Published on December 16th, 2020 by Josh Arnold
Advances in technology have transformed countless industries. One that has been altered materially in the past decade or so is travel. The days of finding a hotel through arduous research or contacting a travel agent have gone, having been replaced by all-in-one travel booking solutions.
While some travel stocks like airlines and cruise operators have historically paid dividends – and significant ones at that – growth stocks in the space usually don’t. That’s to be expected as when an industry is burgeoning, it is far more advantageous for shareholders for the company to reinvest earnings and cash flow into growth ventures rather than simply paying it out to shareholders.
The newest technology travel stock – Airbnb (ABNB) – began trading on December 10th after its blockbuster initial public offering, and of course, doesn’t pay a dividend.
It is already a large-cap stock with a market capitalization above $70 billion. We have compiled a list of over 400 large-cap stocks in the S&P 500 Index, with market caps of $10 billion or more.
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Airbnb isn’t a particularly young company compared to some other technology companies, which begs the question of whether Airbnb will ever pay a dividend to shareholders. In this article, we’ll take a look at the company’s characteristics and see if that’s a possibility.
Airbnb was founded in 2007 and is headquartered in San Francisco. The company had humble beginnings with just a single booking, and was originally called Airbed & Breakfast. Eventually, the company shortened its name in 2010 to the familiar brand we know today. The company’s founders realized the potential of a booking platform and moved Airbnb to compete in the booming online travel booking space during the financial crisis.
Today, Airbnb has grown into massive player in a very fragmented market, operating a platform for stays and experiences worldwide. It runs a marketplace model wherein it matches guests and hosts through mobile devices or online, taking a fee in the process. The company’s model is different from some of its competitors as it focuses on rooms and entire residences rather than traditional hotels.
The company has more than four million hosts on its marketplace, with those hosts having welcomed more than 800 million guests in 100,000 different cities around the globe. Airbnb’s reach is vast geographically, as it is present in nearly every country in the world.
The stock was well over double its IPO value by the time it opened for trading on its first day, and today, Airbnb sports a gargantuan $76 billion market capitalization. The company should produce about $3.3 billion in total revenue in 2020, but growth from here is expected to be outstanding.
Airbnb has a very strong secular tailwind that should produce growth for many years to come. The travel accommodation market – hotels, resorts, residences, etc. – is more than $800 billion annually, and has grown for many years. With the continued move to online and alternative bookings – those that aren’t for traditional hotels or resorts – becoming ever more popular, we see Airbnb as having a huge runway for continued growth in the coming years.
While not a direct competitor, Booking Holdings, Inc. (BKNG) produced 19%+ annualized revenue for the decade that ended in 2019. This sort of sustained, high growth is due in large part to the massive adoption of consumers in using alternative booking methods such as apps and websites.
We see not only that overall tailwind as helping Airbnb, but it has its own competitive advantage in its niche that should help even more. We currently expect Airbnb to produce more than 20% annual revenue growth for at least the next five years given these tailwinds that are lifting the entire industry.
Airbnb has the preeminent brand in alternative online travel, with huge brand recognition among consumers, as well as the four million hosts it has in its marketplace. This ecosystem leads to more and more usage over time as the company can scale and add more tools and products to attract more customers and hosts.
In addition, the alternative travel market, which is where Airbnb excels, is booming. Consumers are increasingly willing to rent out portions of their home, or their entire home, for additional income. In addition, consumers are willing to rent another person’s home to have a different travel experience than staying in a traditional hotel. This rapid ramp up in adoption is a boon for Airbnb.
The niche of online travel where Airbnb operates is also much less crowded than traditional travel destinations like hotels. That means that while other parts of online travel are much more saturated, we see Airbnb as the leader in a nascent and growing market.
Will Airbnb Ever Pay a Dividend?
Given the outstanding growth we expect the company to exhibit, it makes sense that at some point the company should be able to generate significant profits it cannot profitably reinvest in the business. However, given how early on Airbnb is in its lifecycle, we don’t foresee the company paying a dividend anytime soon.
For a company to pay a dividend, it needs a reliable and significant profit stream. This is why mature companies generally pay hefty dividends to shareholders; if their growth cycle is complete (or nearly complete), cash piles up with no obvious better use. That cash is then returned to shareholders. Airbnb is a very long way from that, so we see the likelihood of a dividend in the next decade as quite remote.
Airbnb is currently expected to post losses until at least 2023, meaning it cannot even consider paying a dividend until sometime after that. With that sort of profit outlook, it is quite obvious Airbnb won’t be in any position to return earnings to shareholders. We also think Airbnb will have plenty of opportunities to reinvest cash for many years to come given how early in its growth cycle it is, so it doesn’t exhibit any of the general characteristics of a stock that is likely to pay a dividend.
While Airbnb has a very long growth runway in front of it, we see the likelihood of a dividend payment coming to shareholders as very remote. Airbnb has what is likely to be decades of strong growth in front of it, but with it still posting significant losses, it will be many years before the company is even producing steady profits.
We see Airbnb’s ability to find profitable ways to invest in growth as quite strong for years to come, which could include acquisitions, additional services and products, and product extensions. Given the combination of no profits, being in the very early stages of its growth cycle, and what is likely to be an easy threshold for reinvesting cash into the business, we do not believe Airbnb will pay a dividend at any point in the next decade, at least.