Let me start off by saying that I was very excited to see Airbnb go public, it is a product I love and I admire the company's will to keep relentlessly delivering on the customer experience front. However, seeing how the market is at the moment, I knew the IPO was going to go through the roof. For a tiny investor like me, it is hard to pick up the scraps of the institutional investors after such an opening day. The fact that investing in fixed income is worthless at this point in time has inflated the prices people are willing to pay for equities, and when the Fed raises interest rates and finally stops the music, be that in 2023 or later, people will come crashing back to Earth. That is why I appreciate the comeback of SPACs, not only for the fact that they provide a better outlook into companies and their future cash flows, but because they also democratize asset buying. I do not know if Airbnb's IPO was a pump and dump scheme and I will get the chance to buy the asset at a good price, or if it only goes up from here.
Leaving the IPO aside and talking about Airbnb itself and the travel sector, I must say the product is nothing short of spectacular. An idea so simple that anyone could understand, but that over the years has opened a whole new category in the travel & tourism sector. Working at Skyscanner as a software engineer, I do not get much say into how our own product will develop or make any statement regarding the future. But, I do not think the current internal talk about the future is very realistic. Let's face it, Google is the big elephant in the room, and I feel by the time it gets regulated it will have already wreaked havoc in the travel industry. Competing head-to-head with Google on metasearch is a losing battle ten out of ten times, and search engines and OTAs have realized that. Trying to switch from a metasearch model to a marketplace one is also a futile endeavour long term. On the other side, the hotel side, the market is highly fragmented, the top 10 groups generate 50% of the revenue, showing how hard it is to gain a major seat at the table. That is why I admire what Brian, Joe and Nathan did from a product standpoint. They offered the possibility of a new stream of income for landlords, and offered a much more connective experience for customers at the same time. They wedged a big exploitable gap in an apparently saturated and well-defined market. But best of all, their business is not dependent on search engines and has created a huge loyal two-sided marketplace, with hosts and guests.
By now, Airbnb has become a major player in the travel sector, and the hosts have evolved from individuals trying to make some money, to also include professionals who make major income from the business. The business has grown exponentially over the last few years and although growth ends up decreasing at a certain scale, I do not believe the other tail of the logistic curve is visible yet. It is not far-fetched to say their business can eventually get to $150bn GBV, compared to their $40bn right now, and get about 10% of their S-1 SAM of $1.5tn. They are catching up with big hotel groups, such as Merriott, on nights booked and they are growing on booked nights, at a 31% rate, much faster than anyone in the sector, with Booking and Expedia growing at around 10%. Crucial to ensuring these volumes keep growing is for them to have a high retention rate and in turn, a better LTV/CAC ratio. When it comes to the hosts, the rate is at around 95% that will probably remain about the same, after Brian's empathetic response to the pandemic. On the guest side, Airbnb seems to have increased its retention rate on yearly cohorts from 35% to 45% showing promising signs for the future.
Another thing worth mentioning is the pandemic has hurt Airbnb badly, and added a lot of deficit to the balance sheet, standing now at a total of $2.1bn. Airbnb had negative gross booking value due to all the cancellations and was badly hurt. Despite that, Airbnb's debt is manageable as the company has $4.5 billion in cash, and raised $3.5bn on the IPO. Plus, $1.8bn of the debt is net long term debt. Another positive from the pandemic, is that it has shown tremendous resilience over extremely hard times. In contrast to other sector businesses, Airbnb was able to temporarily refocus their business in a few months to a model based on short-distance travel and longer stays. Their current gross bookings are close to previous levels (-15%) and costs have been reduced. Regarding the cost cuts, I am of the opinion that this forced reduction could be a blessing in disguise in the long run. One of the weaknesses of the Airbnb model is that scaling customer acquisition has proven to be costly and has made the venture unprofitable. It is not that the company is hugely unprofitable but their margins have been negative ~5% and improvement is demanded. S&M expenses have almost reached 35% of revenue at some points, and have recently dipped to 22% due to COVID-19 cuts. This is a 54% cut that if maintained after post-COVID growth could represent under 20% of total revenue. This could realistically be reduced when you take into account the aforementioned numbers concerning guest retention growth. One would also expect the growing scale of the brand to make S&M more efficient in the future. If G&A and tech staff costs do not scale proportionally with future growth in revenue, it could also contribute to make the business finally consistently profitable. The transparency and permanent scrutiny of the public markets could steer Airbnb in this direction and help them be on their way to profitability. Reaching 25% operating margins is realistic and could be more if they find a way to make operations & support more effective. That is a tougher ask, and will require some technological developments as a lot of hands-on work is currently required from Airbnb to handle payments, customer assistance, disputes, and more.
Regarding the experiences side of the business, I do not expect it to have amounted to much revenue so far. Although more hypothetical, Airbnb's TAM is also huge, standing at $3.4tn, and experiences form a considerable part of that. From my point of view, Airbnb is better positioned to take a good chunk out of that gap than anyone else. With a growing remote force and falling fertility rates in the West one would expect people to feel less attached to places and be open to move around more, helping make long-term stays a common occurrence. Real estate, especially commercial, and infrastructure have been badly hit by the pandemic but they are spaces ripe for innovation. Their fundamental mechanisms have not changed for decades and new businesses like Opendoor prove that. On a human level, social networks and remote work are driving us apart, and we all long for deep meaningful connection, so a well planned experiences product could become a relevant player in a future human connection space. Even though this paragraph is whimsical and highly hypothetical, I feel it is worth it to question what are seen as normal tendencies and behaviours.
With an opening day share price of around $160 I did not buy any Airbnb stock. I do not know if I will get the chance as my target price to enter would be at around $70-$80. I believe the business could end up being worth $200bn+ and be another huge success story. But, acquiring it at $100bn does not give me outsized returns and exposes my capital to some risk worth more than the reward, as cost effective customer acquisition is not fully assured.