International Investing . Airbnb: Should you invest in it?

Markets across the globe have been on a strong rally this year and this has increased the interest of Indian investors in international investing, especially in the US market. The opportunity to invest in unique/disruptive businesses which don’t have an equivalent in India, and the annual 3-4 per cent depreciation of the rupee against the dollar, which adds to the returns, are factors that motivate global investing. You can buy US stocks through investment firms such as Vested Finance, Stockal and WInvesta that provide global investment platforms. A few Indian brokerages such as ICICI Direct, Axis Securities, Motilal Oswal Financial Services and Kotak Securities also facilitate overseas investments through their tie-ups with US brokers.

One of the pioneers of the sharing economy, Airbnb (ABNB), had a ‘surge-priced’ listing in Nasdaq on December 10, 2020, with the stock closing the day 112 per cent above its IPO price of $68. The stock closed on Friday at $139, 104 per cent above the IPO price, giving it at market cap of $83bn (enterprise value of around $81bn).

ABNB is a global marketplace, where hosts offer stays and experiences on its platform. It is a peer-to-peer business model that has disrupted the global hotels and bookings industry, like what Uber did to transport. As of September 30, 2020, it had over 4 million hosts globally offering active listing of 5.6 million. About 3.6 per cent of paid trips globally was via Airbnb in 2019.

ABNB’skey advantage over traditional hotel chains are peer-to-peer business model and variety of offerings. It earns its revenue by taking a share of the bookings value – around 3 per cent from hosts and 14 per cent from the guests. What is unique about its model is that the pricing is entirely determined by hosts.

The company is geographically well diversified with 63 per cent of its revenue coming from outside the US. While revenue from as India, for instance, is currently miniscule relative to its overall business, it sees a huge growth opportunity and it plans to tap with future investments in emerging markets. There were unconfirmed reports last year that it had taken a stake in Oyo,butthe company’s IPO filingmentions Oyo as a competitor.

ABNB pioneered and continues to lead a sharing economy theme that is structural. The industry size is upwards of a trillion dollars and the company has a huge market to tap as it gains market share. While its business has been impacted due to Covid-19 and made the company push back some of its aggressive investment plans, it has managed the downturn relatively better than OTA (Online Travel Agencies) and hotel competitors. This it has achieved by controlling costs and by tapping customer preference to stay in private and remote places, given the pandemic scare. The negative impact to its business from Covid-19 will continue well into next year. This can be viewed as temporary and not structural.

The company’s execution track record is impressive with a three-year revenue CAGR till CY (calendar year) 2019 at 42 per cent. It has also managed positive adjusted EBITDA (a key metric tracked by the Wall Street for tech companies in high growth space) in 2017 and 2018. While it reported losses on the same metric in 2019 due to higher spends on technology, marketing and safety parameers, its past performance gives confidence that it has a path to profitability. It is gaining share from the OTA competitors and when compared with sharing economy peers the company has consistently reported better gross margins and adjusted EBITDA margins and is showing a more reliable path to profitability, which is where investor focus is shifting now, after ‘growth at any cost’ over the last decade.

What should investors do?

Post its grand listing, the stock seems expensively valued. At 18 times CY21 enterprise value/sales, it is getting early stage software as a service (SaaS) company multiples which may not be warranted. This is because SaaS companies have better competitive moat with their core technology. ABNB is neither an early stage start-up nor is its technology moat strong enough or unique to keep competitors at bay. Given potential reward of outsized returns if it grows with consistent profitability, and risk of underperformance if profitability is delayed or elusive due to execution issues or more competitive intensity, anywhere between 5 -6 times EV/sales is a reasonable price to enter the stock. That would be a price of between $40-50/share.

Investors must wait for the lean season when it might be available at fair value or discount, either driven by company specific execution issues or a broader market correction. Most of the prominent social media and sharing economy stocks – Facebook, Snap, Uber, Lyft – all have corrected 40-50 per cent within 2-3 quarters of their listing on execution issues that came to fore in their quarterly results. Both Lyft and Uber corrected to as low as 2.5 times next twelve months enterprise value/sales within a few months after listing on weak metrics and this was during the time when the broader market was booming. History is not in favour of chasing this IPO at any price upon listing.

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