Airbnb Has Never Looked Healthier, Yet The Stock Is Still Down | Seeking Alpha

2022-07-23 02:58:13 By : Ms. Tina Wong

Mike Windle/Getty Images Entertainment

Mike Windle/Getty Images Entertainment

Slowly but surely, the market seems to be pushing for a year-end rebound. While dumping spare cash in the S&P 500 to capture that upside isn't a bad idea, I also think investors have a tremendous chance to beat the market handily with some fine-tuned stock selection.

In particular, I'm looking for major decliners this year that have actually seen strong or recovering fundamentals, and Airbnb (NASDAQ:ABNB ) is one key name here. This travel bookings disruptor has completely shaken off the impacts of the pandemic and is benefiting from pent-up travel demand that has pushed its revenue to record levels. In spite of this, however, shares of Airbnb are still down 40% year-to-date:

Since I last wrote on Airbnb in early May, two things have occurred: first, the stock fell an additional ~30% from the mid-$150s, and second, Airbnb released incredibly strong Q1 results that should leave no doubt that the company is on a massive growth trajectory post-pandemic. While Airbnb's stock price drop since then is likely in sympathy with the broader market (and tech stocks in general), this confluence of factors makes for a very timely investment for the investor who is able to bear some short-term volatility. I remain bullish on Airbnb and think now is a great time to buy into an iconic tech brand at a fraction of its worth.

As a refresher, here is what I view to be the key bullish drivers for Airbnb:

Travel is rebounding, and Airbnb has almost become the default mode of lodging for most travelers. Omicron's impact on reopening and global travel has been much more muted than Delta or than Airbnb initially anticipated. As people get back into the swing of travel, Airbnb is well-positioned to absorb that demand and gain market share, thanks to its growing pool of hosts, its broader network of availability in different regions, and its various "Experiences" offerings.

Airbnb may not just be for vacation anymore. With so many companies announcing permanent remote or hybrid work structures, many workers have leaped at the chance to become digital nomads and work from anywhere. In the spirit of this trend, even Airbnb itself has also announced that it is allowing its staff to work from any location (including up to 90 days internationally, limited for tax purposes). This trend may see Airbnb picking up not just travel demand, but essentially "rent" budgets from digital nomads as well. As a result of this trend, average trip lengths are increasing quite substantially

Chance to absorb hotel business through promoted listings. It's not a great time to be in the hotel game right now. After facing two years of heightened vacancy, hotels have always dealt with high third-party booking fees through platforms like Expedia (EXPE) and Booking (BKNG). Airbnb already allows boutique hotels to list on its platform for a fee; over time Airbnb could fully throw its hat in the ring to compete against the high-fee OTA giants.

Profitability in mind. During the immediate aftermath of the pandemic, Airbnb laid off about 20% of its staff. While it is now continuing to hire, this profit-centric mindset and the fact that Airbnb is structurally leaner than it was pre-pandemic has allowed the company to make sizable profitability gains.

Alongside these fundamental merits, we can now also add value to the list of reasons we should invest in Airbnb. At current share prices near $104, Airbnb trades at a market cap of $66.01 billion. After we net off the $9.32 billion of cash and $1.98 billion of debt on Airbnb's most recent balance sheet, the company's resulting enterprise value is $58.67 billion.

For the current fiscal year, meanwhile, Wall Street analysts have a revenue target of $8.20 billion, representing 37% y/y growth (data from Yahoo Finance). Against this estimate, Airbnb trades at just 7.2x EV/FY22 revenue - a very cheap multiple for a company that is currently growing revenue north of 70% y/y.

Note that Airbnb is also just scratching the surface of where we would be able to judge its valuation from a cash flow basis as well. As shown in the chart below, Airbnb generated $2.88 billion in free cash flow over the trailing twelve months (a figure that is only continuing to grow):

Airbnb profitability metrics (Airbnb Q1 shareholder letter)

Airbnb profitability metrics (Airbnb Q1 shareholder letter)

This puts Airbnb's cash flow-based valuation at just 20.4x EV/TTM FCF - again, a very reasonable multiple for a rapidly growing company.

The bottom line here: to me, there's a big disconnect between Airbnb's actual fundamentals and the massive decline its stock has seen year-to-date. I'd take advantage of this gap to build up a healthy stake in Airbnb ahead of a potential year-end rebound.

Let's now go through Airbnb's latest Q1 highlights in greater detail. It was a record Q1 for Airbnb:

Airbnb revenue (Airbnb Q1 shareholder letter)

Airbnb revenue (Airbnb Q1 shareholder letter)

Revenue grew 70% y/y to $1.51 billion in the quarter, smashing past Wall Street's expectations of $1.45 billion (+64% y/y). You can see as well from the chart above that revenue wasn't just indexing well above the pandemic-impacted years, but grew 80% y/y versus 2019 as well.

Bookings volume as well as price contributed to the revenue increase, the former boosted by pent-up travel demand (that should also continue well into Q2). COVID has become more or less "endemic", and many people are getting infected with rather mild cases - which has given many travelers who were previously on the fence on travel the confidence to do so.

As shown in the chart below, the number of nights and experiences booked in Q1 grew to 102.1 million, up 59% y/y as well as up 26% versus the first quarter of 2019. This is the first quarter in which bookings versus 2019 is up substantially, versus flat to roughly down over the past three quarters.

Airbnb bookings metrics (Airbnb Q1 shareholder letter)

Airbnb bookings metrics (Airbnb Q1 shareholder letter)

Here's some helpful commentary from CEO Brian Chesky on the trends that the company is seeing:

First, guests are booking more than ever before. In Q1 gross nights booked grew 32% compared to Q1 2019. And this is despite the pandemic, the war in Ukraine, and macroeconomic headwinds. People are also more confident booking travel further in advance. And we're seeing strong demand for summer bookings and beyond.

Second, guests are returning to cities and they're crossing borders. So our guests continue to travel domestically and continue to go to rural destinations at Airbnb. We are also seeing guests return to cities and cross borders at or even above pre-pandemic rates.

Third, guests are also staying longer, even living on Airbnb. Now, while short-term stays rebounded strongly in Q1 2022, stays of a month or longer continue to be our fastest-growing category by tripling compared to 2019. In nearly half of our nights booked in Q1 were for stays of week or longer in one in five nights booked were for stays of a month or longer. So the world is clearly becoming more flexible about where people can work."

The combination of greater revenue scale, plus the sustained benefits from Airbnb's cost-cutting measures during the pandemic (which now also includes the "work from anywhere" policy for employees, slicing down the need for real estate), have dramatically boosted Airbnb's profitability. Adjusted EBITDA hit a 15% margin in Q1, the first time that Airbnb has broken above zero in any Q1:

Airbnb adjusted EBITDA (Airbnb Q1 shareholder letter)

Airbnb adjusted EBITDA (Airbnb Q1 shareholder letter)

Airbnb is entering into a period of red-hot travel demand. Its revenue growth and bottom-line expansion have never looked more solid. Don't miss the opportunity to buy Airbnb on the upswing, especially while the stock price is still low.

For a live pulse of how tech stock valuations are moving, as well as exclusive in-depth ideas and direct access to Gary Alexander, subscribe to the Daily Tech Download. Highly curated focus list has consistently netted winning trades of 40%+.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of ABNB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.