Airbnb After Earnings Key Question: What kind of environment does it operate in?
- ABNB stock looks attractive, given its impressive growth and strong free cash flow
- Market share gains in travel and potential expansion into new markets suggest the stock could be a long-term winner
- But both sides of the bull case hinge on a key question: What type of environment does Airbnb currently operate in?
Down 31% year-to-date, Airbnb (NASDAQ:) stock looks cheap enough to own. Take $6 billion in cash off the balance sheet and on a 12-month basis, ABNB is trading at around 22 times free cash flow and around 27 times adjusted EBITDA (earnings before interest, tax, depreciation and amortization).
To be fair, both multiples are somewhat inflated. Free cash flow benefits from receiving unearned fees, where Airbnb has collected the money but has not yet reported the revenue. This advantage will fade and eventually reverse over time. Both measures exclude strong stock-based compensation, which has totaled more than $800 million over the past four quarters, or more than a third of adjusted EBITDA.
Still, even normalizing for these effects, Airbnb’s valuation — something like 40x EBITDA and around 60x free cash flow — is at least reasonable for a company growing at this rate. In the United States, revenues increased by 73% compared to their level in the second quarter of 2019, an annualized rate of 20%. Adjusted EBITDA margins for the quarter were 34% versus -4% three years earlier; Airbnb projects 48% to 49% in the third quarter, which is historically the company’s strongest report.
In a normal, sedentary environment, this overall profile would suggest Airbnb stock is a buy. Indeed, Wall Street seems to believe so: the average price target sits just below $170, suggesting a 48% upside from Wednesday’s close.
However, this is anything but a normal or sedentary environment. The question is whether the current environment is helping Airbnb or hurting it. The fact that ABNB stock barely moved after earnings suggests that investors are still trying to figure out the answer to this question.
Is Airbnb generating excessive revenue?
The bear case for ABNB shares is that Airbnb’s revenues — and more importantly, its profits — benefit from everything that happens outside of the company.
Despite constant talk of a recession, the consumer remains reasonably strong. More importantly, most consumers around the world desperately want to travel. Southwest Airlines (NYSE:) published record profit in the same quarter, United Airlines (NASDAQ:) reached a .
Airbnb’s revenue growth of 73% over 2019 statistics looks impressive. But a 20% annualized increase for a company that pre-pandemic was growing reasonably fast — full-year revenue grew 29% in 2019 — is solid, but not necessarily spectacular. This is especially true if current demand is unsustainable.
The same concern is about Airbnb’s profits. The lion’s share of the increase in revenue since 2019 has not come from increased visits, but from rising prices. According to feedback from the second quarter conference call, average daily rates increased by 40% between the first half of 2019 and the first half of 2022. This implies that the number of visits only increased by around 7-8% per year.
Given that last year represents a still strong economy, especially for Airbnb’s core customer base, this growth seems a bit tepid. Indeed, investors first sold ABNB shares after earnings, apparently due to concerns about the .
The obvious concern is that the pricing power will not hold. Hosts may charge more because demand is at its peak. It doesn’t take long on social media to see many complaints over allegedly excessive Airbnb fees. Currently, customers will pay these fees. In an environment of normalized demand — and/or a recession — they may not.
Airbnb gets some of those higher rates — and the nature of a platform business means that that extra revenue drops almost directly to the bottom line.
Again, Airbnb stock looks reasonably priced based on current earnings. But if those earnings fall, or even stagnate, so will Airbnb stock.
The case of ABNB shares
These widespread concerns are enough to explain reasonably high short interest in ABNB shares. More than 6% of the float – $2.6 billion at ABNB’s current share price – is sold short.
But there is an argument that these concerns are overblown. Certainly, there are aspects of the operating environment that are beneficial to Airbnb. Other aspects are not.
Most notably, the novel coronavirus pandemic is still impacting demand. The macroeconomic situation outside the United States deteriorated in the first half. Rising energy prices are depressing demand in Europe. Chief Financial Officer David Stephenson said on the second quarter call that the Asia-Pacific region remained “significantly depressed”, largely due to the pandemic. Around the world, urban markets have yet to fully recover.
Meanwhile, Airbnb has improved its business in recent years. Searching for categories, instead of just locations, opens up new options for customers. Airbnb planned to expand its Experience offering in 2020; these plans have obviously been discontinued, but the company also has the ability to drive growth from this revenue stream.
Working from home augurs another source of demand. Long-term stays over 28 days have almost doubled over the past three years. So-called “digital nomads” can become regular and profitable customers.
There’s no doubt that hosts — and, therefore, Airbnb — enjoy pricing power that will wane to some degree in the future. But there is no doubt that the environment for the company and its hosts is not as perfect as the bears claim.
Particularly near the lows, it looks like the bullish case here has some legs. There is going to be volatility and investors have to trust the broad market to buy the stocks here.
In the long term, however, it still looks like a relatively young, improving and growing company. It may not be as good as recent quarters’ results suggest. But, at this price, if Airbnb performs, it doesn’t have to.
Disclaimer: At the time of this writing, Vince Martin has no position in the securities mentioned.