Should I Invest in Airbnb?
The market’s optimistic valuation for Airbnb is tough to accommodate.
Although Airbnb (ABNB) shares have tumbled roughly 30% since mid-March (versus an 9% increase in the Morningstar US Market Total Return Index), the current price still appears elevated, at a 70% premium to our intrinsic valuation. Our fair value estimate for Airbnb currently sits at $84, compared with the average sell-side target price of $171.
We believe two main factors are driving the market’s overvaluation:
For these reasons, we don’t recommend investors put their money in Airbnb now. Rather, for a solid and undervalued stock in the travel sector, we suggest Sabre (SABR) which carries a narrow Morningstar Economic Moat Rating, and currently trades at a 20% discount to our $17.10 fair value estimate.
We have long believed that Airbnb and the online travel industry are competitively advantaged by way of a network-driven moat. We see six key and roughly equal factors influencing online travel network moats:
Of these six factors, we believe three are key to judging Airbnb’s network advantage and evaluating threats:
Airbnb’s current share price incorporates investor expectations that the company’s revenue growth will average between the high 20%s and low 30%s over the next 10 years, versus the 23% forecast by Morningstar and consensus. More specifically, if we were to merely adjust our sales projections to reach the current $145 per-share price, one would need to believe Airbnb’s revenue growth would average around 31% annually during 2021-30. And even if one also began pricing in upside to our operating margin forecast, we still believe Airbnb sales would need to lift about high-20% on average over the next 10 years.
We see this distortion as driven by the market’s view that the pandemic has positively altered structural demand for Airbnb and the broader alternative accommodation industry, which we think is unfounded.
There are three reasons we believe this:
Even if our view that that alternative accommodation demand has not been altered proves salient, we do think the vertical stands to face intensifying competition, thereby constraining the potential for outsize sales growth over a longer horizon. We also think regulation creates an uncertain future: Five of Airbnb’s top-10 city listing markets have undergone or are looking to undergo tighter restrictions.
We believe that robust operating margin improvement is priced into an Airbnb share price of $145, and we think this discounts the expense that will be required to service and build its network in an intense competitive landscape.
Our Airbnb operating margin forecast already assumes historic expansion of about 22 percentage points for 2019-2024 and 27.5 percentage points for 2021-26.
We see credence in Airbnb’s ability to lower its operating expenses at a faster rate as it is poised to leverage the strong global awareness built in the alternative accommodation industry over a multiyear horizon, supporting its network advantage. In this vein, we think Airbnb can leverage its marketing expenses as a percentage of revenue between 13 and 14 percentage points versus 2019. But we think consensus is even more optimistic on this number, calling for the line item to reach 17.7% of revenue in 2030, versus our 21.2% estimate.
We also expect Airbnb to approach its long-term goal of 24 percentage points of combined variable and fixed-cost leverage compared with 2019. We expect Airbnb to operate more frugally as a publicly traded company, aided by permanently retaining lower levels of labor after cuts in 2020.
Another area of long-term cost efficiency is in Airbnb’s operational and support expenses: Although we expect these costs in alternative accommodations to be structurally higher than traditional hotels, we still believe Airbnb can leverage this line item toward 11% of sales by 2030. The company will automate its customer service call centers over the next few years, and more-defined regulations will result in Airbnb having to spend incrementally less to make sure hosts and guests are using the platform appropriately.
Finally, we model Airbnb’s product technology expense to decline to 15%-16% of sales by 2030, compared with 20% in 2019. We think this view is supported by Airbnb’s announcement that it is launching its most comprehensive platform refresh ever, which will include investments to support host registration and retention, and improve the user booking experience.
Dan Wasiolek does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.