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After the Q3 figures, I already called Airbnb a conservative investment in the tech sector. At that time, the stock was still at $103. Now it stands at 137, but little or nothing has changed in my assessment. The company has a very solid balance sheet and it became clear in the earnings call that everything in the company is still focused on further growth. I also presented the current valuation and the upside potential as part of a multiple valuation.
Expectations clearly exceeded
Airbnb delivered results well above analysts' expectations. In terms of sales, $1.9 billion was achieved instead of the expected $1.86 billion. An increase of 24.1% compared with the prior-year quarter (YoY). If growth had been considered on the same currency basis, it would have been significantly higher at 31%. For the full year 2022, growth was 40% or 46% at constant exchange rates. For the seasonally weaker Q1-2023, the Executive Board forecast sales of 1.75 to 1.82 billion. This represents a year-on-year increase of 16 to 21%. In Nights and Experiences booked, the company posted a year-on-year increase of 31%.
Earnings per share increased significantly and, at $0.48, were far higher than the expected $0.27. For the first time, a profit was also achieved for the full year on a GAAP basis, i.e. in accordance with accounting standards. This was strongly positive at 1.89 billion. In the previous year, there was a loss of 352 million dollars. Apparently, there are still tech companies that can make a profit without countless adjustments.
And this gain comes as little surprise, as operating leverage had been on the horizon for some time. While revenues grew by 40% for the full year, total costs grew by only 19%. In absolute terms, marketing was largely responsible for this in terms of operating costs, while other items such as G&A increased only slightly. The operating margin increased from 7.2% to 21.5%. This is really an impressive result and, judging by the statements of the Executive Board in the earnings call, could actually be sustainable.
A major reason for the only slight increase in costs is certainly that, despite revenue growth of 75% compared to 2019, the total number of employees decreased by 5%. During the Covid pandemic, the company had radically reduced headcount and still managed to deliver one good result after another. A sign of what else, if anything, to expect from Airbnb in the future. CFO Dave Stephenson spoke in the call of an increase in the number of employees in the range of 2-4%.
Regarding the expected profitability for the full year 2023, we have to live with the Adjusted EBITDA margin, which is only meaningful to a limited extent, but since Airbnb has hardly any depreciation and amortization, we primarily only have to consider SBC here. Stephenson held out the prospect of a margin on par with 2022 here. Lower revenue per booking, should be offset by better cost efficiencies. Q1 is expected to be slightly lower than last year in terms of margin, as more marketing spend is moved into this quarter. The idea is that people who have not yet been exposed to Airbnb will learn about the platform in the first three calendar months and then book their summer vacation through Airbnb. For the full year, marketing spend is expected to remain at 2022 levels as % of revenue.
I'm always tempted to ask where the moat lies with companies like Airbnb and very often get the answer: "The moat is the brand. I'm usually not satisfied with that, because I've often seen how low or sustainable the brand awareness is in the end. However, I've come to see it the same way with Airbnb. According to Brian Chesky, they receive over 90% of their traffic directly, i.e. customers don't land on the website via advertising banners or the like, but go specifically to the site and plan their vacation there or book accommodation for various purposes. That's a very valuable asset. Brian thinks that the reason is that the majority, of the apartments offered on their platform, are not offered anywhere else. I have also personally experienced that hosts on their own websites very often offer the apartment more expensive than on AIRBNB. There I grab myself every time to the head. Actually, they should take the same price and then deduct a part of the fee. A win situation for the host and I claim that there are many people my age who look if they just get expensive group accommodation cheaper directly through the host.
A tech company with real cash flow
Unlike many other companies, Airbnb actually generates 'real' cash flow and doesn't just arrive at a barely positive free cash flow through countless adjustments. Of course, the company still doesn't let itself be deprived of the adjustments, but otherwise we wouldn't have anything to do.
As a basis for calculating FCF, we take the reported cash flow from operating activities and adjust for stock-based compensation (the reasons for this I have already explained in detail in a Article presented) and the movements in working capital. This results in an operating cash flow of $2.18 billion, a significant increase compared to the previous year, when only $653 million was generated.
After deducting capital expenditures, free cash flow was $2.16 billion. 343% more than in the previous year. From the low capital expenditures, you can see where the strength of Airbnb's business model lies. The company is very asset-light and has only 1.18 billion long-term assets on the balance sheet. Of that, again, half is goodwill. The very low debt of about 2.3 billion is offset by cash balances of 7.4 billion. Based on the current market capitalization, the enterprise value is 81.7 billion. The current EV/FCF ratio is therefore currently around 38. That sounds a lot, but Airbnb had a decent rally in the run-up to and after the figures and is now pricing in further growth. That also seems understandable to me. Moreover, it is becoming apparent that the company can react very agilely and robustly even to exogenous effects such as Covid. The risks therefore seem low to me.
Growth prospects? Dividend? Share buybacks?
To justify the current valuation, Airbnb needs to show that they can continue to grow. The prospects for this appear to be good, even apart from the guidance for Q1. Fundamentally, we should note that Q4 is rather a weak quarter and that this good result could be a harbinger of what might be possible in terms of increases in the coming quarters.
According to CEO Brian Chesky, Airbnb is also a self-feeding system. 36% of hosts, people who provide accommodations, in Q4 were former guests. Total listings were 6.6 million at year-end.
Apart from this, the company now offers travel insurance as an additional service in 8 countries in order to further expand margins without incurring major additional expense. This form of service is also to be rolled out and expanded further.
Airbnb is also increasingly working with building developers as of now to develop Airbnb-friendly apartments in various cities that are specifically tailored to the needs of the system, meaning subletting the apartments.
Airbnb Experiences, on the other hand, is a marketplace for experiences. Unlike Jochen Schweizer, for example, the focus here is on the experience 'with' another person and not so much on the activity itself. A perfectly sensible addition that fits in very well with the Airbnb feel. Chesky expects significant growth here in the coming years.
When asked by an analyst what investors can look forward to in terms of cash on hand and how it will be used, CFO Dave Stephenson said Airbnb is still in growth mode and capital will be used accordingly. Therefore, a sufficient stock for potential acquisitions should always be kept. That always raises the question of necessity for me, although it wasn't specified whether it might be AI companies or the like. That is something that we have seen more frequently recently, i.e. rather smaller takeovers and not necessarily the direct purchase of market shares through the acquisition of direct competitors.
With regard to the remaining cash balance, the company will consider further share buybacks to negate the impact of stock-based compensation. In 2022, 1.5 billion was spent on share buybacks. In 2023, about one billion SBC is expected, which would be a very modest increase of about 10%. Also something I find very likeable about the company.
Valuation
I have shown the current margins on the cost side in the following table. 2021 and 2022 are the actual figures and 2030 possible figures in the context of a base, bear and bull case.
Margins are expected to remain at least at the same level as Airbnb has already proven that they can grow significantly while reducing costs in % of revenue. This really affects all costs from COGS to marketing. Therefore, even in the Bear Case, I assumed at least flat margins but a lower CAGR. I have excluded the restructuring charges, as they are due to the unusually high redundancies in 2020 and should therefore be regarded as one-off costs.
17% in the Bull Case are based on analysts' estimates up to 2025, but in my opinion they are anything but set.
Based on the above assumptions, the base case for EBIT multiples in the range of 15-40 results in an IRR of 3.1 to 16.5%. I consider the multiple range of 25-40 to be the most likely based on the valuation of peers and other tech companies that are now more in the maturity phase. According to this assumption, a potential outperformance against a broadly diversified ETF would therefore be possible even in the bear case. However, much hinges on the 10% CAGR assumption in this case. Whether and how well Airbnb, as a potential cyclical, can hold its own against a recession in future years remains to be seen.
Conclusion
I am quite taken with Airbnb. I particularly like the asset-light business model and the real free cash flows that can already be seen. The growth prospects are also still very good and the principle of Airbnb is virtually unthinkable without it. What I can't yet gauge is the impact of a recession on the company. Will sales collapse in the same way as those of the long-established competition? Even if that should be the case, the existential risk seems very low due to the cost structure and the balance sheet could hardly be cleaner. Should there be a setback, I would definitely consider buying Airbnb.
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