Chit Chat Stocks - Airbnb (ABNB) | Fundamental Analysis

Episode Date: January 17, 2021

Chit Chat Money covers Airbnb in this week's fundamental analysis. Airbnb is one of 2020's hot IPOs. If you don't know, Airbnb is a marketplace for individuals to rent out their own properties and rent from others. Hope you enjoy today's analysis! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to us on YouTube: https://www.youtube.com/c/ChitChatMoney Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. Okay. Welcome in. This is the Fundamental Analysis Show, our Thursday episode. We're talking Airbnb today, a fun one, probably one of the hottest stocks on the market right now, but we're going to dig into the company. We understand, you know, the valuation is

pushing a billion or a hundred billion dollars. So people might be all, you know, all right, well, when do we, what do we do about this? But we'll get to that at the end. But first we got to talk about seven investing. And I thought for the next few episodes, maybe where we could highlight just one of the analysts each time because there's seven of them there. And if you don't know anything about them, we could talk about one for the next seven episodes. What do you think, Ryan?

Sure. I didn't see this coming. But yeah, I guess we can talk. The head guy, the head honcho, Simon, he's really good at looking at the deep tech companies. Big time. Yeah, really good at understanding these technologies that a lot of investors don't understand, these business models.

He's really good at getting in companies early before the market will catch on, similar to Beth Kindig in that way. You probably heard her talk on our show before, and you've seen her in general. Anything else with Simon? Yeah, he doesn't really follow the crowd. Nope. And he does stuff that I would not consider like – sometimes evaluation will just cancel something for me,

which is probably a bad thing, a bad trait to have. But he came on and pitched Snowflake and made a decent case. uh, for one of our shows. And, uh, yeah, that was when everybody was saying, look how overvalued it is. So, yeah, he did say that sometimes when people say, you know, the consensus is something's overvalued, he's like, all right, maybe people are just disregarding this for no reason. I'm going to take a look, but you know, to get his access, to get his insights, um, and his picks each month, uh, you can sign up with our code CCM at checkout and get $10 off. So your first month is only seven bucks, really easy to try out the service and you can help out the show by doing it,

But we're going to kick things off now with the show Airbnb. So, Ryan, do you want to get into it, the history of the company? Yeah. Well, I'll start with what they do. And Airbnb, I have a feeling most people already know what they do, but they're a global marketplace that allows hosts to provide guests with stays or even experiences as well. But their big goal is to own travel. So they built this off the stays part of their business. The experience is it's kind of new.

That's one of their new avenues for growth. But I'll explain the hosting part for anyone who doesn't know. If you have an extra room or a basement or something in your house, you can basically take pictures of that area at a nightly price and post it on Airbnb. Then guests will, I don't know, search throughout Airbnb in a certain location. If they like your place, they can pick it and they can stay. So really, it's just giving you a chance to get income off these extra rooms and it's giving them a place to stay. It feels a little bit like subleasing on demand kind of thing. because you can pick how long you want to stay too.

And then obviously there's short-term stays, one night, that kind of thing. And then there's longer-term stays. But basically, their entire business was built off the hosts initially. And now it's kind of almost gotten out of hand sometimes because I know there's a lot of people out there who will take out a mortgage on different properties just to rent out a bunch of rooms on Airbnb, which seems risky. to me at least uh so there are i mean people have built entire businesses off of airbnb where they

just buy homes and rent them out yeah we saw that in march uh a lot of people got into trouble with that um you know long-term leases short-term rentals that's how we work out in trouble i mean a lot of these people aren't levering up like they did but yeah i mean that's kind of how the business model has gone for people that are trying to go and be professional airbnbers yeah and some property managers won't let you airbnb your room uh if i'm not mistaken but then uh airbnb now has more than four million hosts around the world in more than 220 countries interesting note uh it's not really that important but uh 55 of the hosts are women so oh interesting just an extra you know a little difference between men and women there not very much but i don't know slight difference

yeah would you have guessed that it was more women than men uh i would have thought it would be 50 50 but i know 55 it's not that big of a difference but it's definitely interesting as for the guests in 2019 there were 54 million active bookers worldwide i'll get into the history though airbnb was initially founded in 2007 by brian chesky who is now the ceo joe jabia and nathan blacharczyk blacharczyk i think yeah he's supposed to be the uh expert coder they said he's like 10 engineers in one which is probably the best compliment he can give to someone like that Interesting. And Brian and Joe were roommates initially in San Francisco. And so as most people know, rent in San Francisco is not that cheap. And so they were trying to look for ways to generate some extra income to pay for rent. And that weekend, there was actually a big design conference. I'm sure a lot of people have heard this story, but there was a big design conference in San Francisco. So they inflated three air mattresses, created a quick website and connected with three people that were looking for a stay.

And yeah, apparently it worked out and they were like, wow, this could really be something here. And so they brought on Nate or Nathan in 2008, who was a software engineer at the time. Now he's the chief strategy officer and they started to really build it out. And keep in mind, this is around the same time as Uber was being founded. I think Uber was 2009, but the sharing economy was sort of in its infancy and they got Y Combinator funding. That's Paul Graham's big business, right? Yeah, it's like the startup incubator. It's, you know, in Silicon Valley, the show when they make fun of the incubator.

This is like the real incubator that actually works like Dropbox is there, other companies like this. And so they got enough funding to go to New York and try to garner interest and get people on the platform. And by 2009, they had 10,000 users, and then the VC money started pouring in. I don't have all the teams or the venture capitalists. I mean, as you can guess, Founder Fund, Sequoia, Anderson Horowitz, all those names. Everything was going really well for them until last year with COVID when they really started to see hard times. In order to survive, they had to fire a quarter of their workforce. I think we talked about this on one of our shows.

And they acquired a new funding round in debt to shore up the balance sheet. Since then, things have pretty much turned around for them. But prior to the IPO, the three founders owned about 44% of the voting power. And each of them had, I think it was 15, 15, or 14, 14, and then Brian had a little more. They kept a lot of the ownership. It's very interesting. Usually, it's down below like 5% or so for these founders or maybe even a little below 10. Yeah.

And then the only other really significant player with a big stake was Sequoia Capital who had 60.5%. I guess the only reason to pay attention to that is when the lockup expires, see what happens with their shares. That's it about for the history. What about valuation? Yeah. So as everyone knows, it was a really hot IPO. What was it? Like a month and a half ago now.

Enterprise value is now at $102 billion, according to Coifin. Ticker is ABNB. Good ticker, I guess. It sounds like you're saying Airbnb, but as a baby. Trading at 21 times 2019 sales. sales. And I'm saying 2019 because 2020 was a really off year. I mean, at one point in March and April, I believe they had negative revenue because similar to booking.com for all the refunds people had. And 2020 will definitely be a higher multiple because of the pandemic.

Shares outstanding haven't ballooned too much pre-IPO, but I know that post lockups, stuff like that, there's a lot of options that get exercised once the IPO occurs. So watch out for that. That's typical for any IPO. That's not just specific to Airbnb. They are unprofitable on a net and cash flow basis right now. So can't really do a multiple there. Obviously, they have no dividend. I think the most important thing for the valuation is just to look at the balance sheet. So at the IPO, before they raised, they had about $3 billion in working capital and about $1.8 billion in long-term debt. But they did raise $3.5 billion in cash at the IPO. So currently, the balance sheet looks strong and they're not hemorrhaging money. They've gotten

you know close to profitability um i mean they've been cash flow positive a few times over the last few years here so uh liquidity is not a concern for them i would think okay is that all i'll get into the earnings and i just took the full year 2019 numbers which i know seems lazy but i didn't want to do all these adjustments and have this long-winded thing for earnings because the numbers have really been skewed all because of covid uh and so i'm gonna look at it almost as if it's normalized. So what I expect the 2021 numbers to look like, I hope it'll be a little more normal. But in 2019, they had revenue of 4.8 billion, up 32% from 2018. They had about 75% gross margins, 500 million in operating losses for 2019. Even though they

were profitable in 2018, they just really ramped up sales and marketing, which I thought was a little weird. They spent 34% of revenue on sales and marketing. In 2019, they've obviously toned that back in 2020 which i feel like after a certain point they don't really need it like it's you know they kind of have the brand awareness to not have to spend on like google ads yeah i would like to see that percentage of revenue uh for snm go down over time for sure okay and they spent two percent of revenue on stock-based compensation pretty low pretty low especially compared to some of these other silicon valley companies uh they have 2.8 billion in working capital similar to the $3 billion number that you pointed out, $4.5 billion in cash and cash

equivalents. They have $3.2 billion in redeemable convertible preferred stock. I forgot to look at the strike price, but I could probably find that. It's probably in the money now. Yeah. Well, yeah. I would have to imagine it is. And then they had 327 million nights booked in 2019. That number grew 31% from 2018. And they generated about $223 million in operating cash flow 97 million of free cash flow i think in 2018 they generated like half a billion free cash flow yeah yeah the 2019 was like they they went back into investing i think they were probably trying to boost their numbers get maybe they had another vc round or something to really like invest back in the business before the ipo but who knows who knows why that happened it shows if they want to

be cash flow positive they certainly can and they have been i guess they weren't in 2020 because it It's a terrible year. But, yeah, I mean, the numbers look strong on a normalized basis. I mean, what do you think will happen in 2021? It's interesting. If the VC – sorry, I think I was trying – I knew what you were going to ask. But I think – sorry, the vaccine. I said VC.

I think if the vaccine rollout goes strong, you know, everything's all back to, you know, normal, at least in the United States and Europe in, you know, what, late spring. That could have a huge second half of 2021. uh that's a little bit speculative but again just looking at over like a five-year period i would expect solid growth i mean the i don't know i mean you gotta weigh it versus evaluation but i mean they have minimal competition now we'll get into it on the second half but yeah what do you think you know 2021 yeah i mean i i have this grand idea that uh we've got the roaring 20s ahead of us that's why everyone has that but yeah but it's all kind of dependent on that vaccine rollout so we'll see i mean right now the numbers looked good they like the they're getting

back to where they were at but it's not some immense growth from the 2019 numbers no so and i mean we'll get into the second half here but the valuation is pricing in a lot of growth so yep i think the vaccine uh they're gonna have to show growth beyond just recouping what they had in 2019 yep i agree all right we're gonna take a quick break and then get to the second half of the show cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox

panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply all right welcome back next up is digging trenches so this is kind of where i think we're gonna have an interesting discussion here the moat rating zero one two or three for airbnb i'll go first i think it's about a 2.5 i think it's very strong um you know each the difference between them okay and say something like uber uber is similar and everyone has this take where uber is almost a commodity product right i mean they may have you know the more drivers you know what i mean and they may provide a good service but each car is very similar airbnb each location is different and you know everyone that's added is just another unique

location on the platform it's really hard for another service to replicate that i think that does give them some sort of a competitive advantage yeah uh the business as a whole i guess it depends what we're rating here um do they have a stranglehold on one night stays i don't think so uh i and we'll get into that as far as like why what i like or as a product um i don't like one night stays on airbnb because you might as well get a hotel because the fees are you know it depends what location you're in but yeah yeah one night stays are probably not the best it's got you know typically like three or four or longer yeah so i would say they're definitely competitive competitively advantaged uh the other part is the brand not only recognition but the

brand relevance not just for the guests but the hosts uh the hosts know that they need to be on there if i mean there are entire businesses being built on airbnb yes they definitely have a competitive advantage yeah and i think a number they had in the s1 now i'm trying to remember the exact one i might have the percentage wrong but i think new host sign up so they're just starting out on the platform 40 of the time i believe they get a booking within like three or four days um either way whatever numbers it actually is they get bookings fast so that you know i think that's an advantage as well because they have all that supply in the platform and as that continues to grow the moat or competitive advantage however you want to define it should

grow over time as their supply increases what are you looking at for further reading okay so the big you know the big knock on airbnb is the bad experiences misuse of the platform uh faking reviews stuff like that right yeah uh you've had personal experience with that i i luckily haven't had any of that uh but i know it is common um you know i want to kind of try to dig into how often our review is fake how often are locations you know not actually what they seem to be online that's a tough answer to find like an exact one but more as a digging maybe people have done studies or i mean i don't know what maybe you could look at their net promoter score stuff like that i'll give some anecdotal evidence their net promoter score is a 74 which

is pretty good that's good but when i had a long stay this summer and i'm usually not the type of person to write a bad review about things i know people are gonna be like wow he's a bad review writer no right it's not he's not but uh i had a pretty bad stay and so i wrote a bad review and The guy didn't take very good care of the house and I had to be there for two months. So, you know, you really start to figure out the ins and outs of the house. And I wrote a bad review and then he just came back and wrote like a lie, bad review about me. He's like all the other people in the house hated him. I was like, I'm pretty good friends with the people in the house and they didn't seem to hate me.

I'm like, there's nothing to stop him. There's nothing to stop a host from just basically backhanding you if you write a bad review. So, I don't know, I guess. No, it's important because I think from what I was reading, so I read or I'm in the process of reading the Airbnb story and it kind of chronicles of how they got to where they are now, you know, what good choices they made, what, you know, hurdles they've had to come over along the way. And they said they've really catered to the host and kind of been like, all right, we're host first. They're not going to pay very many fees. You know, we're going to put most of the fees onto the user, which we all know those extra fees. It comes into like, you know, a 15% bump usually.

yeah uh but the problem with that is that if you cater to the host you you don't really you know lay down the law on them or you don't regulate them at all then something like you know what you happen occurred and then now you you know don't have airbnb in the the same light that you once had right yeah i i really don't i've had like some good stays but i've definitely had my fair share of bad stays and it just the the problem is you know some people like the difference between your stays like they they like having a differentiated experience if you have a bad differentiated experience it just makes you want to go to a hotel because you know what you're getting uh especially for the shorter stays but uh my further reading i'm looking at uh basic i

could probably just look this up but i'd like to know how often the people that book stays actually use the experiences feature because that is sort of an avenue for growth and i've never once used it i think it's pretty low yeah i can't imagine that it's that big and it honestly seemed like a weird next step for airbnb i would have expected them to go a different direction yeah and the thing is you know maybe if it ends up being a niche product they may have wasted a bit of marketing spend it doesn't ruin it for them uh but they have said that this is their big growth opportunity and i kind of think like i don't know i don't know if this is as big as you want it to be i know i'm like in europe and stuff it's nice to tour the cities but you do that on your own

you do that on your own yeah i mean there's tours and stuff that you can get that are really easy like if you show up in downtown whatever you know you just get that one person that's doing the tour of all the stuff and you pay them i don't know why you'd have to go through airbnb it doesn't seem like that improves the experience that much but who knows you know could work yeah it seems like a very niche crowd what are you looking at for future growth opportunities yeah there's a lot for them uh and mainly it's like add-ons to the the standard product so what i have is the travel credit card uh chesky who is the ceo and founder uh he mentioned this on a podcast this spring he said it had to be put on the back burner because of the layoffs right they had like i think he said

they had like six to twelve big initiatives they're hoping to get out in 2020 yeah but they had to push those off to 2021 2022 uh but yeah i mean it's the reason that the travel card i think it would be important is because it gets you to, you know, get on Airbnb or choose Airbnb over a VRBO or others. So I'm guessing it would give cash back on something like Airbnb trips or possibly bundling with transportation. This isn't revolutionary. A lot of people do this. There's already tons of travel cards out there. But I really like the idea because if someone, you know, with lots of disposable income and is like 30 years old, you know, if I was someone like that, i definitely would be getting into that i would love to have that card especially if i was going

to go to travel to a few other places i mean seems worth it and then it locks you into always using airbnbs yeah it makes the switching costs high uh i'm sure they'll probably eventually bring that back um it hasn't ever launched it's just like no i mean they'll take it off the back burners it feels like if they're going to pull some of those initiatives back on uh that'd be one of the early ones that they'd go with but uh my my growth opportunity well i have for i have three so two are just product enhancements which are just that's just me as a customer griping uh the first one is you should be required to show your internet speed and then you should be required to verify it uh so they can like check it because i had slow wi-fi and it was just a pain in the ass

i saw chesky a lot of people have been tweeting about that um which guys come on i mean i don't know why twitter is not the place for that come on you're just wasting the timeline but chesky actually responded to one of them and said we'll look into it and get it going so that might be great and then uh the second one is potentially like a new you know if you're ever looking at a home i think they have this on zillow and i think josh wolf backed this technology but there's the augmented reality thing where you can go through the home and see the whole thing that'd be a nice feature to embed with airbnb maybe they already have something like that but uh right now you're kind of guessing based on pictures like you're hoping that they're not hiding anything maybe

they should have a square foot requirement i don't know you know what i mean yeah like that but anyway those are just two small product enhancements and then the other thing i'd say big growth opportunity would be transportation that would have been for me the logical next step instead of experiences no they said they were going to get into that so that was another one of his growth things they said they were trying to get into the transportation part so maybe they launch their own or maybe they just acquire Turo or Turo whatever, which is like the car sharing service. I mean, if they're out there traveling and everyone knows how much of a pain like car rentals are. I think Dan McMurtry had like a tweet thread about it this week. And yeah,

I've never had like a great car rental experience. The car sharing service seems like a really logical next step uh if people are already traveling yeah it is interesting they can definitely do a lot with transportation um they probably want to get on it soon uh you know because other companies can kind of step into it we know the hotels aren't trying to invest in you know airbnb is kind of eating some of their market share they're trying to you know invest back now similar to other companies that have been disrupted by these you know silicon valley giants and upstarts as they call but let's get into highlights and lowlights why don't you go first okay highlights for me it does not take being all that brilliant to

realize the value that Airbnb provides and the product is good and I think they have a stranglehold on medium-term stays like if I was going to stay anywhere for a month or two months something like that I'm going to Airbnb because you know you don't have to lock into like a one-year lease or anything like that they're a little more I guess the hosts are a little more adaptive to what you might need um and the hotel rooms are just i mean hotel rooms are great for a few nights but when you have the kitchen it's too expensive and if you have a kitchen and stuff i mean it's fantastic yeah i mean you want a real house if you're gonna stay for too long uh but the low lights for me uh not that important but i personally haven't enjoyed my stays um you

Maybe you're just not a good analyst. Possibly. But that's what it comes when anyone can list. Yeah, and the short-term stays seem really pointless for me. So I guess that's really on the product side. The other part is this is a business that fits right into everyone's circle of competence. As far as analyzability goes, no one really has a huge edge because everyone understands it. And so that can lead to a premium valuation because there's just a lot more market participants in a company like this.

Possibly, possibly. But I think a lot of people understood it, you know, Netflix's business, right? At least like five years ago. I mean, not the long-term vision of the business, but yeah. I mean, right? Because a lot of people just saw it as an aggregator and not something that was building their own great content by the end. I don't see the inefficiency in Airbnb's business where I'd have an edge. Maybe.

Maybe. Maybe. I don't know. I think there's parts of Airbnb's business that are different that people might not be looking at. I think the long-term stays people haven't really been looking at too much. That's a big growth avenue and a few other things. Yeah. Yeah. But people like, I feel like investors, people understand the long-term stays. The

growth that a lot of it is pricing in is stuff that hasn't happened yet. Like the, you know, the travel card or the transportation. Like, yes, if that happens, I did not see that coming and I was wrong and maybe there's more ahead, but that's once again, an if that's not anything with the business where there's an inefficiency. Yeah. And the, no one can argue that the The valuation is premium right now. And it is one of the most talked about companies. It's definitely not under the radar. But I also violated a rule, which is can't say valuation.

Yeah, that's true. That's true. All right, I'll get my highlights. I'm going to keep it very simple. I like the management team. I think they're very good. To be honest, when I was reading the Airbnb book, Buffett gave them, you know, the blessing. He went to Omaha to do a partnership with the Berkshire Animal Meeting,

you know, help with the supply and stuff. And Chesky, I believe it was him, talked with Buffett for like four hours. So now it's got to be an investment now, right? I went and looked at your notes, so I saw that you put management. That would have been probably my biggest highlight as well. Like Chesky seems like a great CEO. Yep. And then the business model is great.

I mean, those two combinations and the fact that they're not egregious with stock-based compensation. I like that a lot. And again, the valuation just comes into play. The low lights, you know, for me, the fake reviews and the freaking bad experiences and then the, quote, experience part, that's not the staying, you know,

the extra things like cooking, whatever. I don't think that's not, I don't think it's very promising. Maybe I'll be wrong. But Chesky also gets, you know, Musk-like RSUs, restricted stock units, all based on stock price tranches, uh which i don't like that at all but it's kind of what you get nowadays maybe that's why that

maybe that's why he made his face during that interview and they're like he knows that table he's looking at that table he knows what he gets and they're like so you have a hundred billion dollar company and he was like uh you know yeah it doesn't mean the company's uninvestable whatsoever but i don't like it i don't know but i'm not gonna be able to change it okay so more or less interested definitely well i i already knew a lot about the business but say this is the first time we looked at it definitely would be more interested in the business and it's going on our watch list we're probably going to do some research on it but i mean at this valuation i don't know i would invest at what like a 50 percent haircut something along

those lines you know it's at a i could see them someday generating what like eight to ten billion dollars in free cash flow uh but right now they're valued at 102 billion dollars so what kind of growth you're getting you're looking at first of all they're not out of hard times yet like uh they're still it's not uh clear weather for them from here on out and the vaccine hasn't been widely distributed and so they are going to have to deal with some of those difficulties around the business but you're looking at 200 times their greatest annual cash flow yes which is i mean that's definitely not cheap. And I feel like people just, you know, whatever, that's just a valuation, you know, you're too disciplined on that and you're missing out on best in breed

companies, but it's like price does matter. Uh, and this is a company that I'll probably set a multiple for like myself, uh, because they can be cashflow generative and it feels like they're spending money. They don't need to, which in the long run might help. Uh, but it shows that They're sort of masking true profitability in my opinion. So I might set a multiple for them and if they cross that threshold, then I'll buy. But for the time being, like that's a valuation that I just cannot get around. Yeah, valuation is too much. I mean we can all see that the business model is good.

When the CEO is shocked by the valuation, investors should be too. Yeah. And he knows the business better than any of us. So he knows what it's really worth. Yeah. And look, the IPOs are all currently right now. I don't want to say the B word, but currently right now, IPOs are popping 100%. I would just be cautious out there, guys.

Yeah. And now I understand why people have that rule of thumb of two quarters after an IPO before purchasing something. Wait for the lockup period too. Yeah. Wait for the lockup period because there's no doubt in my mind that Sequoia, and rightly so, they've held on to shares for a decade, is going to be dumping their stock. Yeah. And that's not a bad thing. They're going to be selling.

They got to return, you know, the LPs of their fund are waiting for a decade to get this money back. Right. All right. Well, that's going to do it. As always, you know, make sure to use our code CCM at checkout to get $10 off your first month at 7investing. Remember, we are not financial advisors.

Anything we say on the show is not formal advice or recommendation. Thank you all for listening. We'll see you on our next episode. We'll see you next time.