In the past 12 months Airbnb has delivered a return of 16.5%. That’s certainly not bad, is it? But Uber is up 44%, so that has proved to be the right choice over this period. I can’t resist a cautionary tale about IPOs in frothy markets, as Airbnb is still trading below its hyped-up price on the first day of trading back in 2020.
Both these companies represent the new-age economy, in which platforms connect owners of assets with people who need to use those assets for a short time. At Uber, it’s all about transport — whether of people, food or parcels. At Airbnb, the focus is on accommodation and related experiences. On paper, these sound like very similar businesses. Both of them have even managed to achieve the ultimate success for any brand: becoming a verb! In practice, though, they appear to have very different moats and, arguably, growth prospects. This is why I’m a shareholder in Uber and not in Airbnb.
Before digging into why I feel that way, we need to consider the relative valuations to see what the market thinks. We can use a price/sales multiple here, as it works well for growing platform businesses that tend to have dicey profitability until they reach that magical inflection point of having sufficient scale to unlock sustainable profits and cash flows.
Over three years, the average price/sales multiple at Airbnb was 10.7. At Uber, it’s much lower, at 3.2. Here’s the more interesting thing: in the past three years, the multiple at Airbnb has unwound from 23.6 to 7.8! At Uber, it has unwound from 6 to 3.6. In both cases, higher interest rates and a dose of realism in the market caused havoc for the multiple. It just affected Airbnb to a far greater extent, as high multiples are more vulnerable to macroeconomic shifts or underlying disappointments in earnings. Even today, Airbnb is trading at more than twice the multiple of Uber. Is each dollar of revenue at Airbnb really worth that much?
It turns out that the market is putting more value on the Uber platform than on Airbnb, an approach that I agree with
To answer that question, we need to move past the price/sales multiple. It’s helpful, but it can never be the only valuation metric you use. What really drives value is how effectively a company turns revenue into profits and thus cash returns to shareholders.
So, to really compare the valuations, we can use the free cash flow margin (free cash flow divided by sales) and then compare that to the sales multiple. Airbnb achieved free cash flow margin of 30% over the past twelve months. At Uber, that margin is 10.1%. Based on the sales multiples, Airbnb is therefore trading at an effective free cash flow yield of 3.8% (on a sales multiple of 7.8 you’re paying $78 for every $3 of free cash flow) and Uber is at 2.8%. Despite what a quick glance at the sales multiple would suggest, Uber is actually trading at a premium to Airbnb (a lower yield is a more expensive stock). It turns out that the market is putting more value on the Uber platform than on Airbnb, an approach that I agree with.
In the latest quarter, Airbnb grew revenue by 10% and Uber grew by 20%. Therein lies another secret to the valuation differential: a combination of growth prospects and the efficiency in which sales get turned into cash flows. Uber just grew free cash flow by a ridiculous 133% year on year, as the platform has reached the stage where much of the additional sales growth now falls to the bottom line. This is a core part of my investment thesis in Uber and it suggests that the free cash flow margin is on the up. Over time, this should support the Uber multiple moving higher, with the share price return as a function of multiple expansion and underlying earnings growth. That’s the theory, at least.
Above all else, my view is that Uber actually solves a problem that needed to be solved. It’s a safe way to get around on demand and with card payments, across many places in the world, through one app. Though Airbnb’s original offering was also unique, allowing people to rent out spare rooms and air mattresses on their living room floors, these days it is trying to compete with the likes of Booking.com because it ran out of growth. Uber, on the other hand, still has plenty of room for its core to grow. Wherever possible, I prefer a simple business model to a more complicated one. Uber is my choice.
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