Motley Fool Money - 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

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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 shipped those bookings to other sites like Burbo 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 Bigger Pockets 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 Full analyst Alicia Alfieri for a look at both sides of Airbnb as a

stock and as a real estate investment. Scott, you and we were all talking beforehand and you said that 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 pulled our audience and said, what's the strategy you're going to pursue? Five percent of them said they were interested in short-term rentals. That carried through to December of 2020, and in 2021, it exploded. 20 percent of our members became interested in short-term rental investing.

That jumped to 23 or 24 percent by the next year, and it's receded back to about 18 percent of our audience in the last year. And I bet you when we put on the poll, the end of this year, we're going to see it in the low teens. So we haven't seen a, 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 bigger pockets content. But we definitely saw a receding or a retraction in interest from there. And I think as we get into it, the professionalizing of that market to a large degree.

As I've 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's the reasoning behind that? Yeah. So one of the things 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 demand, grew quite strongly for Airbnb's, but supply grew faster. And so that was a problem and that compressed 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. Is that answering your question? Yeah, I think so. At least 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, that is not, 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 bearcase 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. And 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 kind of the ability to pay a little. 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 five million hosts, something like eight 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 a statistic came out with an estimate that it's something like $900 billion in revenues for 2024 expected.

So it's pretty big. 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 it that way and to refer to even if they were to VRBO. They might say, oh, I Airbnb. And so that's like quite the following and quite the brand name that you mentioned. investing sometimes we talk about something called the snap test. 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, 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 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, VRBO or Verbo. I'm never sure which one they go by. So they're a close, but no cigar competitor. So Airbnb, they have a bigger amount of listings. I think Verbo is something like 2 million. And there's also a limit in terms of what you can rent in Verbo. So you have to rent the whole property in Verbo. Whereas for Airbnb, it could be a private room, the whole house, a tree house, all the way up to a castle. 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 $10.5 billion in revenue and over $4 billion 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. So that cash, they spend in share buybacks, which is kind of complicated, right? Sometimes you could have tech companies spending a lot of money on share buybacks, and 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 that 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. You know, 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 is trading at 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 company is valued at a point where you would feel comfortable stepping in. I think for Airbnb, you could look at it, in any company, you could look at it historically for that company. You could go back and say, okay, is this a reasonable price based on the past? And so 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 Marriott, which you mentioned earlier, is at 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 not super expensive, but it's also not super duper cheap either. And I think what's important here 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 like 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 how when you talk about, 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?

I mean, 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, like 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 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, like, is that dependency? Is there grievance attached to that? Like, 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? 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 shipped 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 Wi-Fi at that Airbnb. And guess what they ask for when you use the Wi-Fi, 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 that 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 another 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, is there a common, 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 events. 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 it's it's enabled the industry. It's a good for at least these operators. Airbnb is a great thing. They wouldn't be in the business at the same to the same degree, many of them without it. But I think that obviously it's 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 in 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's meat 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 missing something? Is it really that easy? It's that simple and that hard, Right? Because now, because 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, we can go even further on this. Mindy and I discussed a great 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 homebu

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 going to go from Denver and buy in smoky mountains and you're going to buy five properties and you're going to passively manage your short-term rental portfolio that ain't happening and that's been a pain point for a lot of people 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 air-b-nbee 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 and everyone will tell you that 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 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 of their email address when they signed it to try to log into your Wi-Fi, for example,

and those types of things. So 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 5-10 mark, it becomes a lot easier to attract bookings. You've talked about, okay, if you're really serious about this, turning it into a business, and thinking about your Airbnb property, any property 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 cash flow on a long-term rental might be a couple hundred bucks a month on a several thousand dollar rent check. You give 10% 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, I'm going to charge 18 to 30% of the revenue for those bookings. And that's the trade-off is, can you actually make it passive there? And I think, again, that's a beauty of real estate investing point is this is not a passive activity, unless you hired out to a property manager, 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 is a several dozen or maybe 100 plus dollar an hour activity in those first few years. And then after you do that a couple of times, major 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 de-leveraged 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. 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. They vote against them, and it's you're taxing out-of-towners when you raise taxes like that. You know, I'm a pro real estate guy, but I'm probably vote to raise taxes on short-term rental operators in my own district. Because why not? They're coming in. I'm going to get taxed when I go visit them in their area.

So I think you're going to see, I think that's a long-term trend that's been in motion for several years and we'll continue, where you're going to see local markets continuing to crack down on Airbnb operators, make it more painful for folks who 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, like you're going to buy a single family home as a rental property, you underwrite it as a long-term rental first, because that market

should be there forever. Then you think about Airbnb is 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 rentling 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 than 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. Yeah, cheer, everybody. 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 the perspective of a real estate investor,

or, you know, we can open the door to things beyond that. 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 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? Or do you see hotels moving like to try to capture some of those those elements that are popular for for Airbnb's where there's there's more space you're not all packed into a small space you know you're

more in the neighborhoods you can get a better feel and how do you see that both you know impacting the the investment piece for people who might want to get into Airbnb's and you know stock concerns both for Airbnb and the large hotel chains themselves yeah I think from the professional side I think what the theme that 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 that was not something I would have expected and what I'm hearing is no they're growing demand is growing as a in general for travel and you're gonna see more demand I think for both Airbnb's and hotels year over year at the highest level

so I think that that's that's the backdrop here the question about supply and where that's gonna go I think is more is 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, there's a, 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 Airbnb's is what happens if there's a real economic,

pullback in the form of a recession where stock prices drop and lots of jobs are lost. Because all of these vacation homes, yes, 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, 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 X factor on the short-term rental side. And that will, if that comes, 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 people who are high-frequency travelers also because they could get those rewards and then roll them forward and if if you if you go to a hotel enough you can get some of those personalized touches that that people do like from Airbnb, right? Like if you're ambassador level at Marriott,

you could get chocolates or something when you check in. But Airbnb, I don't see them going into a community and buying a house and then 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's something that only Airbnb could do, right? Like Marriott or Hilton is a train, isn't going to be able to do that for you. Yeah. That reminds me of a great forum thread we had on Bigger Pockets, which was discussing.

About Heights? Well, no, but it was a different, it was the same concept, but it was, should you ethically be required to disclose a haunting to your Airbnb guest? Yes. The answer is yes.

The consensus was you charge extra for the haunted house. You can actually. Yeah, the investors. Especially during Halloween. Yes. I love that. Yes.

Big thanks to the denters. 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.