Is Airbnb the Foundational Stock of the 21st Century Generation?

Airbnb is the poster child for the 2010s and apparently, 2020. In this article I break down why I added Airbnb to the Granicus stock portfolio.

Disclaimer: Nothing here should be misconstrued as investing advice. I am NOT licensed to give any advice. These writings are intended as entertainment to put into context how a media entrepreneur and investor thinks, given my unique time horizon and risk profile. Educate yourself, read up on mistakes others have made and speak to a licensed professional who can help you based on your investment profile and time horizon.

They say some of the best companies are built in the doldrums of economic cycles. Airbnb was founded in 2008, right after Lehman Bros. took down the stock market and the economy.

The splintering of Craiglist

I recall that year vividly, as WatchMojo was in its 3rd year and had freshly run out of money in December 2007. Naturally, to drum up interest amongst investors, I decided to spend even more time in the most expensive city in the world, New York City. Scouring Craigslist to find an apartment to sub-rent was exciting to the masochist in me but clearly not a very efficient system. As the year went by, I spotted another company whose approach was incredibly refreshing if not unconventional: Airbnb.

By the time I got an email from Airbnb’s marketing team in 2011,

the company had moved from folksy legend to a bona fide high-flyer – securing $7.2 million in Series A funding in November 2010 from Greylock Partners and Sequoia Capital.

If you’re wondering what ensued from those talks, we proposed a $25,000 marketing proposal and they countered with $10,000. Maybe I should have asked for stock! Or, maybe I didn’t because May 2011 was the second month we broke-even after six years of losses.

In 2011, it raised an additional $112 million in additional funding from Andreessen Horowitz, DST Global Solutions and General Catalyst Partners. As per The Information:

A Tale of Two IPOs

Fast forward a decade, Airbnb went public on December 10 2020. Priced at $68 per share, it opened at $146, and closed with a $99.99 billion market capitalization.

Hmm… Wonder what $10,000 in Airbnb’s then-stock would translate to? The Series A and B were below $5 billion, meaning a 20X return on that $10,000 amount! I say this in jest, recognizing such a proposal would have been hard to pursue, let alone pull off with investors like Sequoia… but you can imagine that marquee investors who passed on Airbnb may have some regret seeing that outcome.

The blockbuster offering came a day after DoorDash, a food delivery start-up, also defied gravity on its first day of trading by surging 86 percent to a valuation of $68 billion.” I did not buy Doordash shares, but did ask if it’s the next Priceline, at least symbolically.

A Unique IPO in an Unconventional Year

Regardless of what comes next, what makes Airbnb’s IPO so remarkable isn’t the sheer valuation it commanded, but that a mere eight months before, it faced a near-death experience when a pandemic dramatically scaled back demand for global travel, cutting its private valuation from $30 billion to $17 billion. The vultures were encircling the body, with dark clouds over the horizon.

The Unicorn Trifecta

After Airbnb shed its folksy image, it grew into the quintessential unicorn that an entire generation of venture capitalists chased. As such, it was always lumped into the unicorn trifecta along with Uber and WeWork.

WeWork = Shit Filter

While Uber’s culture may have been toxic and its view from its most important stakeholder negative, there’s most certainly a global business there that’s quite promising and consistently valuable… though it could be far more. WeWork, mind you, was a “shit filter” in that it made investors take pause to at least read the paperwork and make a proper judgment about the fundamentals of the business.

In that context, I am growing increasingly convinced that we are due for a correction in the near-term, but given my time horizon and risk profile, I remain a long term bull. For my investment philosophy check out the anti-portfolio background which then also connects to my current portfolio.

However, while in 1999 you had many turds pass off as legit businesses, I feel like the market today has become better at filtering shit before it hits investors.

Negatively or Positively Correlated to Covid?

The reality is Airbnb is a tale of two stocks, or timelines. In the near term, Airbnb is naturally hurt by, exposed to, and vulnerable to the pandemic. But over the long term, it’s arguably the best positioned and armed company as the sector resets, recovers and mainly, reinvents itself.

That is half the story, though. Warren Buffett talked of looking for candor in management. He was right. But given technology’s transformative nature, the cycles of industry move faster, so you also need to back resilient and agile managers. Airbnb founders deserve criticism for many things, but they also command respect for how they have navigated the terrain.

Via NYT:

“Unlike the other start-ups, which have seen demand for their products soar in the pandemic, Airbnb spent most of the year reeling as people canceled their bookings. In the first nine months of the year, Airbnb brought in $2.5 billion in revenue, down from $3.7 billion a year earlier. It lost $697 million during that time, more than double last year.”

Airbnb’s Real Comparables?

Naturally, the media was quick to report that:

"That puts Airbnb past the market cap of travel giant Booking, which has a valuation of more than $86 billion. Competitor Expedia has a market cap of more than $18 billion. Its market cap far surpasses hotel chains as well, such as Marriott and Hilton, which hold market caps of more than $42 billion and $29 billion, respectively. Delta Air Lines has a market value of about $30 billion.

Bilateral Ecosystem

While Airbnb’s valuation today soared it above Marriott and Expedia’s, I feel narratives like that may overlook the real upside.

From a bottom-up approach, let’s start narrow:

Whereas Expedia and Hotels are more zero-sum (i.e. Marriott may eventually move away from Expedia and Expedia would not exist without the underlying hotel rooms),

Airbnb can technically

list Marriott’s hotels on its website and
include its properties on Expedia, if it wanted to…

Airbnb can somehow coexist with other stakeholders as much as it seems heretic to suggest that now given the animosity hotels have for Airbnb. However, given the slow recovery of business travel and general unease of leisure travel until a vaccine brings back a sense of normalcy, global hotels are more likely to want to leverage Airbnb’s assets than fight it through lobbying.

[My 2 cents: From a S&C perspective, you may ask why? Simple. Right now hotels need revenue, that lifeline could come from Airbnb. In normal/boom times, the legal and lobbying fees to mount such an attack would be overlooked. Right now? Unlikely].

Sleeping Giant and Monopoly?

Moreover, while Airbnb has a long list of competitors broadly speaking in travel, it is a monopoly of sorts in its specific segment.

A Foundational and Generational Stock?

Airbnb is the kind of company I referenced in my ironically called “Anti-Portfolio” citing companies that shook, shaped and structured industries (but which I was then too broke to buy!), namely: Google, Facebook, Apple, Amazon, Tesla.

I asked Rafat Ali – whom I have known for a decade and interviewed – founder of the pioneering PaidContent publication and wildly influential Skift which covers the travel industry for his thoughts on Airbnb:

"I am a huge admirer of what it brought to the travel world, a modern brand that embraced openness in many ways and changed how we travel in deeper ways, even if you discount all their marketing gloss about “belong anywhere”. I think it is the only superbrand to come out of travel in the last century and probably has as much resonance as Thomas Cook had a century or more ago on British Empire, only this time globally. Parallels to Apple are not completely hype, but lots of pitfalls remain, particularly regulatory and dilution of brand as they scale."

Brand and Goodwill

Throughout my 25 years of studies, the most valuable companies all have outsized Goodwill, or brand equity, drive their valuation through premium multiples. Airbnb is no different:

“People are interested in the name, not the financials,” said James Gellert, chief executive of Rapid Ratings, a provider of financial analysis. “This is a company that is going in the wrong direction today, from a financial strength perspective.”

Avoiding The Ultimate Sin

I’ve always personally been a revenue-minded executive. But managing costs is crucial. My old boss would always say how a dollar out the door is simple but securing a dollar in revenue rather hard.

Airbnb’s near-death experience will save it in the future, avoiding it a needlessly complex future. Via NYT:

“In April, it raised emergency funding, closed certain side projects and shelved its I.P.O. plans. In May, the company laid off a quarter of its roughly 7,600 workers.”

Indeed, the shock the company got may in the long-term differentiate Airbnb between a multi-hundred billion dollar business and a trillion dollar one.

What’s the Story?

To convince investors it belonged in the same category as “Covid-winners,” Airbnb’s offering prospectus presented a grand vision. The financial document featured magazine-style spreads of guests and renters in beautiful settings. It argued that it had invented a new kind of travel while also providing economic stimulus, a cure for loneliness and spreading “healthy tourism.” And it unfurled a well-worn underdog narrative of resilience and redemption.

No one knows what the stock will do in a day or week, even month or quarter… but in a year, or ten… it’s hard to see Airbnb as anything other than a foundational stock. Of course, it faces a multitude of long and short term risks, but no one foresaw that Amazon would be buying brick or mortar businesses. Similarly, the inherent assets (more in the SWOT below) Airbnb has are its global community, its brand, the massive supply and demand of units who open up a plethora of cross-selling opportunities.

Passing the Torch

Ultimately, if you want to build the Liberty Media or Berkshire Hathaway of the 21st century, you want to own the best businesses, and it’s hard to argue that Airbnb has the foundation to become one of the century’s best. After all, Facebook, Google et al. are – if we continue the 1999 analogy – where Microsoft or Cisco were. Those companies remain formidable, but who will carry the mantle?

Any Regrets?

Having sat on the sidelines of the Google IPO way back, I was going to buy shares in light of my renewed interest in investing. Buyer beware, however, because $100 billion valuation is rich. That said, the future of travel will take a long time to recover, and it will recover in a manner that means a very different travel industry. The reality is Airbnb is well positioned for that. I wonder if some of the venture capitalists who passed on Airbnb as private investors bought the stock today.

Congrats to @Airbnb’s @bchesky @jgebbia & @nathanblec, all high quality people with a strong ethical compass.

I feel extreme FOMO because I passed on their seed deal telling them “someone will get murdered and the blood will be on your hands.” All-time, three comma fuckup. https://t.co/oBJSHAzk7l
— Chris Sacca 🇺🇸 (@sacca) December 10, 2020

The following SWOT was created by my “being assembled as we speak” research team here at Context. If you would like to join us in a blend of industry experience, insights and research, feel free to reach out.

Internal Factors

Strengths:

Capability : Strength in number of accommodations compared to traditional hotels; 7mil. Units (Airbnb) vs. 4.3mil. Units (Combination of traditional hotels) – 2020
Brand presence: Efficient SEO that maximizes their average monthly search volumes in popular locations: London, NYC, Tokyo, Sydney and Orlando ( 1.04m average search/mth)
Industry disruptor: First-Mover company in 2008 to introduce a P2P service regarding housing accommodations
Marketing: Effective marketing strategy to attract and retain users with external communication methods: Paid search, email marketing, social media and referal programs (150+ mil. Users in 65,000 cities)
Security: Large user and host community (150 mil. Users) uses review/rating format that provides insight on both renter and rentee for future references
Capability: Airbnb’s model allows for variety of lodging from different types of hosts, this introduces lower, but competitive prices
Employment: 14,384 employees in 2020 composed of data scientists, software engineers and developers. In 2018, workforce was 47.6% female and 52.5% male
Capability :Airbnb filed for IPO due to go public in early December, target for capital raised in IPO ($1 billion) – IPO date TBD
Differentiation: Detracts from touristy and expensive locations in cities, allowing travelers to have unique experiences i.e: Rural Japan, outbacks of Australia etc.
Marketing: Airbnb has efficient organic reach, 91% of the company’s traffic comes from direct and unpaid channels

Internal Factors

Weaknesses:

Financial: Although Airbnb thrives in every Q3 in terms of profits, Q1,Q2 and Q4 suffer every year due to seasonality; they lost more in Q1-2 ($731 mil.) of 2020 than the entire year of 2019 ($567 mil.)
Dependency: Airbnb has high dependencies on seasonality to make it’s jump in revenue, which is during the summer season. Occupancy rate starting January can dip down to 30% from an average peak of 50-56% (Atlanta, Austin, London [UK], NYC, SF, Toronto [CAN], Sydney [AU]) – 2019
Financial: Airbnb dishes out high expenses for sales and marketing while operating in annual and quarterly losses (Adjusted loss 2020 Q1: $341 mil. Q2: $400 mil. ); total expenses for marketing not specified in 2020, but $1 billion was cut for damage control
Legal: There are international laws that prohibit promotion of unlisted Airbnb lodging (Places like Spain, France) Exhibit A: Barcelona fined Airbnb €600,000 for not respecting local laws
Environment: Increase of hosting in conservative countries like Japan causes high amounts of tourist pollution. New law was made (June 2018) to limit and have renters register before listing
Security: More than 50% of people who stayed at their listing were worried about being spied on by the host. 1 in 10 people have actually found cameras in private rooms according to a survey by IPX
Social: Surging cases of guest discrimination due to ethnicity, Harvard Business School documented that approximately 16% of people who have a distinct “African-American” name, are less likely to be accepted as guests

External Factors

Opportunities:

Environment: Availability of Covid vaccine can flatten the curve and ease social distancing regulations worldwide (Expected mass availability in 2021). This would allow for increased listing for Airbnb
Financial: Decreased cases of Coronavirus can lead to a huge increase in listing and revenue, Which would give investors more confidence in helping Airbnb reach their capital goal of $1 Billion when they go public
Financial/Environment: Airbnb partnered with the IOC ( International Olympic Committee ) as their goals for sustainability are in line with the IOC and the UN. This ultimately promotes sustainable traveling, which can potential increase demand for Airbnb
Brand expansion: Airbnb partnered with Puerto Rican tourism organizations as well as authorities to help promote domestic tourism
Brand expansion: Airbnb partnered with Singapore to promote tourism recovery from Covid-19, this can potentially lead to a negotiation with regulations for short-term rentals. It is technically legal to host in Singapore, however not for short term rentals (minimum 30 days stay)
Loyalty program: Airbnb CEO, Brian Chesky, had desires to make loyal host become shareholders for the company, as a sort of reward like how Uber does for loyal drivers (up to $10 000 bonus)
Financial: Airbnb estimates their addressable market at $3.4 Trillion, which includes the sectors of short-term stay ($1.8 Trillion), travel experience ($1.4 Trillion) and long term stays ($210 Billion)

External Factors

Threats:

Legal: Every city and region has full control of regulation changes over Airbnb; i.e In 2015, San Francisco (Airbnb’s home turf) almost passed a regulation where the number of days owners can rent out properties are reduced. 55% of people voted against it
Environment: Natural disasters or highly polluted areas that affected the air, deter guests from that region. i.e Wildfires in Yosemite National Park, California and air pollution in China
Environment: Tourism pollution (littering, transportation, noise pollution) causes negative effects for popular destinations. i.e Water in Venice canals clears up from lack of tourism and boat emissions. 30% less pollution than 2019
Competition: There are many smaller companies that are similar alternative to Airbnb like VRBO, Sonder and Vacasa who all manage vacation/lodging rentals
Competition: There are big contenders online that are also similar to Airbnb, for example Booking Holdings (BKNG), Expedia (EXPE) and Trip.com. Search engines and metasearch sites like Google, Baidu (BIDU), TripAdvisor (TRIP) and Trivago (TRVG) are also in the mix as they direct large amounts of web traffic

References (By Order)

Strengths:

Weaknesses:

Opportunities:

Threats: