Motley Fool Hidden Gems Investing - Two Sides of Airbnb

Episode Date: September 22, 2024

The “Airbnbust” has not arrived, but Airbnb is no longer at peak expectations.  Mary Long hosted Motley Fool Analyst Alicia Alfiere and BiggerPockets CEO Scott Trench at The Denver Press Club for a conversation about Airbnb as a stock and as a real estate investment. They discuss: - Airbnb’s capital allocation strategy. - The hosting platform’s competition. - How real estate investors can get started with Airbnb. - The scaling challenges of managing short-term rentals. Company discussed: ABNB Host: Mary Long Guests: Alicia Alfiere, Scott Trench Producer: Ricky Mulvey Engineer: Tim Sparks Special thanks to Alex Pailet from BiggerPockets and Alby Segall, Jean-Luc Currie, Jim Bofencamp, and Katlyn Howery from the Denver Press Club for making the event happen. Learn more about your ad choices. Visit megaphone.fm/adchoices

head back to the streets and FX is the drop a snowfall saga watch Wanda Bell and Leon Simmons fight to reinvent themselves in 90s Los Angeles where the fallout from the crack epidemic fuels the rise of west coast rap ambition loyalty and survival collide as everyone risks everything to build something lasting and FX is the drop a snowfall saga streaming now on hulu on disney plus click or tap the banner to sign up now There's a larger number of short-term rental hosts that are professionalizing in the industry, and a battle that they're fighting, I think, fairly quietly is on how do they get, ship those bookings to other sites like Vrbo, or can they book directly?

I'm Ricky Mulvey, and that's BiggerPockets CEO Scott Trench. He leads a company that aims at democratizing real estate investing. Scott is also the co-host of the BiggerPockets Money podcast. And today's show is an edited recording of our collaborative live event with them at the Denver Press Club out here in Colorado. Mary Long hosted Scott and Motley Fool analyst Alicia Alfieri for a look at both sides of Airbnb as a stock and as a real estate investment. Scott, you and I, we were all talking beforehand and you said that you had some, you had a good overview of kind of like the market sentiment and how investors have, have been feeling about short-term rentals over the past couple of years. So you want to kick us

off by giving us a sense of what that looks like. Yeah, sure. So in the real estate investor community in 2019, nobody was interested in short-term rentals. We polled our audience and said, what's the strategy you're going to pursue? 5% of them said they were interested in short-term rentals. That carried through to December of 2020. And in 2021, it exploded. 20% of our members became interested in short-term rental investing. That jumped to 23% or 24% by the next year, and it's receded back to about 18% of our audience in the last year. And I bet you when we put it on the poll at the end of this year, we're going to see it in the low teens. So, we saw a gold rush. I mean, this was the best way to make money you could imagine in 2021, 2022 in the COVID

environment. And we haven't seen the Airbnb bust that I think a lot of people were worried about, hashtag Airbnb bust on a lot of social media channels, a lot of BiggerPockets content. But we definitely saw a receding or a retraction in interest from there. And I think as we get into it, a professionalizing of that market to a large degree. As I said, we're going to kick it to Alicia to start with, and we'll talk about how Airbnb stock has fared recently. But as you're talking about the not quite airbnb bust from your perspective what what's the reasoning behind that yeah so uh one of the things and and i'll have to look back on 2024 data to see how this year plays out but one of the things we saw last year was that uh demand grew quite strongly for airbnbs

but supply grew faster and so that was a problem and that compressed a key metric in the industry called Revenue Per Available Rental, REVPAR, which made it a lot harder for these folks to achieve the promised cash flows, the cash flows that they were expecting from short-term rentals. A lot of people still did well, but they didn't do as well as they were thinking

in that context. Does that answer your question? Yeah, I think so. Alicia, I'm wondering if you have a different perspective because if we think of Airbnb maybe as a travel stock, first, travel is back post-COVID. And yet if you compare Airbnb to other hotel stocks, Airbnb is down about 16% over the past year, and competitors like Hyatt, Marriott, they're not following the same story.

So, what gives? What's the deal with Airbnb? Yeah, and this is a fair question. So, one of the biggest drivers that's happening here is something called revenue growth deceleration. So, in the second quarter, Airbnb reported revenue growth of about 11%, which is pretty solid, but it is less than it was in the first quarter. And the first quarter was something like 18%. And on top of that, the company gave guidance that third quarter is going to grow something like 8% to 10%. So you have analysts in Wall Street kind of concerned about what the growth is going to be going forward, if there are issues with economic uncertainty and that sort of thing.

There was also an interesting trend that the company talked about in their transcript or their earnings call. And that was that the lead time in booking trips had recently declined. And so what that meant was, so in May or June, people were booking their beach trips instead of their Thanksgiving trips. That doesn't mean that they won't eventually book those trips, but the shorter lead times gave some people some concerns. So we've started this conversation by kind of looking backwards, and now I'm going to ask you to instead look forward and walk us through the bull and the bear case

for Airbnb so maybe let's we've set the table kind of with some negative like Scott said Airbnb bust so maybe we'll start with the bear case and then we'll try hashtag I know I think we found the title of the show before we even began so maybe we'll start with the bear case and then you can switch hats and tell us why we should believe in Airbnb sure yeah so if we look at the bear case right now I think a lot of people are concerned because travel can be cyclical it is a really big industry. But it really depends on economic strength. I think there's a concern that if there is an economic recession or just economic uncertainty, you could have consumers pull back in terms of their spend and their desire to travel. You could also potentially have travelers looking to book travel that has rewards, so the ability to pay a little bit for your future trips by going through someone that has travel rewards. And Airbnb doesn't currently have that.

They don't need to, but that's something that they don't have. In terms of the bull case, so number one is Airbnb has an incredibly strong brand, right? I mean, the name of the company has gone so far as to become a verb for travel. People will say, oh, I Airbnb'd that trip. So that's massive. They also have a huge network, and that's a massive competitive advantage for them. So when you think about it, they have 5 million hosts, something like 8 million listings. And since inception, they've had 1.5 billion travelers use their site.

And so that's pretty strong. Additionally, the travel industry is really big. I think Statista came out with an estimate that it's something like $900 billion in revenues for 2024 expected. So it's pretty big. I love that you mentioned that 1.5 billion guest stat because that's actually pretty staggering when you think about it. And I think back to even just like 10 years ago, so often I would hear about Airbnb through word of mouth. Like that's kind of how it got started. And now, as you said, Airbnb is a verb. People use use it that way. And to refer to even if they were to VRBO, they might say, oh, I Airbnb.

bead um and so that's like quite the following and quite the brand name that you mentioned in investing sometimes we talk about something called the snap test um a can you explain to us what the snap test is for those that might be unfamiliar and then b let us know if airbnb passes it yeah yeah definitely so for those who are unfamiliar uh the snap test is something that david gardner came up with and if you're a fan of the marvel cinematic universe you could think of of it as kind of like the Thanos test. So essentially what that means is, if the company that we're talking about

is snapped out of existence suddenly, would people miss it? Would they be upset about it? Would the market clamor to create something similar to fill that need? For Airbnb, I would say for both the hosts and for the travelers, it feels like they would pass the snap test. As we said, 1.5 billion travelers,

that's a lot of people. five million hosts eight million listings they also have as you mentioned uh vrbo or or verbo i'm never sure which one they go by so they're they're a close but no cigar competitor right so airbnb they have a bigger amount of listings i think uh verbo is something like two million and there's also a limit in terms of what you can rent in verbo so you you have to rent the whole property in Vrbo whereas for Airbnb could be a private room the whole house a tree house all the way up to a castle right so it's just it's not quite the same from an investing perspective one of the things that we often love about Airbnb is that it's incredibly asset light

then they have a really profitable business model so in the past 12 months Airbnb has generated 10 and a half billion dollars in revenue and over four billion dollars in cash from operations They have over $4 billion in free cash flow in the trailing 12 months. What is Airbnb doing with all of that capital? Well, Mary, they spend probably over 60% of that free cash flow. That cash they spend in share buybacks, which is kind of complicated. Sometimes you could have tech companies spending a lot of money on share buybacks, and you You can see them not decrease the number of share count, right?

So they'll spend millions or billions of dollars. And then instead of the share count going up or instead of the share count going down, it goes up. That hasn't been the case for Airbnb. In June, I think the share count went down something like 2%. And so it's not as bad as if the share count were going up. We would still like to see if a business uses some of that cash for business purposes like paying down debt or something like that. Airbnb has some debt, but currently they have more cash

than debt on the balance sheet. So it's really not a problem here. We think about where Airbnb's been, where it's going. Currently, the stock is trading at about 20 times free cash flow. That's less than Uber. That's less than DoorDash. On a price to sales basis, Airbnb's trading at just under, um, just under DoorDash and Uber as well. You know, again, I'm going to go back to Scott's phrasing of it's not quite the Airbnb bust. Okay. That's where we are now. But looking forward, does all that make this an opportune time to be buying Airbnb? What do you think of how it's currently valued? I think it depends. And when we talk about these multiples, these are like napkin math for valuation to try to tell if a, if a company is, is valued at a point where

would feel comfortable stepping in. I think for Airbnb and any company, you could look at it historically for that company. You could go back and say, OK, is this a reasonable price based on the past? For Airbnb, it has definitely had higher multiples than this. It's been over 50 times free cash flow at one point. So, it is better than that. You could also look at the industry in general so uh marriott which you mentioned earlier is that like 26 times free cash flow expedia i think is at 10 and booking.com is at about 20. so it's about on par with the average but i would say it's it's not super expensive but it's also not super duper cheap either and i think what's important here is is to realize that there are still expectations for growth

baked into the valuation and baked into what people think about the stock, even with the decline that happened recently. Scott, I want to move a bit over to you and to get a sense of Airbnb from the perspective of the real estate investor. On investor presentations, calls, et cetera, Airbnb makes really clear that hosts are their ultimate customers. How do most hosts that you talk to, you might be a short-term rental skeptic yourself, but when you talk to hosts and people that are in the short-term rental space, how do they feel about Airbnb and their relationship with the company? Airbnb is a dominant player in the industry. So these hosts are dependent on Airbnb for huge percentages of their bookings. So it's just a fact of life. The strategies around

Airbnb are how do I make short-term rentals? I'm just using it as a verb, right? Like you just said there is around how do I attract the most listings? How do I present it well on Airbnb be specifically? How do I get those first few critical five-star reviews to increase my overall throughput of bookings on that platform? So it's a fact of life. They'll grumble about policy changes from time to time, but there's a total dependency, I think, on this for most operators in the short term rental space. Is that dependency, is there grievance attached to that? As you're describing this, I can't help but think of, okay, third-party sellers might feel the same way about Amazon. Is it a healthier relationship with Airbnb or? So this is where it gets fun, right? I think, you know,

there's a larger number of short-term rental hosts that are professionalizing in the industry and a battle that they're fighting, I think fairly quietly is on how do they get, ship those bookings to other sites like Burbo or can they book directly? So I bet you, you know, if you've been in an Airbnb recently with a professional operator, it's almost certain that you've attempted to use the wifi at that Airbnb. And guess what they ask for when you use the wifi? your email. And they're building those lists to attempt to get those bookings around there, because Airbnb will talk about how, you know, who's paying the fees or whatever. But at the end of the day, I think the guest is paying a 14% fee to Airbnb and the host is also paying

a fee to the Airbnb. And that 17% tax can be avoided with a better experience there. So that is an undercurrent of a soft battle that's being fought. They're not going to go overboard and actually attempt to take a booking on Airbnb off because that would destroy the Airbnb relationship. But there's a lot of things that people, the professional operators are starting to do to try to move people off of that platform and book in other sources to diversify. For those that are going to stay on Airbnb, or I guess maybe the better way to phrase this question is like, if you take the pricing away from it, are there common things that a lot of hosts would like to see from Airbnb that they're not currently seeing?

I think that it comes down to more exposure and more listings. I think that Airbnb is fundamentally the discovery platform for these investors. And the asks at the top of it will be lower fees, more revenue, better pricing around it. So I think that, again, it's enabled the industry. For at least these operators, Airbnb is a great thing. They wouldn't be in the business to the same degree, many of them without it. But I think that obviously it's a big tax to go through them. On the spectrum of real estate investing, what is the challenge level of Airbnb? Like if I am, if I've been thinking about breaking into real estate investing for a while, is Airbnb and short-term rentals, is that the place to start? Or is there a first step that

you might suggest before heading there? It's definitely more active than running a long-term rental business, which is why I run the long-term rental business. And I think what you've seen in the last few years, again, is a lot of people got into this thinking the cash flows are going to be great and found out that, hey, if I'm not actually running this as a professional and kind of an active business, I'm not really going to do that much better at the end of the day than a long-term rental. That said, I think that Airbnb is a great way to get started. For example, in Denver, Colorado, where there are rules that allow owner occupants to Airbnb their property and you're facing less competition. So one of my favorite tactics, if I was starting over on my wealth

building journey today, I would consider buying a property in Denver, maybe with a mother-in-law suite or whatever, living in that and Airbnb being the main unit because I'm going to face less competition. And I'm going to be able to really inflate those cash flows. It's not a scalable system that I can repeat and build, but it's a great cheat code to get started. And I think that's a really, really powerful, powerful tool. And especially for someone maybe earning a median to upper middle class income, getting started. You say that and it sounds like temptingly simple. Is it really that simple? Or if I'm sitting here and I'm listening to this and I'm thinking, oh, okay, buy a building, mother-in-law suite, Airbnb. Okay, let's do it.

am I am I missing something is it really that it's that simple and that hard right because now because like what like what you're doing is you're giving up I mean what that entails this is the concept of house hacking so now we're bringing this back to a mindset about wealth building in a general sense but if you're willing to give up a higher quality lifestyle than you can afford to build wealth then you think about what's the optimal approach to doing that this would be close to that optimal approach and in fact I we can go even further on this Mindy and I discussed a uh concept around adu investing and that's now essentially been enabled in most of colorado so i love that approach for someone getting started can you think about a property that would it make

sense for an adu in an area that would attract that in denver maybe with a detached garage build that now you're talking about a big project but also a lot of opportunity that is accessible to that first time home buyer to get started if you're going to build a business in airbnb that's a little bit different but that's the path that you have to go to actually scale this and i think do it successfully what i think people should be really skeptical of is oh you're gonna go from denver and buy in the smoky mountains and you're gonna buy five properties and you're gonna passively manage your short-term rental portfolio that ain't happening and that's been a pain point for a lot of people uh who got into that in the peak in the last couple years so whether it's a

mother-in-law suite or it's like a whole separate unit what tips might you have for someone who is in who maybe already has an airbnb rental but hasn't gotten much traction and wants to optimize that yeah i think it's starting to treat it like a business so it starts with the pictures right um and everyone will tell you that uh how are you positioning that property how are you pricing that property is it laid out appropriately have you furnished it appropriately do you have your do you have all these tools set up right you need a channel management system that pipes the listing to airbnb to vrbo to the other places that you want to um that you want to pump it and then again that comes down to like a lot of airbnb operators will say you have to get a pricing engine you have

to get a host you know a management system like a hospitable that can handle the tenants and can capture their email address when they sign up to try to log into your wi-fi for example uh and those types of things so uh it's about building those systems out and then i think a lot of airbnb operators will cite the first few bookings as the hardest you kind of have to go down below that price point maybe go above and beyond really entice them to give the five-star reviews because once you get past that 510 mark it becomes a lot easier to attract bookings you've talked about um okay if you're really serious about this turning it into a business and thinking about your airbnb property any property as as a business what are the pros and cons of going at it yourself

or hiring a property manager to handle this stuff yeah well the property management fee is going to be 30 so in a long term like when you talk about long-term rentals right you know the uh the cash flow on a long-term rental might be a couple hundred bucks a month on a several thousand dollar rent check you give ten percent of that away and you've eaten up half of your cash flow after your principal interest taxes insurance airbnb operators are going to charge short-term rental operators going to charge 18 to 30 percent of the um of the revenue for those bookings and the that's the trade-off is can you actually make it um passive there and i think again that's a beauty of real estate investing point is this is not a passive activity unless you hire it out to

a property manager um which makes it semi-passive at that point but what's great about real estate is let's say let's use that example of the person earning the median to upper middle class income in denver buying airbnbs well in the first couple of years and they're getting started in their career manage that that that is a several dozen or maybe hundred hundred plus dollar an hour activity in those first few years and then after you do that a couple of times make your career booms then all of a sudden your time gets more valuable now it's time to hire that out to a property manager and you hopefully deleveraged or cash flows have increased over time and so that's the trade-off that i think in practice a lot of real estate investors make across their journey

we're recording this in denver colorado the colorado senate introduced a bill last year that would have quadrupled property taxes on short-term rentals that bill ultimately died in committee but we hear about regulation about airbnb all the time not just in denver but all over the country um broadly what is the state of those regulations today it's just getting it's too easy right the short-term rental industry is too easy to crack down on people don't like them in their backyards uh they vote against them and it's you're taxing out of towners when you raise taxes like that you know i'm i uh i'm a pro real estate guy but i'd probably vote to raise taxes on short-term rental operators in my own district uh because why not they're coming in i'm gonna

get taxed when i go visit them in their area so i think you're gonna see i think that's a long-term trend that's been in motion for several years and will continue where you're gonna see local markets continuing to crack down on airbnb operators uh make it more painful for folks who to allow guests that cause problems and raise taxes and fees on them. Because why not? Why wouldn't they do that to a large extent? Especially in areas, I think,

that don't need or want that extra tourism activity. So does that change the calculus for potential short-term rental landlords that are here, that are local? I think when you think about short-term rental, you're gonna buy a single-family home as a rental property, you underwrite it as a long-term rental first, that market should be there forever. Then you think about Airbnb as an upside case. And I think

that's how a lot of investors underwrite in there. Not everybody. I think they all should. And you say, okay, great. If I can make an extra thousand bucks a month, short-term rentaling it on average across the year, I'm going to do that. And I know that city council might crack down on my illegal Airbnb operation or make it just harder or change the rules and make my currently legal operation illegal in the future. And I think that's the calculus that a lot of investors run through when they're going in the market. If you're listening to this and you're not attending live, you might not know that we are hosting a live show. We actually have an audience before us right now. Yeah. Thank you for coming. We're going to take advantage of that live audience and

open the floor for questions from any of you all. So whether, again, whether it's about Airbnb as a stock investment from, from the perspective of a real estate investor, or, you know, we can open the door to things beyond that. Um, raise your hand. I'll come find you with this mic and we have our two experts up here. Oh, front row. Easy. How do you see hotels responding to Airbnb? Are you seeing that there's a segmentation of the travel market where there's, yeah, okay. You're taking your, your kids and you want some space and you don't want to be in a room versus you don't want to take out the trash, start the towels, mop the floors and bring the mail in before you leave. Um, or do you see hotels moving like to try to capture some of those, uh, those elements

that are popular for, for Airbnbs where there's, there's more space. You're not all packed into a small space um you know you're more in the neighborhoods you can get a better feel and and how do you see that both you know impacting the the investment piece for people who might want to get into airbnbs and you know stock concerns both for airbnb and the large hotel chains themselves yeah i think from the the professional side i think what the the theme that i i heard what one of the things that i was surprised coming into today to learn is that Airbnb is down so much. Like that was not something I would have expected.

And what I'm hearing is, no, they're growing. Demand is growing in general for travel. And you're going to see more demand, I think, for both Airbnbs and hotels year over year at the highest level. So I think that that's the backdrop here. The question about supply and where that's going to go, I think, is a more interesting piece.

And I think what's going to happen in the next year or two, if I had to guess, is, yes, I think people who want hotels versus Airbnbs have kind of already made up their minds, and that shift has already happened. So I don't think there's going to be a big pattern shift there. But I think that what happens with supply on Airbnb is really interesting to me. And one fear case I have for the short-term rental operator and a bull case for the guest trying to stay in Airbnbs is, what happens if there's a real economic pullback in the of a recession where stock prices drop and lots of jobs are lost because all of these vacation homes

you know there's a yes 30 30 of the market is professionals but 70 is not professional 70 this is their second home or whatever and what happens when you lose your job and you've got a second home well the first thing you do is you run it out so now you have a lot more supply coming on the market probably with a property manager is going to be pretty good at that the second thing you do is you sell it um possibly to another airbnb operator is going to be more successful so i don't know if that's answering your question i think that the demand piece is going to be strong but the supply piece is going to be the the x factor on the short-term rental side and that will if that comes if if that fear-mongering case that i just made there comes to fruition you'll see the

price lower and more people switching back to airbnb's is that reasonable answer to your question is that what you're looking for yeah i think i was just also asking more like do you see the hotels themselves trying to recapture some of this market or have they mostly just went you know what you're a different thing and we're just gonna we're gonna take the travel segment that we have and leave you with the travel segment that you have i think it's an interesting question and i think hotels continue to lean into things that they're they're good at right business travelers generally go to hotels um people who are high frequency travelers also because they they could get those rewards and then roll them forward. And if you, if you go to a hotel enough,

you can get some of those personalized touches that people do like from Airbnb, right? Like if you're ambassador level at Marriott, you could get chocolates or something when you, when you check in, but, but Airbnb, I don't see them going into a community and buying a house and then, you know, either renting out rooms or renting out the house. I think Marriott tried to do something like with villas or something like that, where it was a little bit different than a regular hotel room. So you might see something like that. But I think also Airbnb is trying to get ahead of that in terms of experiences. They rolled out something called Airbnb icons, where you could have these unique experiences. One that sticks in my mind because I'm afraid of heights, so this is like

a personal nightmare for me, is the house from up. So you could stay in the house from up with the balloons and they raise it off of the ground in a crane or through a crane and that would be terrifying right but that that's something that that's something that only airbnb could do right like marriott or hilton isn't going to be able to do that for you so yeah that reminds me of a great forum thread we had on bigger pockets uh which was discussing about heights well no but it was a different it's the same concept but it was is it should you ethically be required to disclose a haunting to your Airbnb guests? Yes. The answer is yes. The consensus was you charge extra for the haunted house. You can actually. Especially during Halloween. Yes. I love that.

Yes. Big thanks to the Denver Press Club for hosting the event. It's the nation's oldest press club. Make sure you check it out if you're out here in Denver. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.