As Hospitality Recovers, Check Into Airbnb

Connected networks and data are changing hospitality, and it is a big opportunity for investors.

Airbnb (ABNB) on Tuesday reported that revenues in the fourth quarter swelled to $1.5 billion, based on 73.4 million nights booked. The company also reported its first ever quarterly profit.

Shares are a long way from their record levels. Investors should take another look.

The San Francisco, Calif.-based business gets a bad rap. Too often investors throw unprofitable west coast businesses into the same bucket. They are thought to be more sizzle than steak, with likely losses extrapolated for years. Admittedly, there are many Silicon Valley companies that fit this description.

Airbnb has a sizzling idea: An online marketplace for lodging, primarily homestays.

It is the best of all worlds. The company’s software connects travelers and property owners, then takes a commission for the hookup. There is no inventory, almost unlimited selection and no muss. It is purely transactional.

There are other businesses that fit this model. YouTube is one. eBay (EBAY), Amazon.com (AMZN), Mastercard (MA), and Uber (UBER) are others. In every case the business is putting buyers and sellers together, then skimming a commission off the top.

The company began in 2008 when Brian Chesky and Joe Gebbia came up with a way to profit from the Bay area’s tight accommodation market. They plopped an air mattress on their apartment floor and called it an air bed and breakfast. A year later they brought in Nathan Blecharczyk to build out the codebase. Airbnb had venture capital funding by 2009, 10,000 users and 2,500 listings.

That’s when the money started pouring in. Sequoia, Andreessen Horowitz and even Ashton Kutcher invested in the formative years. Tiger Management, Kleiner Perkins Caufield and Byers, and Google Ventures were involved by 2015 as the company expanded globally.

The genius of Airbnb is value. Patrons can often rent an entire apartment for the same rate as rooms at established hoteliers like Marriot (MAR) or Hilton (HLT). Shareholders get a great business with operating margins above 80%, and overwhelming scale.

During the fourth quarter Airbnb announced revenues swelled 78% year-over-year, to $1.53 billion. The number of nightly stays increased by 59%, to 73.4 million. And the business is set to improve mightily as the global economy recovers from the covid-19 pandemic and reopening.

In a letter to shareholders Chesky noted that the number of listing has swelled to 6 million. Hosts earned $34 billion in fees during 2021. And business metrics in 2022 should exceed pre-pandemic levels.

There is a lot of enthusiasm about reopening. Investors expect the hospitality sector will finally return to normal. Restaurants will open, airlines will fill their jets and theme parks will swell with fun seekers. Airbnb is the ultimate reopening investment, and exposure to inflationary pressure is limited.

Restaurants will face higher labor costs. Food prices are rising, too. Airlines are battling rising jet fuel costs. Theme parks face labor shortages. Airbnb operates a marketplace. It is an agent.

Shares have come under pressure with the rest of technology. After reaching the $210 level last November the stock fell all the way back to $135. Shares have recovered some, last trading at $180.07.

At current levels shares trade at 186x forward earnings and 22x sales. While these metrics are extreme, they do not tell the entire story of Airbnb.

The business has tremendous scale and leverage. Although profits amounted to only $55 million in Q4, the company has operating margins of 81%. The meager profit is due to the network buildout. After 14 years that process is mature.

Longer-term investors should consider buying shares into any near term weakness.  

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