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RIIQ Newsletter

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Every Sunday morning, we publish a free write-up within our RIIQ Newsletter with leading insight and analysis — the aim is to help investors of all skill levels focus on key fundamentals, gain confidence in developing an investment strategy, and gain an edge in the push to generate true wealth.

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In Today’s Newsletter

• The post-COVID hangover

• AirBnB’s unique, capital-light business model and its benefits

• An assessment of international expansion as a key opportunity for AirBnB growth.

• The current dip in the stock price could be an opportunity to buy in at a discount

Deep-Dive

Deep-Dive

Today, we're diving into the famous Airbnb ($ABNB). The platform has seen its fair share of highs and lows recently, and these shifts have been reflected in its stock price. So, let’s unpack what’s going on and see where Airbnb stands in 2024!

As always, we’re keeping things straightforward. No complex jargon here—just a clear overview to help you understand the key points to consider before making any investment decisions.

A LITTLE BACKGROUND

Airbnb, the brainchild of Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, has come a long way since its launch in 2008. Originally designed to help people rent out extra space in their homes, Airbnb has grown into a global giant in the hospitality industry, offering everything from short-term apartment rentals to unique experiences like treehouse stays and guided tours.

In 2021, Airbnb hit a major milestone: the best financial year in its history. This was driven in large part by the pandemic, which disrupted traditional travel and prompted a shift in how people viewed work and leisure.

With remote work becoming the new norm, many opted for "workations"—longer stays in different locations where they could mix work with pleasure. This trend was a boon for Airbnb, boosting its revenues and helping the company bounce back from the early pandemic slump.

But fast forward to 2024, and the landscape looks quite different. The pandemic-fueled boom is fading, and Airbnb, like many other companies, is facing new challenges.

THE POST COVID HANGOVER

Airbnb’s 2021 success was no fluke. It capitalized on the massive shift in travel behavior during the pandemic. As people sought out safer, more isolated travel options, Airbnb’s business model—offering homes and unique stays—fit the bill perfectly. The company’s revenues soared, with a record-breaking $2.2 billion in Q3 2021 alone.

However, this post-pandemic success was not destined to last forever. As travel restrictions eased and traditional tourism began to recover, the demand for Airbnb's unique offerings started to level off. By 2024, it became clear that the "pent-up demand" from the pandemic was waning, and Airbnb’s growth began to slow.

In mid-2024, Airbnb’s stock took a hit after the company reported its Q4 earnings. Despite exceeding Wall Street’s expectations with $2.22 billion in revenue—a 17% year-over-year increase—investors were spooked by the company’s cautious outlook for the year ahead.

The stock dropped -4.4% in pre-market trading, reflecting concerns about a potential slowdown in growth.

WHY IS AIRBNB’S STOCK DROPPING?

So, what’s driving this dip in Airbnb’s stock? There are a few key factors at play, such as macroeconomic concerns: the broader economic environment is sending mixed signals.

On one hand, the U.S. economy is showing signs of resilience, with unemployment claims falling in July 2024. On the other hand, the unemployment rate has actually edged up slightly, and there’s growing concern about consumer spending. These uncertainties are causing turbulence in the markets, and Airbnb, along with other consumer-driven stocks, has felt the impact.

Then, as we said, we have slowing growth: Airbnb thrived on the surge in travel demand post-COVID, but that demand is cooling off. In 2024, management forecasted a more modest growth of 8-10% for Q3, a significant drop from the double-digit growth seen in the previous years.

Investors are naturally concerned about this deceleration, especially as the company faces tougher year-over-year comparisons. And beyond the numbers, Airbnb's forecasts for the future didn't inspire much confidence.

The company suggested that demand would be stable, but not spectacular, in the first half of 2024. This cautious outlook has made some investors nervous, contributing to the share's recent decline.

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” - Warren Buffett

A DEEPER LOOK AT AIRBNB’s RESILIENCE

Despite these challenges, it’s not all doom and gloom for Airbnb!

The company still has a lot going for it, particularly when it comes to its margin. Let's take a look at the net margin (net income/revenue) of Airbnb vs. Booking, one of its main competitors.

Airbnb seems to have a stable or even growing net margin, which is a rather positive signal when it comes to analyzing a company. The company is still generating substantial cash flow, and that doesn't seem to be changing!

Note that Airbnb's financial model is a major advantage, setting it apart from a number of traditional hotel chains that require significant investments in real estate. By not owning the properties it lists, Airbnb keeps its overhead low and maintains a flexible cost structure that adapts to market changes.

This capital-light approach not only generates strong, recurring revenue through commissions but also allows for high levels of free cash flow, which can be reinvested into growth or in share buybacks as it is currently doing.

To illustrate this, let's take a look at the levels of cash from operating activities generated quarterly (in billion $) by Airbnb and two indirect competitors, Marriott and Hilton. The platform's low cost structure enables an unrivalled level of cash flow compared to well-known hotel brands. Quite simply, they are different business models!

As detailed in this write-up by eInvesting for Beginners, determining and understanding the capital intensity of a business will help you find great investments.

A business with an asset-light model enjoys various advantages over its capital-intensive counterpart:

• Lower Capital Requirements

• Higher Profit Margins

• Flexibility to Seize Business Opportunities

• Doesn’t Need Debt to Grow and Operate

• Focus on Innovation, Product Development, and Customer Satisfaction

• Cash-Generating Machines

• Inflation Doesn’t Impact as Much

“We still love a business that takes very little capital and, earns high returns, and continues to grow, and requires very little incremental capital.”

~ Warren Buffett

With respect to share repurchases, the company announced a $6 billion share buyback program at the beginning of 2024, describing this year as a pivotal year for the company. In Q2 2024 alone, the company repurchased $749 million worth of shares.

Over the past year, it has spent $2.75 billion on buybacks, reducing the number of shares on the market and increasing the value of the remaining shares. With another $5.25 billion authorized for future buybacks, Airbnb is signaling that it believes its stock is undervalued.

Besides, how can we even verify that the stock is under-valued, as they may claim? After analyzing the net margin, let's take a look at the P/E ratio (Price/Earnings per share).

Compared to Booking, the ratio seems quite low (16 in August 2024). At constant earnings, as the price has fallen, we can deduce that the share is indeed potentially undervalued right now.

Now, let's take a look at Airbnb's ROE. As a reminder, this indicator calculates the financial return on shareholders' equity. The indicator has been stable for several months, at around 75%, so the company seems to be cruising at this stage!

THE GLOBAL EXPANSION STRATEGY

Airbnb isn’t sitting back and waiting for the market to improve. They seem to react quickly. In addition to share buybacks, the company has set its sights on international growth, expanding into underpenetrated markets like Switzerland, Belgium, and the Netherlands. This strategy follows successful expansions in countries like Germany, Brazil, and South Korea, where Airbnb has seen significant gains.

Indeed, international markets represent a huge opportunity for Airbnb. While the company is well-established in North America, there’s still plenty of room for growth in Europe and Asia.

For example, the company has made big strides in China; in Q1 2024, nights booked on an origin basis in China increased nearly 80% on a year-over-year basis. As Airbnb continues to push into these markets, it could open up new revenue streams and help offset the slowdown in its core markets.

One of the biggest challenges Airbnb faces as it expands internationally is competition. In Europe, the company is up against well-established rivals like Booking Holdings, which has a strong foothold in the region. Most of all in Asia, local players like China's Tujia and Meituan are formidable competitors, offering similar services tailored to the unique needs of their markets.

WHAT ABOUT COMPETITION?

Then, Airbnb has a strong competitive edge, thanks to its network effect, where more users enhance the platform's value. This, along with global brand recognition and a wide range of accommodations from budget to luxury, makes Airbnb a go-to for unique and local experiences. Its adaptability and innovative offerings, like Airbnb Experiences, help sustain this advantage long-term.

When it comes to competitors, Booking.com is a serious player with its vast array of accommodations, but as we said, traditional hotel chains like Hilton and Marriott are less of a direct threat. These hotels cater to travelers seeking consistency and amenities, which is different from Airbnb's focus on authentic, local stays. Airbnb’s unique market position allows it to stand apart, keeping it ahead of the competition.

So to stay competitive, Airbnb will need to leverage its strong brand and innovative approach to travel. The company’s focus on its community-driven model could help it stand out in these crowded markets. However, the battle will be fierce, and success is far from guaranteed with the arrival of new players!

LOOKING AHEAD

So, where does Airbnb go from here? The company is at a crossroads, facing both significant opportunities and risks.

On one hand, Airbnb’s strong free cash flow, aggressive buyback strategy, and international expansion plans are all positive signs. These factors suggest that the company is well-positioned to weather short-term challenges and emerge stronger in the long run.

On the other hand, the macroeconomic environment remains uncertain. If the U.S. economy slips into a recession, consumer spending on travel could take a hit, further slowing Airbnb’s growth.

Additionally, the company’s reliance on short-term rentals leaves it vulnerable to regulatory changes, which have become more common in cities around the world, like New-York City.

For investors, the recent drop in the stock price could be seen as a buying opportunity, especially for those with a long-term perspective. As Airbnb’s current price-to-earnings ratio is near its lowest ever, it would suggest that the stock is undervalued relative to its earnings potential. However, the short-term road is likely to be bumpy!

CONCLUSION

Airbnb’s journey through the post-COVID world has been anything but smooth. The company’s stock has been buffeted by macroeconomic concerns, slowing growth, and cautious guidance. Yet, despite these challenges, Airbnb remains a powerful player in the travel industry, with strong cash flow and ambitious plans for global expansion.

For those who believe in Airbnb’s long-term potential, the current dip in the stock price could be an opportunity to buy in at a discount. But as with any investment, it’s important to do your homework, understand the risks, and be prepared for the possibility of further turbulence ahead!

Now that you’ve got the lowdown on Airbnb, you’re in a better position to decide your next move. Whether you’re a seasoned investor or just getting started, staying informed is the key to making smart investment decisions. So, keep an eye on the market!

You’re now in a better position to dive deeper and decide how to proceed.

Good luck! And if you want more...

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Key Insight

The platform's low cost structure enables an unrivalled level of cash flow compared to well-known hotel brands.

This capital-light approach not only generates strong, recurring revenue through commissions but also allows for high levels of free cash flow

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