Introduction
Airbnb, the home-rental startup, was once considered a darling of Silicon Valley. The company’s IPO made a grand debut in late 2020 by registering impressive gains of 135% on its very first trading day.
And, from its IPO price of $68, ABNB shares soared ~223%, hitting an all-time high of $220 in less than three months, resulting in a stellar IPO that soon valued the company at over $100 billion.
However, with the pandemic’s abrupt arrival again in 2021 with the delta and omicron varients, travel came to a halt, and Airbnb’s business dropped 80% in no time.
$ABNB stock, in turn, dropped roughly 40% from its all-time high of $220 and is still trading below its February 2021 peak.
Source: Tradingview
In 2022, however, things are very different: many countries are easing or eliminating quarantine restrictions, as Covid cases have dropped significantly, with China being a rare exception.
And as spring is in the air, people are eager to travel as remote working has now become a new reality, thanks to Covid-19!
With these positive signs in mind, investors might want to explore travel stocks like Airbnb, which recently reported spectacular earnings.
But what made the earnings report so special? Let’s take a closer look.
Airbnb is booming like never before
Airbnb CEO Brian Chesky wrote on his Twitter feed:
Chesky went on to say that we had the most productive two-year period ever when we cut down the majority of our projects, improved our cost structure, and even paused performance marketing when the travel was on halt.
And by late-2021, when urban and cross-border travel was returning to pre-COVID levels, we slowly began investing in brand marketing, Chesky continued.
And in turn, the company reported its highest quarterly revenue and net profits in its history, reflecting the leadership of its CEO.
The firm dramatically rebounded its sales to $1.51 billion, compared to an estimate of $1.45 billion, a 70% YoY growth and an 80% increase from the first quarter of 2019.
Source: ABNB Shareholders’ letter
The adjusted Ebitda was $229 million, with a gross booking value of $17.2 billion. In terms of loss per share, it only lost $0.03 vs $1.95 a year ago.
Source: ABNB Shareholders’ letter
Furthermore, Airbnb’s net loss has decreased from $1.2 billion to $19 million.
More than 102 million bookings accounted for the majority of the revenue growth, which marked a new quarterly record for Airbnb.
Airbnb project substantial demand in the near future
As the travel industry returns to pre-covid levels, management expects revenues likely in the range of $2.03 billion to $2.13 billion, versus Wall Street’s estimate of $1.96 billion, citing 30% more bookings.
Chesky continued his Twitter thread, saying people have spread out over hundreds of towns and cities, staying for weeks, months, or even entire seasons, mainly due to the freedom given by new remote work policies.
And we’re likely to see these trends continue in the coming years.
In a letter to shareholders, management also stated we’re expecting “greater than historical demand” in the fourth quarter, indicating that consumer confidence in travel persists beyond the summer vacations.
But what about the valuation? Is it justified at the current price?
When it comes to Airbnb, there’s a lot to admire. But when it comes to Airbnb stock, one prominent source of concern is its high valuation.
The company has yet to have an entire profitable year, yet its stock is trading at a price-to-sales (P/S) ratio of 17.
For comparison, the average P/S ratio of S&P 500 stocks is roughly 3, and they are already trading at a premium over the 10-year average of 1.5, making Airbnb a highly overvalued stock.
Furthermore, because Airbnb is already the leader in the hospitality industry, many investors believe that the company’s future growth is already priced in!
However, there is another argument from investors and even Wall Street analysts who believe that the company’s valuation is acceptable even at this level, saying:
Even though Airbnb’s P/S ratio is now at 17, it is near to an all-time low since going public in 2020 and is justified by the company’s outstanding revenue growth.
Also, while Airbnb’s stock is still trading at the same level since going public, its total revenue, on the other hand, has surged by 77% from 2020 to 2021.
Additionally, Airbnb has a strong balance sheet with over $6 billion in net cash. And as CEO Chesky mentioned on his Twitter feed, Airbnb is utilising this cash for continuous innovations and upgrades on their platform.
For example, in 2021, Airbnb completely overhauled its platform by making 150+ upgrades, including the launch of the “I’m Flexible” feature, which has been used more than 2 billion times!
What do analysts have to say about Airbnb?
Turning to Wall Street, JMP Securities’ Andrew Boone just reaffirmed a “buy” rating for ABNB shares, with a $220 price target. Wells Fargo followed suit, setting an even higher price target of $250.
The analyst rating consensus earned a Moderate Buy rating, with 17 Buys, 19 Holds, and 3 Sell ratings.
Below is a snippet of how these analysts ranked Airbnb in the previous 12 months, along with their estimates for the coming year:
According to the 39 wall street analysts’, the stock has a 27% upside potential having an average price target of $198.09, with a high of $250.00 and a low of $150.00.
What could go wrong?
#1: Inherent Risk of Business Model:
One of the significant concerns lies on the head of Airbnb is that its business model is almost entirely dependent on its hosts to provide desirable accommodations for its guests.
If the company fails to grow its host count, its revenue growth may stall.
And since becoming public in late 2020, Airbnb has had the same issue, with the overall number of hosts still stuck at 4 million.
#2: Stiff Competition
Increasing competition is also becoming an alarming concern for Airbnb as competitors like Turnkey and Vrbo are already giving Airbnb a run for the money.
As Airbnb initially focused more on the urban core, Turnkey and Vrbo, on the other hand, positioned themselves in the vacation rental space, and now Airbnb finds it quite challenging to dig its roots in the same space.
Additionally, Hotels.com and Bookings.com provide information about different hotels with significantly lower rates.
Such rivals may create a threat of jeopardising Airbnb’s market share and profits.
Final Words
- Despite all of the risks and concerns we’ve discussed, the reality is that the world is embracing the “live anywhere, work anywhere” culture, and Airbnb has already earned a leadership position in this niche.
- With outstanding financials, continuous innovation and clear signs of a travel industry rebounding in the months ahead, Airbnb is one of many well-positioned travel stocks likely to benefit.
- Additionally, higher inflation may support Airbnb and other similar stocks because travellers will focus on cheaper options compared to expensive hotels.
- However, if Airbnb fails to maintain its competitive pricing and is unable to grow its host count in the near future, it may lose its market share to its competitors.
- Therefore, before diving in, investors should consider all the upside potential and the downside risks mentioned above.
Please note that all the information contained in this newsletter is intended for illustration and educational purposes only. It does not constitute any financial advice/recommendation to buy/sell any investment products or services.
