Airbnb Inc.

Summary

Airbnb is a company in the process of building its leading alternative accommodations booking service into a platform that enables vacationers, property owners, experience providers and, importantly, a mobile workforce through a marketplace of services that create an unprecedented degree of fungibility in housing. Beyond simply providing an alternative to hotels for a vacationing family, Airbnb allows a property owner in one city to generate revenue to secure housing in another city. To the extent that a more mobile workforce will be a major feature of post-pandemic society, Airbnb will be a critical part of the ecosystem that enables it. Goldman Sachs sees this, and the platform optionality it creates, along with opportunities in travel and experiences, as one of the most significant early-stage growth propositions in the Internet sector.

While near-term pandemic related headwinds are likely to continue to weigh on financial performance, Airbnb’s share gains relative to others in the online travel space and the lodging space in general (Exhibit 16 - Exhibit 17) reflect the strength of its brand, with ~90% of traffic coming directly to the site, and the value of the marketplace model’s flexibility. With management having significantly reduced costs in the early days of the pandemic, aligning the cost structure around the core alternative accommodations business, the economics of the model at scale are among the most favourable that Goldman Sachs sees in the online travel space. That said, at ~17x ‘22 GSe Sales with a 3yr CAGR of 33% versus comps at 5x on 27% growth Goldman Sachs believes much of this outlook is priced into shares of ABNB already and will look for better entry points.

PM Summary

Airbnb is a company in the process of building its leading alternative accommodations booking service into a platform that enables vacationers, property owners, experience providers and, importantly, a mobile workforce through a marketplace of services that create an unprecedented degree of fungibility in housing. Beyond simply providing an alternative to hotels for a vacationing family, Airbnb allows a property owner in one city to generate revenue to secure housing in another city. To the extent that a more mobile workforce will be a major feature of post-pandemic society, Airbnb will be a critical part of the ecosystem that enables it. We see this, and the platform optionality it creates, along with opportunities in travel and experiences, as one of the most significant early-stage growth propositions in the Internet sector.

While near-term pandemic related headwinds are likely to continue to weigh on financial performance, Airbnb’s share gains relative to others in the online travel space and the lodging space in general (Exhibit 16 - Exhibit 17) reflect the strength of its brand, with ~90% of traffic coming directly to the site, and the value of the marketplace model’s flexibility. With management having significantly reduced costs in the early days of the pandemic, aligning the cost structure around the core alternative accommodations business, the economics of the model at scale are among the most favorable that we see in the online travel space. That said, at ~17x ‘22 GSe Sales with a 3yr CAGR of 33% versus comps at 5x on 27% growth we believe much of this outlook is priced into shares of ABNB already and will look for better entry points.

Key investment questions and topics

What’s the addressable market for Airbnb?

There are several components to the market that Airbnb addresses: lodging, experiences, short and long-term housing, host and traveler services, all of which are evolving and in some cases challenging to define. Prior to the pandemic, we estimate the addressable market for travel bookings was nearly $1.5tn annually with lodging making up ~40% of that total. The company sees the addressable market for experiences as $300bn, but growing to $1.4tn over the next 10+ years. While the size of the opportunity created by a more mobile workforce and the fungibility of real estate that Airbnb offers is difficult to quantify at this point, we believe its size could come to outweigh Airbnb’s current core opportunity over time. Regardless, with ~$23bn in bookings in 2020, we believe Airbnb’s current penetration into its addressable market is at most low single-digit percentage points.

What is the impact of the COVID pandemic and expected recovery?

While at its peak the pandemic drove booking declines of +90% among traditional the online travel agents, Airbnb saw bookings decline “only” 67% in 2Q (Exhibit 11). More importantly, the flexibility of the marketplace model allowed Airbnb to adapt to changes in demand and by 3Q bookings declined only 17% y/y, while the OTAs (Booking, Expedia) still experienced nearly 60% declines on average. This came as Airbnb became not only a place to book alternative accommodations viewed as safer than hotels, but also a place to book housing for months as people left cities for less dense alternatives.

While the resurgence of lockdowns has had a negative impact on the leisure travel component of the business, as travel activity begins to increase we expect that the broader selection of accommodation types and locations offered by Airbnb will continue to drive travelers to the platform. For context, our expected bookings recovery has Airbnb’s 2021 GBV returning to 92% of 2019 levels, compared with ~55% at the OTA’s, as people continue to choose short-distance travels, safer alternatives to hotels, and long-term stays amid the pandemic. Beyond the pandemic, we believe the consumer adoption that Airbnb is seeing currently will lead to ongoing growth and engagement as travelers choose to take advantage of the platform’s broad offerings and a workforce / student population with more flexibility leverages Airbnb to enable that lifestyle.

Can Airbnb expand its take rate?

Though the 3% Airbnb charges hosts on average is considerably lower than the roughly 15% OTA’s charge hotels, Airbnb charges travelers a booking fee (Exhibit 2) that results in a total take rate of ~13%, with a 12.7% bookings margin (net revenue as % of gross booking value) reported in 2019. While we don’t expect Airbnb will look to raise take rates on a standalone basis, we do expect the company will continue to develop value-add services for travelers and hosts that will add to the company’s revenue growth relative to bookings. We expect the company will add at least 100bps to booking margins over the next 3-5 years by offering financing, home upkeep, concierge, and other services.

What are the competitive risks?

As with the rest of the travel space, we see Google as the biggest competitive risk to Airbnb. While we don’t see Google getting into the alternative accommodations space directly, at least not in the near/medium term, its position at the top of the funnel for so many travelers does represent the biggest risk we see to Airbnb’s +90% organic traffic as the company looks to grow both its supply of hosts and travelers. Beyond Google, Expedia’s Vrbo and Booking.com’s supply of alternative accommodations represent some competitive threat, as do other regional competitors and potential new entrants. That said, we believe that the challenged financial position of the OTAs and the traffic challenges they currently face limit their ability to effectively compete.

How much of a risk are regulatory issues?

Major cities around the world have viewed Airbnb as violating local ordinances governing rent control, zoning, public safety, and taxation, among others. The company has negotiated solutions with many of these jurisdictions that in many cases involved taking down large numbers of listed properties, restricting certain types of stays, and collecting/remitting lodging and other taxes. Despite these efforts, Airbnb still has a number of these issues outstanding, though we believe the company will be able to address these in largely the same way. Uniquely, the company is the only US internet company with a significant presence in China. This creates risks both in terms of the company’s ability to operate in the country and in the data that must be communicated.

Valuation & key risks

Our $143 price target (12-month) is based on 16x 2022E EV/Sales, or approximately 3x the OTA average of 5x, in line with Airbnb’s ~3x faster growth rate over the ’19-’24E period, attempting to normalize for the distortion of the pandemic. In addition, our 16x 2022E EV/Sales implies nearly 50x Discounted 2028E EBITDA (Exhibit 23) on a 55% 3yr CAGR (2022-’25E) which is roughly in-line with historical growth-adjusted EBITDA valuation across the Internet sector where EV/EBITDA/growth has trended around 0.8-0.9x. (vs. 0.85x implied for ABNB).

Key risks: (+) User growth, experiences opportunity, stronger travel recovery; (-) Regulation, competition, rising customer acquisition costs, and weaker travel recovery.

Company overview

Airbnb operates a global alternative accommodation (short-term stay, vacation rental) marketplace, allowing hosts to offer stays and experiences to guests through the company’s platform across the web and mobile devices. Listings on the platform include private rooms, entire homes, luxury villas, treehouses, igloos, and a wide variety of experiences, in roughly 100k cities across 220+ countries/regions. Airbnb generates revenue through service fees, net of incentives and refunds, charged to both hosts and guests that are recognized upon check-in. Gross Bookings Value (GBV) represents the total dollar value of all bookings made on the platform in a period. GBV is inclusive of host earnings, service fees, cleaning fees, and taxes, net of cancellations and alterations.

In 2019, the geographic split of nights/experiences booked based on listing region was 43% EMEA, 29% North America, 18% APAC, and 10% LatAm. With differences in average daily rate across regions, this split of nights/experiences resulted in a GBV mix of 38% EMEA, 42% NA, 13% APAC, and 7% LatAM in 2019.

Total Nights & Experiences grew 31% y/y in 2019 to 327mn, driving GBV to $38bn (+29% y/y) led by healthy growth across regions. The majority of the platform’s bookings have come from nights. In 2019, revenue grew 32% to reach $4.8bn representing a bookings margin of 12.7% (vs. 12.4% in 2018). Adj. EBITDA losses widened to $253mn with margins (as % of GBV) deteriorating by 130 bps to -0.7% on investments in growth initiatives and technical infrastructure.

Over the longer-term, the company expects EBITDA margins of greater than 30% (as % of sales) on greater scale and operational efficiencies.

Growth

Gross Booking Value growth is primarily a function of Nights / Experiences bookings growth and gross daily rates.

1. Nights / Experiences growth. Owing to declines in bookings in 9M20 driven by COVID-19, we expect 2020 Nights / Experiences to decline by 44% and grow at a CAGR of 40% between FY20-23E benefiting from the following factors:
   1. Listings growth. With the platform unlocking the potential for hosts to earn supplemental income by listing rooms/homes, the number of active listings increased 30% in 2019 to 5.7mn. By making the onboarding process seamless and empowering hosts with information and tools to manage their listings, Airbnb continues to see strong growth in the number of hosts on the platform and high retention among hosts. In 2019, the number of hosts grew 21% while 84% of revenue came from stays with existing hosts (at least one completed guest check-in before Dec-2018). As of 9M20, active listings have stayed stable at 5.6mn with deterioration in host revenue retention owing to bookings decline.
   2. Guests growth. Through the platform, guests look to experience unique stays that were difficult to access before Airbnb, experience places the way locals do, live in spaces that feels like home, and are competitively priced vs. hotels. The company has seen strong guest growth, reaching 54mn in 2019 (+30% y/y vs. +40% in 2018). The company enjoys strong guest loyalty owing to its large global network, unique experiences offered, and product innovation. 69% of the total revenue last year came from stays by repeat guests with at least one prior booking. For the 9M20 period, the platform has still seen 14mn new active bookers with deterioration in guest revenue retention owing to bookings decline.
   3. Global coverage. Guests get to choose authentic experiences (including cabins, farms, boats, castles, yurts, igloos, treehouses, lighthouses, private islands) from a wide coverage of listings spanning roughly 100k cities across 220+ countries and regions, many of which are not served by hotels. As per a report commissioned by Airbnb in 2018, at least 2/3rds of guest arrivals took place outside traditional tourist districts even in popular destinations. Expanding further and primarily increasing depth in earlier stage geographies will be a tailwind for growth long-term.
   4. Opportunities in length of stay. Long-term stay was one of the fastest growing categories for the company in 2019. During the 9M20 period, while short-term stay bookings declined ~81% y/y in April, long-term stay declined only 13% in this month and saw y/y growth between May and September 2020. 24% of the total nights booked on the platform were long-term stays (vs. 14% in 2019 and 13% in 2018). Beyond the current pandemic, we see opportunities for the lines between work and travel to blur further as work-from-home enables longer-term stays.
2. Gross daily rate. Gross daily rate rose 16% y/y in 3Q20 to $130 owing to faster recovery in North America and mix-shift towards entire home listings in non-urban destinations which have higher daily rates. We expect daily rates to be at ~$124 for FY20 & 2021 and decline until 2023 as pricing trends normalize post-COVID and lower rate regions (e.g., LatAm) increase within the overall mix.

Profitability

Adj. EBITDA losses widened to $253mn in 2019 with margins deteriorating by ~130bps to -0.7% (as % of GBV) on investments in growth initiatives and technical infrastructure. Near-term we expected in investments in product to drive some deleverage as the company continues to invest in its platform and product. Over the longer-term, the company expects EBITDA margins of greater than 30% on scale benefits to gross margin and leverage on sales & marketing.

Industry overview

Addressable Market

As per the company, the serviceable addressable market (SAM) amounts to $1.5Tn, comprised of a short-term stays market of $1.2Tn (based on the company’s estimate of 6.5bn paid overnight trips) and a ~$300bn market for Experiences (based on global tourist spend on attractions & experiences). Expanding this over the next 10+ years to incorporate growth in population, higher trip frequency, adding longer-term stays, and expanding experience opportunities equates to a TAM of ~$3.4Tn (Short-term stays: $1.8Tn; Experiences: $1.4Tn, Long-term stays: $200bn). Based on Gross Bookings of $37.9bn in 2019, the company’s SAM penetration reached ~2.5%.

Competition

Apart from hotels which have been promoting direct channels and focusing on loyalty programs, Airbnb competes primarily with Booking.com and Expedia in the travel accommodation space. As the company has scaled up its operations over the past few years, the number of nights & experiences booked on the platform has reached the levels of Expedia’s (Exhibit 9) in recent times.

In terms of booking margin, the delta with Booking.com (Exhibit 10) reflects the scope for uptick in host fees (which currently account for ~3% of overall booking value). However, instead of aggressively increasing host fees, we believe the company is more likely to focus on generating additional revenue by offering ancillary services such as financing, home upkeep, concierge, and other services, in order to support host growth and retention.

Airbnb’s gross bookings grew nearly 5x of Booking/Expedia’s between 2Q-4Q19 (Exhibit 11) as the latter faced the twin challenges of Google’s meta search platform and hotel supplier’s direct efforts. With the onset of the pandemic in 2020, Airbnb’s gross bookings have recorded sharp declines, although still lower than the ones recorded by Booking and Expedia. As lockdown restrictions eased across geographies and travel recovered during the summer months of 3Q20, gross bookings at Airbnb declined only by 17%, in sharp contrast to the 45%+ declines experienced by the other OTAs. We attribute this out-performance to the differentiated inventory offered by Airbnb which under pandemic protocols came to be viewed a safer option to hotels and as an alternative to long-term rentals for people who left cities for less dense alternatives. Even with the OTAs trying to grow their alternative accommodation business, we believe their stretched balance sheets (2020E net debt of $5.2bn and $2.0bn ex-investments for Expedia & Booking.com, respectively) are likely to limit their ability to invest in this space.

Traffic

Comparing traffic across Airbnb and OTAs such as Booking.com and Expedia highlights Airbnb’s stronger growth in traffic and engagement over the last one year. In-line with the gross bookings data, Airbnb saw higher traffic growth than its peers in the pre-COVID months and recorded fewer declines during 2Q20 when the travel industry was the worst affected. While travel activity recovered to some extent in 3Q, trends have softened in 4Q as per reported data from OTAs and comScore (Exhibit 12). However, in the scenario of a longer-term recovery in the travel space going forward, we believe, Airbnb’s differentiated inventory and solid brand positions it better than its peers.

Investment framework

Within our investment framework, we look for companies exposed to the strongest growth drivers, high degrees of operating leverage, management focus on disruptive innovation within large underlying industries, and, in a sector that offers few of them, real competitive barriers or sustainable advantages in technology, scale, and/or business model. In particular, we look for strong network effects, a high ratio of revenue to customer acquisition costs, and strategies to exploit the growth in internet as a whole.

Upon determining attractive and sustainable business models, we layer on valuation to determine our best investment ideas. We look for attractive valuations relative to the growth rates and returns that we believe companies can sustain. Those are the companies we believe investors will be best served to own, particularly when current growth multiples undervalue those opportunities in our framework.

Based on our growth, leverage, innovation, and competition (GLIC) framework analysis and the stock’s current valuation, we believe Airbnb (ABNB) warrants a Neutral rating.

Growth

Pre-pandemic, Airbnb grew at a significantly faster rate than its peers, albeit from a smaller base and recorded smaller declines during 2Q20 which was the worst affected quarter for all travel companies (Exhibit 16 - Exhibit 17). During this period, long-term stays was one of the growth drivers for the company with positive growth y/y every month between May–September amid the work-from-home option followed by people across the globe. With this flexibility likely continuing beyond the current pandemic, we see further growth opportunities being driven by Airbnb’s long-term stay offering as well as the liquidity it creates for property owners.

Additionally, with any recovery in travel, we expect the company to be better positioned for customers seeking unique experiences at competitive rates versus hotels. While Airbnb’s Gross Booking Value was ~30% of the average GBV of Booking.com and Expedia in 2018, we expect this share to go to 60% by FY24 (Exhibit 16).

Leverage

The company acquires customers through both paid and direct channels, with 77% of traffic coming unpaid or direct in 2019 vs. 91% unpaid or direct in 9M20. Airbnb’s unique supply (relative to hotel-heavy peers) and strong brand, in our view, enable the company to better navigate many of the high-cost paid channels (e.g., Google) its online travel peers (Booking Holdings, Expedia, etc.) are more reliant on. In addition, nearly 70% of revenue was generated by repeat guests in 2019 (vs. ~50% in 2015), further driving customer acquisition efficiencies. On other side of its marketplace, existing hosts and direct host relationships drive supply efficiency, too. In 2019, more than 80% of revenue came from existing hosts while ~80% of hosts that joined the platform in 2019 came directly. We believe these factors have enabled the company to gain higher sales & marketing spend efficiencies as compared to its other OTAs (Exhibit 18). We measure leverage as incremental margin, which is calculated as (2023 adjusted EBITDA – 2019 adjusted EBITDA) / (2023 sales – 2019 sales), using GS estimates. Airbnb ranks 8th in our coverage group on leverage.

Innovation

Enabling people to trust strangers and share/live in their accommodations is a key innovation introduced by the company in the travel space. This has been facilitated by seamless communication between hosts & guests prior to booking, secure global online payments for booking purposes, setting up cleanliness standards, background checks in specific countries and sharing reviews of the place on the platform post-stay. During 2019, 85% of the overall stays had at least one review from the host or a guest. We use a 50%/50% blend of TTM product development expense and TTM product development expense as a percentage of gross profit to quantify the level of innovation at a company. Airbnb ranks 7th on innovation in our coverage owing to its high absolute dollar R&D spend and as % of gross profit.

Competitive advantage

We measure competitive advantage using a 50%/50% blend of (i) a qualitative (1-4) rank where 4 represents high levels of competitive advantage and (ii) NTM market share for the respective addressable markets. Airbnb ranks 12th in our coverage in terms of competitive advantage. The company’s competitive moat lies in its differentiated accommodation offerings spanning private rooms, entire houses, luxury villas, treehouses, igloos, cabins, castles boats and a wide variety of experiences, in roughly 100k cities across 220+ countries/regions. Customers choose the platform as they get to live in unique places that may not be accessible otherwise and also get to experience newer markets the way locals do. While the major OTAs are focusing on growing their alternative accommodation business, search results for apartments on these platforms are often skewed towards smaller, independent hotels. From a supply perspective, hosts’ preference towards Airbnb as compared to traditional OTAs is more likely to stem from greater customer support availability and lack of channel conflicts at the former. Additionally, we believe Airbnb’s strong brand drives lower customer acquisition costs, greater customer loyalty which could create upside for its growth flywheel over time.

Financial model

We believe Airbnb’s growth will be driven mostly by nights/experiences growth (40% CAGR between 2020-23) as the opportunity expands beyond travel to longer-term stays. We expect GBV/booking to decline to $112 by 2024 (vs. our expectation of $124 in 2020) as the mix-shift impact from booking of entire home listings moderates and pricing trends normalize post-COVID with lower rate regions (e.g., LatAm) increasing within the overall mix.

We expect Adj EBITDA profitability beginning in H2 2021 vs. -5.3% (-0.7% of Bookings) in 2019 driven by strong top-line performance alongside scale benefits delivering operating leverage primarily within sales & marketing as well as efficiencies in gross margin.

We forecast adjusted EBITDA margins expanding to 15.3% of revenue (2.1% of Bookings) by 2023 though we anticipate the company will continue to invest in the business to drive growth, putting the company’s longer term target margins of greater than 30% of sales well beyond the window we forecast.

Seasonality. Seasonality is reflected in the company’s financial performance with bookings building during 1H before trailing off in 2H, but due to revenue being recognized at check-in, Q3 historically represents the strongest quarter for revenue contribution. Particularly in North America and Europe where the company has significant exposure. Higher unearned fees (from service fees collected at time of bookings) in the first two quarters contributes to higher FCF during this period.

Valuation & key risks

Our $143 price target (12-month) is based on 16x 2022E EV/Sales, or approximately 3x the OTA average of 5x, in line with Airbnb’s 3x faster growth rate that we estimate over the ’19-’24E period attempting to normalize for the distortion of the pandemic. In addition, our 16x 2022E EV/Sales implies nearly 50x Discounted 2028E EBITDA (Exhibit 23) on a 55% 3yr CAGR (2022-’25E) which is roughly in-line with historical growth-adjusted EBITDA valuation across the Internet sector where EV/EBITDA/growth has trended around 0.8-0.9x.

Key risks

(+) Opportunity from Experiences. While experiences constitute an insignificant portion of the company’s overall business at present, any meaningful share gains over the next few years could prove an upside risk to our estimates. (+) User growth. There would be upside risk to our estimates in the event Airbnb is able to drive faster user growth globally by benefiting from secular tailwinds and accelerating share gains from the traditional hotel category. (+/-) Uncertainty around travel recovery. Most of the leverage in the model centers around expectations of recovery in the travel industry in 2021 and beyond. We estimate Gross Bookings in 2021 to be ~92% of 2019 levels. Any multiple waves of COVID, fears over new strain and potential tighter lockdown restrictions next year could prove our numbers to be optimistic. On the other hand, if the cadence of a recovery proves more robust than our expectations and/or Airbnb gains more share during that period, our estimates could prove conservative. (-) Regulation. Increased scrutiny by regulatory bodies over the short-term rental and home sharing business poses a significant risk to the company’s business model. Rules that restrict/ban hosts from short-term rentals, impose caps on number of days host can share their homes, require hosts to seek permission to offer short-term rentals and require hosts to register with the municipality/city increase the friction for hosts for listing their homes on the platform and thus affect the operations of the company. Regulations of these kinds coming into effect poses a downside risk to our revenue and profitability estimates. (-) Competition from OTAs/Google. In the event that OTAs get more aggressive in the alternative accommodation space or Google’s search algorithm promotes alternative accommodations, we could see a negative impact on Airbnb’s business. That said, we believe that the more challenged financial position of the OTAs is likely to limit their ability to invest in this vertical. (-) Lock-up expiration. Airbnb’s lock-up has three release windows. The first release window is the first trading day on which ABNB common stock is traded on Nasdaq. Up to ~17mm shares will be released in the first window. The second release window is the second trading day immediately following the public release of earnings for the first quarter following the most recent period for which financial statements are included in the prospectus. Up to ~28mm shares will be released in the second window. The third window is the later of (i) the opening of trading on the second trading day immediately following the public release of earnings for the second quarter following the most recent period for which financial statements are included in this prospectus and (ii) the 121st day after the date of this prospectus.

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