$ABNB: A Bet on the Future of Life
Weekly Semi Deep-Dive
From now on (on top of a monthly deep dive) I will be doing weekly semi deep-dives in which I will aim to distill the essence of potential long positions. I will not go too deep into the details of the company, but rather aim for us to walk away with a new clear-cut addition to our mental map of potential investments in order to:
Increase overall market awareness.
Track the addition through time and potentially capitalize on any opportunities Mr. Market may bring along.
Below, my most recent thoughts on $ABNB. As always, I hope you find them useful.
The Essence of $ABNB
$ABNB is pointing at a future in which automation forces people up into the creative class (a term coined by Richard Florida), yielding an eventually predominant part of the population that has the means to live a more nomadic lifestyle and work from anywhere, ultimately participating more actively in Airbnb and other similar marketplaces. “Areas of high Airbnb presence are those occupied by the ‘talented and creative’ classes, and those that are close to city centers” a study found, citing that “this result is consistent so much so that the accuracy of predicting Airbnb’s spatial penetration is as high as 0.725”. But what is the creative class?
The creative class is a part of society that focuses on creative endeavors, all the way from art to business to technology. In my opinion, the creative class has emerged as a result of agriculture and manufacturing getting cheaper and more outsourceable through time. Naturally, with their basic needs covered, people can focus on more creative tasks, which can be done remotely. Today, “30% of the american workforce identify themselves with the creative class” and “this number has increased by more than 10 percent in the past 20 years” (source). As automation continues to permeate the economy, we can expect the number of people with their basic needs covered to grow and hence $ABNB´s TAM to grow along with it. 4-5 decades down the line or perhaps even sooner, I believe most of humanity will be in the creative class.
Airbnb is positioned to catalyze and capture this trend, for it is top of mind in this space, which in Web 2.0 is directly equivalent to a moat. As $ABNB continues to invest in its platform and marketing and as the creative class grows, the moat will become stronger. This is naturally because the marketplace becomes more liquid, hence more useful and ultimately, the level of social capital within the platform grows. By social capital I refer to the level of trust between users, which results from mutual reviews after every interaction. It is hard to catch up with $ABNB in this sense and it will get harder through time.
$ABNB will be much more valuable and profitable in the future if automation continues to lift people into the creative class and in turn, human life becomes more bucolic. Just to clarify, I do not believe that only the creative class uses $ABNB, but I do believe they are the heavy adopters that drive further adoption, very much according to the Law of Diffusion of Innovation. With around 7 million listings today, it has plenty of room to penetrate the further 2.3b houses in the world.
More Specific Thoughts
$ABNB´s core transaction has some friction. It happens in the physical world and this brings some problems with it, such as potential damage to properties and relatively prohibitive regulation. In turn, the core asset that $ABNB deals with (homes), is hard for AI to entirely capture which decreases $ABNB´s ability to enhance its moat, versus other companies that deal with core assets that are more processable by deep learning algorithms. In this sense, I view companies such as $SPOT having better weather ahead. These properties do not revoke the above idea that $ABNB can be much more valuable in the future, but are worth keeping in mind when looking horizontally across the mid-cap tech landscape. Low friction and high AI processability will lead to out-sized gains in the coming decades.
Further, $ABNB presents meaningful signs of anti fragility; a property that I always look for in potential investments. From their FY2020 letter: “From December 31, 2019 through December 31, 2020, active listings remained stable at approximately 5.6 million despite the decline in booking activity on our platform due to COVID-19.” Also, “No single city represented more than 1.1% of our revenue before adjustments for incentives and refunds during the year ended December 31, 2020 or 1.2% of our active listings as of December 31, 2020”. $ABNB´s supply side resilience and diversification greatly decrease risk. Overall, the company has bounced back nicely from the pandemic, proving that anti-fragility extends beyond its supply side:
Management also looks good, not only on a qualitative note, but from a quantitative point of view aswell. Metrics such as Asset Turnover, RoE, RoA and RoI are all pointing upwards. To further expand on the qualitative take, a team that has created such a prominent company from scratch is likely to be good management going forward.
Framing a Potential Investment
By looking at their I/S, it becomes immediately apparent to me that the company is greatly investing in product and marketing, in the attempt to capture the future I have painted above, sacrificing more aesthetic numbers in the bottom line in the short term.
Despite this, it has produced a levered FCF of 2.3b$ in the TTM, has 5.9b$ in cash and 1.9b$ in LT-debt (with no ST-debt). The balance sheet looks solid and its ability to generate cash seems very healthy, to say the least.
In terms of valuation, however, $ABNB trades at 23.48 times sales, which is a generous, so it does not look like the market is missing out on the above thesis. $ABNB seems quite priced in, although not an imprudent investment at this time. Having made it through what is in effect a worst case scenario for the company and given the above considerations, the investment looks reasonable and although in the short term the valuation can turn out to be fragile due to its generosity, $ABNB has a big growth runway ahead.
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