Airbnb Stock -- Investing In What We Can't See

The market is worried about slowing growth and that's our opportunity.

Author

Travis Hoium
August 08, 2024

This has been one of the more vexing earnings seasons since starting Asymmetric Investing. In “showing my work” as an investor I not only do deep dives on every stock I own, I tell premium subscribers what I’m buying and why I’m buying it before each purchase.

With the right long-term mindset and frameworks, I think this will lead to market-beating returns. On the downside, if I’m wrong, I do so in public.

In Q2 2024, I’ve been “right” about the revenue and profit growth of a lot of the companies I’ve invested in. I’ve been “wrong” about their stock movements after earnings.

Airbnb was a great example of this dynamic this week. The company reported an 11% increase in revenue to $2.75 billion, bookings were up 11% to $21.2 billion, and free cash flow was $4.3 billion over the past 12 months putting the enterprise value to FCF at about 15x. So, why did the stock drop 15% in response?

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What Can Be Seen

What the market didn’t like was the company’s slowing growth rate. You can see in the chart below that growth has slowed significantly since the pandemic boom.

In Q3 2024, management thinks growth will fall further to 8% to 10% year over year.

I could quibble with the reality here like the fact that travel spending was over-inflated in 2021 and 2022 and we’re seeing a snap back to more normal long-term trends right now. But the reality is that growth rates are on the decline.

This post does a great job outlining the downside of Airbnb.

  1. Growth has slowed to high single digits.

  2. Margins will likely decline in the future as management spends to boost growth.

  3. Falling interest rates will be a headwind to the interest income on ~$20 billion in cash on the balance sheet.

All of these “fears” are true. What we can see at Airbnb and restaurants and airlines and hotels is slowing growth and even declines in some cases.

But every analysis of Airbnb that I’ve seen overlooks what can’t be seen. There’s only a passing mention of experiences. Hotels aren’t brought up. Neither are flights. Or car rentals. Or artificial intelligence.

Optionality in Airbnb is being entirely overlooked.

This optionality and what we can’t see is where that asymmetric opportunity in Airbnb lies.

What Can’t Be Seen

In 2016, a little company called Apple had falling revenue and profits as Android was taking market share in smartphones. Investors questioned the company’s future and the stock traded for just 10x earnings (less than that if you pulled out cash).

What happened next?

Yes, the iPhone, Mac, and iPad grew over the next eight years, but at modest 4.9%, 3.5%, and 3.1% compound annual rates respectively.

What drove Apple stock up 642% since September 2016 was the booming wearables and services business.

Investors underestimated the optionality and opportunity in businesses that extended Apple’s core.

What can’t we see at Airbnb?

As investors, we’re putting a lot of faith in the leadership of businesses to find new opportunities.

This is a risk. It’s also our biggest opportunity.

Wall Street analysts can’t model products that don’t exist.

This is why one Asymmetric Investing framework is to over-index to founders, like Brian Chesky. He’s innovated before and built Airbnb to what it is today and he has the vision and the gravitas to forge a new, more expansive path forward.

What might that path look like?

Airbnb has given us some ideas.

Experiences

Airbnb has always been about unique lodging experiences and it’s leaning into that with Icons. You can see below, there are wild and interesting icons that serve as both great marketing and a new revenue source.

This is only scratching the surface of experiences. But we don’t know exactly what that means.

Will Airbnb lean into third-party experiences like day trips and family excursions?

Can Airbnb connect me with the most interesting wineries to visit in France or the best scuba instructor in Belize?

Experiences have the potential to be a much bigger market for Airbnb and it naturally augments the core business.

Hotels

Airbnb has always been seen as a non-hotel option. But Chesky seemed to open the door to hotels being a bigger piece of the business in the future.

For everyone who books an Airbnb, about 9 people book a hotel. And so if we can get just one of those guests to book on Airbnb that's currently booking at a hotel platform, we would go from nearly 0.5 billion nights a year to 1 billion nights a year. And there's 2 ways to do that. One is the increased reliability of homes in Airbnb because #1 reason people tell us they book hotels is they're typically more reliable. They know what they're going to get. They have a front desk. The other is adding hotels in Airbnb. And we're not philosophically misaligned with adding hotels. If we were, we would have never bought HotelTonight before the pandemic. We just haven't prioritized hotels. We think of hotels as filling in network gaps during high occupancy nights. We generally think our travelers, if there's an incredible home at a low price, they're always going to choose that.

…

There are also some use cases where hotels are better and Airbnbs are better. If you need a space for one night, you're a traveling alone, you're business traveler and you plug in and you plug out, a hotel is better.

Brian Chesky, Co-Founder and CEO

I view this as Airbnb maturing into a position where it understands its place in the market, including its strengths and weaknesses. Airbnbs as we know them can’t be all things to all people.

If Airbnb is going to be a true travel platform, it needs to include hotels. It also needs air travel and car rentals, which could make it your travel concierge.

Artificial Intelligence

CEO Brian Chesky has been talking about AI for a few quarters and the vision of building a “travel concierge”. It sounds like that will take more time, but is still very much in the cards.

This is a long quote, but it provides context and ends with the long timeline to build such a concept.

Generative AI, ChatGPT launched late November 2022. When it launched, I think we all got like incredibly excited. It was kind of like the moment probably some of us first discovered the Internet or maybe when iPhone was launched. And when it was launched, you had the feeling that everything was going to change. But I think that's still true. But I think one of the things we've learned over the last, say, 18 months or nearly 2 years -- 22 months since ChatGPT launched is that it's going to take a lot longer than people think for applications to change. If I were to think of AI, I'd probably think about it in 3 layers. You have the chip. You have the model. And you have the applications. There's been a lot of innovation on the chip. There's been a lot of innovation on the model. We have a lot of new models, and there's a prolific rate of improvement in these models. But if you look at your home screen, which of your apps are fundamentally different because of the AI, like fundamentally different because of generative AI? Very little, especially even less in e-commerce or travel.

And the reason why is I think it's just going to take time to develop new AI paradigm. ChatGPT [ is an AI model interface that could ] have existed before AI. And so all of our paradigms are pre-AI paradigms. And so what we need to do is we need to actually develop AI applications that are native to the model. No one has done this yet. There's not been one app that I'm aware of that's the top 50 app in the app store in the United States that is a fundamentally new paradigm as fundamentally different as a multitouch was to the iPhone in 2008, and we need that interface change. So that's one of the things that we're working on. And I do think Airbnb will eventually be much more than a search box where you type a destination, add dates and find a listing. It's going to be much more of a travel concierge. It's having a conversation, learning, adapting to you. It's going to take a number of years to develop this. And so it won't be in the next year that this will happen. And I think this is probably what most of my tech friends are also saying, is it's going to just take a bit more time.

Brian Chesky, Co-Founder and CEO

Could Booking, Travelocity, or Google build this?

Sure.

But I bet that Airbnb and Chesky will do it better. And that’s what often wins in a market of abundance, consumer choice, and network effects.

Something Else?

What is the unknown unknown for Airbnb?

We don’t know….

This is why I over-index to founders.

Steve Jobs created the Mac, but he also created the iPhone and iPad decades later.

Jensen Huang started NVIDIA in 1993 to create gaming processors and is now the king of AI.

Elon Musk started a payments company in the 1990s and now builds rockets and electric vehicles.

Jeff Bezos started an online retail company only to make most of his money on cloud services.

We don’t know what’s next but if I can get a proven, visionary founder with a large user base, amazing balance sheet, and great core business in a 2-sided market ALL for a reasonable price…I’ll take that bet every time.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.

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