”

10. Proven Technology Platform Ensuring Trust : Airbnb has invested extensively in research and development using the latest technologies to ensure a stable system that can ensure trust between the two parties using its platform to perform the needed transactions. The platform has developed and delivered what Airbnb calls “System of Trust” enabling strangers to trust one another.  Here is what Airbnb states :  “The system for trust that we have designed includes: reviews, secure messaging and account protection, risk scoring, secure payments, watchlist and background checks, cleanliness standards, fraud and scam prevention, insurance and protections, age restrictions, an urgent safety line, a 24/7 neighborhood support line, and our guest refund policy”

11. Much Ahead of Competition : The closest competition to Airbnb are the Online Travel Operators like Expedia Group,  Booking Holdings Inc and to a lesser extent TripAdvisor. Though these competitors do compete with Airbnb, the roots of their core business have been tied to the hotel industry primarily.  Airbnb has been growing 3X faster than its online peers and outpacing them for the past 3 years. Even Covid impact on Airbnb’s business was less severe compared to peers as many guests preferred to use Airbnb than to stay in hotels. Being a category defining leader in the Alternative Accommodations and Experiences place, it has a much bigger advantage than peers in acquiring users and hosts organically. Airbnb has a much broader and diverse selection of host properties that are exclusive to Airbnb and not listed on any other sites. This clearly is a big advantage over competition as guests decide which platform they need to use for booking their accommodation needs.  Research firm Technavio estimates the vacation rental industry will grow at a compound annual rate of 7% through 2024. The fact Airbnb outperformed the industry before COVID-19 -- continuously taking market share in the process -- should bode well for its future.

    Familiarity of consumers with online portals for booking vacation properties : Statista 2017 Survey

    Airbnb has been increasingly trended higher in Google Searches compared to Vrbo :  Google 5 year Trend Airbnb vs Vrbo

    Analysts like Needham have done several Property Manager checks that shows Airbnb consistently outperforming competitors Vrbo and Booking Holdings and firmly established as #1 booking channel that drives most volume for property managers in at least 2/3rd  of the cases and equal volume in remaining 1/3rd. This lead is only getting stronger and currently the response received from Property Managers has the highest strength in favor of Airbnb  compared to all past 4 year surveys by Needham.

12. Additional Revenue Stream from Experiences Marketplace : Airbnb has been able to show the true power of the platform by developing an alternate source of revenue besides accommodations by creating a marketplace for Airbnb Experiences that guests can book in advance besides accommodations. During Covid these experiences were further broadened into in-person and online set of services. This acts as an additional source of revenue not just for Airbnb but also for many of their hosts themselves who offer many of these experiences as a purchasable service to their guests. As per Airbnb in their IPO prospectus: “Airbnb Experiences allow our hosts to not only share their homes with guests, but also their skills and passions by offering authentic activities in over 1,000 cities around the world.”

13. Deep Leverage in Cost Structure : Airbnb’s Cost of Revenue primarily consists of payment processing fees ( 60% of cost of revenue) that Airbnb currently do not pass to the host. 30% of cost revenue is infrastructure hosting cost and use of third party tools and services. With improvements and optimization of tech stack, I noticed that analysts like Needham believe that Airbnb can improve cost of revenue by 500 basis points over the next 3-5 years resulting in further improvement to Gross Margins from current 83% to a target of 88%. Also as Airbnb scales further and growth in host numbers reaches maturity, there is opportunity for Airbnb to pass on some of the payment processing costs to the hosts and thus improving the Gross Margins further.  In addition to Cost of Revenue, looking at Operating Costs, leverage opportunities exist in Sales and Marketing, Operations and Product Development. Since Airbnb does not depend so much on paid user acquisition market cost for growth, they have significant leverage there. Moreover Airbnb did a complete re-platforming of their technology platform in 2019 to a service oriented architecture that added re-platforming cost to 2019 as well as 2020. Analysts expect the product development cost as a percentage of revenue to go down to below 20% by 2022.

14. Additional Revenue Opportunity from Sponsored Listings : Airbnb has a solid opportunity to generate new revenue streams. One of them is to create Sponsored listings where the hosts pay for the privilege to advertise the listings to the targeted guest audience. This is similar to sponsored ads shown by Amazon for third-party seller products and revenue from ads have become a significant component of Amazon’s revenue over time. 

Conclusion

ABNB has seen a spike in its price on day one itself post IPO. Due to Covid impact, business is expected to show significant impact in upcoming quarterly earnings results. So prices will stay volatile for some time. EV/Sales (TTM) is 24.8 and so markets seem to be pricing in some of the expected growth in the years ahead. However, ABNB tends to get bucketed with Expedia Group and Booking Holdings as they compete in the same space. Market does give it a premium currently over these competitors due to its superior performance in the past and resiliency during Covid compared to its peers. However, I believe the market is still underestimating the huge long term potential of a platform leader in such a huge TAM. Travel and Healthcare each represent some of the largest components of a nation’s GDP and the leaders disrupting and increasing share in these two areas will command a significant premium in the coming years due to the long runway of growth. Classic way of leisure travel is getting disrupted and the shift is expected to accelerate further in the coming days as more and more people start experiencing the alternative accommodation models. Moreover, as outlined above, there are several strengths in Airbnb’s model that can help them drive revenue growth and accelerate it as they execute well and add revenue streams including ad revenues , new products like they did for Online and In-person Experiences. Some of the DCF model assumptions by analysts seemed a bit conservative to me who are putting the 1 year price targets around $150-$200 depending on the analyst.  Considering the upside from all of the above factors that I discuss here in this article, my One year price target for ABNB is $220. I took a position at $142-$145 range and planning to hold long term unless the story changes. ABNB is a stock that investors are better served holding long term (3 years or more) because it is a phenomenal growth business that is taking increasing market share in a huge expanding market.