Airbnb Stock: If We Forget Reality, Great (NASDAQ: ABNB)

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Investment thesis

Airbnb (NASDAQ: ABNB) is significantly overvalued relative to its near-term potential.

I’ve been arguing for a while that Airbnb stock is expensive. And even though its valuation has fallen 30% since I wrote this bearish article, I argue that his stock is still too expensive in relation to the upcoming difficulties that his European business is about to face.

Simply put, even though the stock is already down 30% year-to-date, that won’t stop a sell-off from manifesting further.

Therefore, I value the stock as a sale.

Airbnb’s revenue growth rates will slow further

Airbnb revenue growth rate

Airbnb revenue growth rate

Looking ahead, the high end of Airbnb’s Q3 forecast points to 29% year-over-year revenue growth. For a company that earlier this year recorded more than 60% growth in revenue, this indicates a marked deceleration.

And before readers start claiming that Airbnb is understating estimates to allow for easy beatings later, consider the following revenue surprises.

ABNB revenue surprises

ABNB revenue surprises

As you can see in the trend above, over time the amount Airbnb has exceeded Street estimates has steadily reduced and even turned negative in the last quarter.

It is not a company well positioned to positively surprise the investment community. But there is more.

Why is Airbnb ready to fight?

Airbnb is the market leader in vacation rentals. However, despite its leading position, it is not immune to the underlying reality that the amount of discretionary income available in Europe over the next twelve months will be severely limited.

Airbnb U.S. and International Revenue

ABNB 10-Q Q2 2022

Currently, a major cost of living crisis is unfolding in Europe, caused by exorbitant energy prices.

Even though Airbnb doesn’t disaggregate the proportion of its revenue that comes from Europe, we can always go back and see that for 2021, around 30% of its total revenue came from Europe, the Middle East and Australia. Africa (“EMEA”).

That being said, as you can see above, Airbnb’s strongest growth of late has come from its international business. Therefore, we have to assume that EMEA now accounts for around 35% of its total revenue.

Of this 35% of total EMEA revenue, a significant portion will come from Europe. And Europe will be very mild over the next twelve monthsas Europeans are forced to embrace a severe cost of living crisis.

Then, further complicating matters for Airbnb, consider that there was a amount of pent-up claim to travel this summer.

And in the same way that there was an unprecedented wave of travel demand in the second and third quarters, I think there will be a wave of households leaving nowhere this next Q4.

With higher interest rates in Europe impacting household mortgage payments, along with higher energy costs and exorbitant food prices, there will simply be no appetite for travel. Especially after a significant part of the population has already moved during the summer.

Explain why ABNB’s free cash flow will become a headache

Airbnb Free Cash Flow

Letter to Airbnb shareholders, Q2 2022

Currently, Airbnb’s high free cash flow margin goes a long way to support the multiple that investors are willing to pay for the stock.

The problem here is that most of its attractive free cash flow is driven by its strong line of deferred income. It is cash that Airbnb is paid for vacations that will only be recognized in the future.

For example, if a traveler makes a reservation months in advance as they plan their itinerary and secure their location, Airbnb get that money up front. But it only pays out this money once the customer has registered. Here’s what Airbnb says in its 10-K filing:

We record service fees we collect from customers prior to recording on our balance sheet as unearned fees.

Unearned Airbnb fees

Letter to shareholders ABNB Q2 2022

For the second quarter of 2022, unearned fees reached $2 billion. This has largely contributed to strengthening Airbnb’s free cash flow, so that in the second quarter, Airbnb finally reported $785 million in free cash flow.

However, looking ahead to the third quarter, I contend that Airbnb’s free cash flow will decline significantly as demand for rentals will be significantly reduced.

Therefore, rather than seeing $2 billion of cash injection via unearned fees, it wouldn’t be surprising to see that figure drop to less than half in Q3 and not return to over $1 billion. dollars at any time in the next twelve months.

Valuation of ABNB shares – 8x sales are too rich

In 2020 and early 2021, we’ve gotten too used to valuing businesses at 10x sales and above. And while it might have made sense then, I don’t believe it makes sense right now.

In particular, when the company is significantly exposed to the cyclicality of the economy.

Meanwhile, if we look at Airbnb on an EBITDA multiple, a reasonable estimate of EBITDA for 2022 would see around $2.2 billion versus around $1.6 billion for 2021.

That would put the stock priced at around 33 times this year’s EBITDA. A figure that seems to me simply too high as a starting point, for a company that will experience a significant weakening in the months to come.

Of course, that’s not even taking into account that over 30% of its EBITDA is stock-based compensation.

The essential

Airbnb is overpriced relative to the underlying reality.

I recognize that Airbnb is the premier rental market and that will go a long way in supporting its stock having a high valuation. Let’s call this its ”mark” multiple. This mark multiple will only go so far.

There is always a limit to what shareholders will be willing to pay for what will soon be a “high growth” company that is losing its alluring revenue growth and is on the verge of becoming a mid-tier company in the short term. road growth company.

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