Should I Invest in Airbnb?

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:

1. Investors could be overestimating the degree to which remote work stands to buoy long-term demand, while discounting competitive and regulatory threats in Airbnb’s core alternative accommodation business.
2. The market may expect improved profits as Airbnb leverages an expanded sales base, with operating margins averaging between the low 20%s and low 30%s over the next 10 years. We view this as unlikely (with our forecast calling for 14% margins), as we suspect increased investments will be required to support its network advantage amid an intensifying competitive backdrop.

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.

The Keys to Airbnb’s Long-Term Network Advantage

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:

• alternative accommodations;
• experiences;
• traditional hotels;
• competitive threats;
• long-term coronavirus pandemic impact;
• and environmental, social, and governance factors.

Of these six factors, we believe three are key to judging Airbnb’s network advantage and evaluating threats:

• Alternative Accommodations: Airbnb’s network advantage will continue to be driven by its communal culture and unique lodging supply. This will allow the company to maintain its leading presence in the roughly $150 billion alternative accommodation booking market, buoying its competitive position, despite intense competition and regulatory risk.
• Experiences: We believe Airbnb’s unique communal culture will allow it to strongly participate in the experiences booking industry, which will support its network moat.
• Traditional Hotels: We maintain Airbnb won’t compete in this space, which only stands to become a threat to its network advantage if the company is pushed to enter the vertical owing to waning performance in its core alternative accommodation business.

Airbnb Recovering After COVID-19--but Not Enough to Justify the Price

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:

• We don’t subscribe to investor expectations that alternative accommodation demand now stands to incrementally cannibalize traditional hotel demand. We see evidence that hotel demand is resilient, and increased demand in alternative accommodations is not coming at hotels’ expense. While hotels may have been viewed as less desirable during the height of the pandemic, we’re seeing evidence that with vaccinations on the rise, people are more ready than ever to get back to hotels in mass travel destinations. Gaming operators like MGM (MGM) and hoteliers like Hilton (HLT) are reporting strong hotel occupancy rates for 2021.
• We don’t believe remote working will materially drive more long-term demand for Airbnb. As we’ve previously discussed, past wars and political upheavals haven’t materially affected our working conditions in the long term. Plus, when you consider our estimate that only 40% of occupations are eligible to work from home, roughly half of those companies will offer employees the option, and then only a portion of that population will actually choose to do so, the number of people that will end up permanently working remotely is small.
• We don’t think the pandemic accelerated the shift of alternative accommodation bookings online. Most of the vertical’s bookings have been occurring online since 2018, before the pandemic, reaching a mid-50%s level in 2019. And we expect alternative accommodation online penetration to continue to expand, reaching about 80% in 2025.

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.

Market Optimism About Operating Margins is Inflated

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.