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Don’t sleep on this king of house rentals – Grizzle

Airbnb goes public this month and has the distinction of being the biggest public offering of December in what turns into a busy IPO month.

To prepare you for the early days of the action, we went through the financial documents to understand what this company is all about.

We think the pandemic is giving investors a gift with this one.

A real unicorn at a reduced price.

Let’s dive into it.

Airbnb just broke the surface of a massive market

Airbnb is just starting to disrupt an absolutely huge market.

Between short stays, experiences and long-term rental potential, the market is worth over $ 1.6 trillion in 2020.

The gross value of Airbnb reservations, before COVID-19, was $ 38 billion per year, or just 2.3% of the market.

Airbnb is only scratching the surface

As big as you already thought, AirBnB is just getting started.

Management is spending a lot of money on R&D to figure out how to further expand their market opportunities and the way the team has responded to the coronavirus gives us confidence that they will find growth in unlikely places.

COVID-19 Wasn’t Kind But Airbnb Surprised Us

Yes, all of the short-term rental business was impacted this year, but the resilience of Airbnb’s business model was fully visible.

Providing a private space for families, close friends or individuals has now proven to be a good business model in and out of a pandemic.

Looking at booked nights, Airbnb suffered as much as hotels did when the world was on lockdown, however, the rebound was so much stronger for the company.

In September, Airbnb bookings were down only 23% year on year, while global hotel chains were still down 50%.

Year of nights reserved

The very fact that the company has been able to keep the number of registrations stable in the midst of a pandemic tells us that management has a lasting relationship with its hosts, the cornerstone of the company.

How did they do it? Local trips

Airbnb has been more resilient than traditional housing providers because it has a much more diverse source of housing supply.

While hotel chains are clustered in major cities and along travel corridors, Airbnb hosts can be located literally anywhere.

Not to mention, an Airbnb rental is usually private and doesn’t require you to be among dozens of other guests, which has been a huge plus during a pandemic.

In 2019, nights booked on Airbnb were 51% national, while in 2020, 77% of nights were local, up 35% year-over-year.

Local travel has taken over for international travel

Airbnb is unique because its rental inventory truly represents the entire global housing market.

The company will continue to innovate and find ways to increase the number of ways consumers will want to interact with the Airbnb platform.

Airbnb is a true technological unicorn

The word “unicorn” was coined in 2013 to describe the rare occurrence of a billion dollar startup.

Now, with the market whipped into a cappuccino like froth, $ 1 billion startups are pretty common.

A market cap of $ 1 billion may be common now, but a profitable startup is still the real unicorn.

Airbnb is that unicorn.

Unique in the startup landscape, Airbnb has positive free cash flow, which means there is excess cash after reinvesting in the business, since 2016. Airbnb has an amazing business model that works much like an insurance company.

Customers pay cash up front for a rental they can’t use for months.

In the meantime, Airbnb can invest this money and earn interest that it keeps. They are effectively paid to borrow money from customers.

Additionally, the business is inherently more profitable than hotels due to low capital intensity, software and not suites.

Airbnb and hotel gross margin

Source: Airbnb S-1, http://www.Ycharts.com

Airbnb is a real unicorn, offering investors rapid growth and free cash flow, a very attractive combination.

Putting the IPO price of $ 68 in context

The latest indications are that Airbnb will price its IPO at $ 68 / sh, valuing the company between $ 41 billion and $ 47 billion depending on the number of shares.

Based on our expectations of a 35% rebound in revenue in 2021, the company goes public at 9 times next year’s revenue.

9x would make Airbnb the most expensive short-term rental inventory by around 6%, compared to main competitor Booking.com.

Even though Airbnb will go public as the most expensive of the bunch, that’s actually a reasonable estimate compared to most other IPOs this year.

DoorDash, for example, has priced its IPO at a 50% premium over the next most expensive competitor and, as of today (December 9), is trading at a 170% premium.

Investors are getting a slight reduction on the price of Airbnb’s IPO thanks to the ongoing pandemic.

If Airbnb had gone public at the end of 2019, the IPO’s price would likely have been much higher than any other competitor in the market, simply because of the company’s enthusiasm.

Airbnb is billed above hotels and booking sites

Source: Airbnb S-1, Grizzle estimates, YCharts

Airbnb is worth $ 550 by 2030 or $ 250 today.

Even though the IPO price of $ 68 is not cheap, we are all day long buyers because we believe there is a significant rise in the stock over time.

Airbnb has consistently outperformed its online competitors Booking.com and Expedia since its inception and will continue to grow once we get past COVID-19.

Source: Airbnb S-1, http://www.ycharts.com, Grizzle estimates

Booking.com is Airbnb’s scarecrow and the management team has managed to increase revenue by 21% for more than a decade.

20% growth for a decade

Source: http://www.ycharts.com

We believe Airbnb can do even better given the small part of the market it currently has, which offers a huge avenue for growth.

Management is always experimenting with how to break into the experience and long-term rental market and once they do, growth can easily pick up.

Airbnb is on a better growth trajectory than booking.com and we believe revenue can increase by 35% over the next 10 years, compared to 50% on average over the past 4 years.

Booking.com compared to Airbnb since its inception

Source: Airbnb S-1, Grizzle estimates * The dotted line is Grizzle’s estimates for 2020-2030

The advantage is so great here that investors can make money on this stock even if there are growth hiccups along the way.

With stocks valued at $ 250 / sh today, we’re comfortable buying into the IPO even though it inevitably trades well above $ 68 / sh for the first trade. .

We recommend that you invest 25% of your total allocation up front and then increase it as the business proves the growth is on the mend.

Grizzle’s buy / sell tool will show you the way

Our visual guide to stock prices below helps us decide whether stocks are too expensive or cheap in a given year as they get closer to our price target.

At the top of the range is an annual return of 7%, or $ 260 / sh today, which is the minimum we will accept for the level of risk inherent in the Airbnb business model.

At the bottom is an annual return of 20%, or $ 74 / sh today, a hell of a good rate of return that any investor can be satisfied with.

In the red zone, Airbnb is a sale because the stock has run too far, too fast.

In the green zone, you buy all day because the annual increase should be significant.

Buy and sell points for Airbnb until 2030

Airbnb isn’t a fad, it’s a real disruptor, and should be on any investor’s long-term buying list.

* Assumptions for a target price of $ 550

* 35% CAGR of income until 2030

* Margin of 25% FCF in 2030 (25% below Booking.com)

* 6x the income multiple in 2030 (low end of Booking.com)

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and / or Grizzle employees hold positions in the company (s) mentioned in the article. For more information, please see our Content Disclaimer.


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