Airbnb Has A Purpose and CEO Chesky Is Proving A Visionary. This Could Drive The Stock 50% Higher.

There is a reason why Warren Buffet and Charlie Munger have never bought a new issue (IPO). It’s because they are manufactured investments, orchestrated in such a way that the investor gets the worst deal possible. I concur. The very thought of a group of people who make the optimum amount of money by selling you an investment at the highest possible price just makes my stomach turn. Wind it back to my previous article on Uber Technologies, Inc. (UBER) and the initial sale to the public. The stock took two and a half years to become interesting again. It was one of the highest-level pump and dumps I’ve seen, and I’ve seen a few having spent 30 years in the business. You rarely see an IPO cheap on a value basis. Usually, I wait until the snap crackle and pop to die out and look in the wreckage of discarded names when they are forgotten about and unloved. Spinoffs are similar investments in that respect, although they are less manufactured and, quite honestly, a better place to dig for gold. However, every now and then an interesting fallen IPO appears with the correct ingredients.

Bring on Airbnb, Inc. (ABNB). Chief Executive Brian Chesky is one of the humblest billionaires on earth. He’s gone from zero to being worth a staggering $1.9 billion in a short space of time. The Co-Founder, CEO, Chairman and Head of Community of the tech juggernaut kicked off the firm’s life in San Francisco 14 years ago because he could not afford to pay his rent.

And like most great things, Airbnb was born out of necessity, not greed.

When I look for potentially great companies to invest in, I try to evaluate their purpose. Their “‘why.” This essentially translates to “what problem do they solve?” If you think about it, all great companies solve a problem. Apple (AAPL), Tesla (TSLA), Google (GOOG), etc. Moreover, their mission statement connects with the problem, and with that, there is an inherent need for the business.

“Airbnb’s mission is to create a world where anyone can belong anywhere and we are focused on creating an end-to-end travel platform that will handle every part of your trip.”

The global pandemic that has caused a lot of us to change our lifestyles has not only enforced Airbnb’s “why,” it has brought it forward years and made the company very valuable. This gap between price and value is where you should look for an investment.

Chesky’s decision to live as an Airbnb guest for an undefined period could unlock the key to others following their dream to live as remote working “digital nomads.”

In 2020, CEOs of the top 350 firms in the U.S. made an average of $24.2 million each, but in contrast Mr. Chesky makes $420,982 and is not the highest paid executive on the board of his own company. The year Airbnb was launched (2008) was during the height of the Great Recession with 8.8 million jobs lost in America alone.

Man On A Mission

On February 4, 2022, he Tweeted, “Airbnb Hosts have earned $150 billion since we started. It began when my roommate Joe and I couldn’t pay our rent. We inflated 3 air mattresses and created an Airbed & Breakfast. Sometimes when you solve your own problem, you’re onto something bigger…” Chesky and (Joe) Gerba were college buddies at Rhode Island School of Design (RISD).

Now, Joe is the Chairman of Samara, an experimental product development team at Airbnb, as well as chairing Airbnb.org, a community-powered non-profit connecting those in crisis with places to stay. Airbnb has numerous subsidiaries and has made inroads to pursue the notoriously difficult Chinese market. The company now has listings in more than 220 countries and regions, and is currently valued at $114 billion. Chesky’s theory is to prove the pandemic has turned the world around with people now having new freedom to travel. He’s also banking on the future of jobs changing to potentially “living as a service” for wherever people want to go and work remotely. Whether it be cities, country, or beaches around the world, Chesky set off on an Airbnb adventure of his own to prove his point on January 18. And with countries worldwide finally opening their borders – including the long-awaited access for vaccinated travelers to Australia from February 21 – the world is literally an oyster to all Airbnber’s who may believe wherever they lay their hat is their home.

Chesky Outlines The Future of Travel

Chesky may prove to be a visionary in the making. Clearly the old school word “‘flexitime” is starting to become even more flexible and working from home (or anywhere for that matter) seems to have become the norm. Recent studies show that companies with remote work programs have reported excellent productivity. This has prompted unprecedented moves away from big cities and, more importantly, the real kicker for the stock is the ability for people to vacate to anywhere and anytime they want, which will give ABNB a direct line to increased profitability. As Chesky recently said, “The pandemic has created the biggest change to travel since the advent of commercial flying.” Millions upon millions of people can live anywhere and ABNB has clearly become the hidden “‘opening up” investment everyone has been looking for.

How The Numbers Stack Up

As US leisure travel spending ($790 billion) is expected to surpass pre-pandemic (2019) levels by mid-2022, ABNB is turning out to be one of the big beneficiaries. Currently, there are six million properties marketed on ABNB (active listings). The global supply lies in the range of 12 million to 16 million properties (could be as high as 20 million). Therefore, there is still a while (at least three to five years) for ABNB to hit the supply-side ceiling. Furthermore, in the last six months, the company optimized its performance through disciplined marketing and it indicated it will maintain this course. In our view, this strategy will bring required profitability (adjusted EBITDA of $3.4 billion by FY24E) and free cash flow ($3.6 billion by FY24E) to support and improve the current elevated valuations. See here for ABNB’s earnings results (published after market February 15, 2022).

The only negative we see here at The Edge is emerging competition coming from a recently-listed vacation rental company Vacasa, Inc. (VCSA, market cap $1.5 billion). However, VCSA’s scale remains very small near 30k properties against ABNB’s 6m, meaning this new competitor has only around 0.5% of the total ABNB properties. Therefore, we do not anticipate a big impact on ABNB in the near future.

Our analysis finds that with the Work-From-Home model and the flexibility that affords workers and the rise in longer stays while traveling are key catalysts for this major player in the booking space. We expect Airbnb to retain its premium against its peers and recommend investors buy this for the long-term. On the valuation front, given ABNB’s demonstrated superiority over competitors, we expect the company will continue to command a 4x to 5x premium over its FY24E EV/EBITDA peer average of 10.3x. This translates to a near-50% in upside for the stock at current levels.

To request The Edge’s analysis, see here.

I am an owner of shares of ABNB.

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