Our view on Facebook and Airbnb

By Morningstar |  16-12-20 | 

The Airbnb stock is so typical of the year 2020: Unpredictable and Uncertain. It soars in its IPO debut, begins to sink, and then gets smacked with a downgrade. All in a matter of a few weeks.

The Federal Trade Commission, or FTC, filed antitrust suits against Facebook, wanting the monopolistic social media giant to be broken up.

Morningstar’s senior equity analysts share their view on the respective stocks.

Airbnb - Dan Wasiolek

We believe Airbnb has achieved a critical-mass network advantage in alternative accommodations, the source of its narrow moat, as witnessed by its 5.7 million active listings (the supply side of the network equation) and 247 million guest arrivals (demand side) in 2019.

We see its network position supported by further expansion into emerging markets, where Asia-Pacific was already 12% of 2019 sales, and the experiences vertical, which we think adheres well to the company’s communal culture.

In addition to a fit network effect, Airbnb’s liquidity profile is stout. To illustrate, the firm had $5.6 billion in pro forma cash and marketable securities, with just $1.8 billion in debt as of September 30, 2020. Also, it generated $5 million in free cash flow during the first nine months of 2020. As a result, we think Airbnb has enough means to invest in its platform, barring a prolonged shutdown of global travel.

  • Fair Value Estimate, or FVE

Our FVE is $60, which models healthy 15% average sales growth during 2020-29, with operating margins meaningfully expanding to 25% in 2029 from negative 10% in 2019.

With Airbnb shares trading well above our intrinsic valuation, we think investors should avoid this advantaged travel operator.

  • Airbnb and Booking’s

Our valuation implies roughly a $40 billion market cap. Meanwhile, about 20% of narrow-moat peer Booking’s 2019 business was from alternative accommodations. Because this segment offers faster growth than Booking’s consolidated average, and despite its higher servicing costs, we think it is reasonable to attribute 25% of Booking’s roughly $85 billion market cap to this business, implying a $21 billion market cap.

We believe Airbnb’s alternative accommodation business should warrant a premium to Booking’s, given the former’s $38 billion in 2019 alternative bookings versus the latter’s roughly $20 billion (although we think Booking overall offers a more complete network with structurally higher margins).

Facebook - Ali Mogharabi

The FTC and 47 states have filed separate antitrust suits against Facebook. The FTC claims Facebook has illegally attained market power through the acquisitions of Instagram and WhatsApp and is requesting that the courts order Facebook to spin off those businesses. The FTC also wants to restrain Facebook from making acquisitions in the future.

  • A forced breakup may not happen

We expect the courts to side with the FTC regarding limitations on future acquisitions, but we think the likelihood of a forced breakup is low.

Our skepticism concerning a forced Facebook breakup is based primarily on our review of how interpretation and enforcement of antitrust acts have changed over time. While antitrust laws were initially intended to foster competition by protecting rival companies, interpretations of those laws began to change in the 1970s as courts emphasized consumer welfare, not only firm size. Facebook’s dominance (including Instagram) has not led to explicitly higher consumer prices, as the services remain wholly ad supported.

The firm’s network effect benefits current customers as additional users jump on the platform. Also, competition exists in the social network market, where switching costs are minimal. Pinterest, Snap, and Twitter have accelerated user growth and monetization recently, and newer competitors like TikTok have emerged.

In addition, competition for Facebook continues to emerge.

  • Undoing acquisitions

Even if Facebook is forced to spin off Instagram and WhatsApp, its shareholders may ultimately benefit; we estimate that the three companies could fetch more than our $306 fair value estimate for Facebook if valued separately.

Undoing Facebook’s Instagram and WhatsApp acquisitions would also likely hurt advertisers. Given that all of Facebook's businesses are globalized and have created strong engagement among users in nearly all areas globally, advertisers have gained the ability to reach potential customers in new ways, with ad prices generally falling in recent years.

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