In an unrated report dated Dec 9, PhillipCapital says Airbnb may gain traction as a recovery play in 2021 on the release of a potential Covid-19 vaccine.
The vacation rental online marketplace is set to list some $51.9 million shares at a revised offer of US$56 ($74.88) to US$60 per share on NASDAQ on Dec 10.
The share price is higher than the US$44 to US$50 that was originally planned on the back of improved sentiment.
Airbnb says it intends to retain future earnings and that a dividend policy is not on the cards just yet.
The way PhillipCapital’s Singapore research team sees it, Airbnb’s asset-light platform gives the business greater flexibility in managing its costs when it comes to adapting to a challenging environment.
“Its business has been resilient this year. It was able to reduce its costs by a massive 34.6% y-o-y in 3QFY2020 to cope with the Covid-19 impact, allowing it to book positive net income in the quarter. Lower fixed costs from its recent job cuts and marketing budget cuts also allow for margin expansion when things eventually normalise,” says the team lead by its head of research, Paul Chew.
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Following the lifting of travel restrictions, Airbnb has seen its figures mitigated by the rise in domestic travel even though international borders have remained shut.
Domestic gross booking value (GBV) between June and September grew 42% y-o-y, which cushioned an estimated 62% average decline in international bookings.
According to TripAdvisor’s Seasonal Travel Index, the growing preferences for domestic travel are expected to continue in the near term, as nearly two-thirds or 65% of all travellers around the world are planning domestic getaways for the fall season from Sept 1 to Nov 30.
Airbnb’s IPO proceeds will also help boost cash reserves and potentially release the company’s cost of debt.
“Digital media company, The Information, estimates that Airbnb burnt US$1.2 billion of cash between mid-2019 and mid-2020. With net IPO proceeds of US$3.1 billion and US$4.5 billion cash on hand, Airbnb should have more than sufficient liquidity to last the next five years, under the worst scenario,” says the team.
“Airbnb is also paying high interest of 9-11.5% from debt raised earlier this year. This bumped up its interest expense by 16x in 9M20. Increased transparency and listing credibility from its IPO can potentially improve its borrowing terms and reduce its cost of debt,” it adds.
Airbnb’s wide network of guests discourages potential competitors from getting into the game.
In 2019 alone, the company added a record 700,000 hosts, which represents a 20% increase y-o-y from 2018.
About 23% of these new hosts started as guests on the platform.
“The value of Airbnb’s platform grows from each additional guest as it can attract more hosts in a virtuous cycle which raises barriers to entry. This network effect discourages potential competitors,” says the team. “Being an online platform, Airbnb has the ability to scale up rapidly with minimal cost outlay, relying primarily on marketing to build a stronger brand name.”
However, near-term uncertainties arising from the Covid-19 pandemic still remain for Airbnb.
Covid-19 infections spiked in 4Q2020, and another wave of lockdowns are being imposed, in particular Europe, which accounts for 40% of its revenue.
SEE: Airbnb files for IPO, confirms the damage it suffered during Covid-19
As such, the company can expect to see a decrease in bookings this quarter.
Government bodies including the European Union (EU) are also planning to curb the market power of big tech companies to promote fairer competition. Tougher regulations on urban rental may limit Airbnb’s profitability, says PhillipCapital.
In addition, the company faces competition in the online travel market from well-known brands such as Booking.com and Expedia.
“Huge marketing expenses have to be spent in order to defend or increase market share. Booking.com alone spent over US$5bn on marketing in 2019,” adds the team.
Looking ahead, while the team at PhillipCapital foresees a weak quarter for Airbnb currently due to the resurgence of Covid-19, investors are looking forward to a semblance of normality in 2021.
Airbnb may then gain traction as a recovery play, it says.
“Assuming next year's sales grow 60-70% for Airbnb, its valuation at the top end of its listing price is 8.1x price-to-sales. This may be a 130% premium over its global peer group but is comparable to that of online travel market leader, Booking Holdings,” it adds.
“Investors may attribute a premium for its dominance in the home-sharing space, asset-light business and better geographical diversification than its rivals. At current market environment, investors may value high-growth companies at more than 10x annual sales such as Tesla and Snowflake. A 10x price-to-sales for Airbnb will command an expected share price of US$74.”
