Can Airbnb Live Up to Investors’ High Expectations?


One of the biggest Initial Public Offerings (IPOs) of the past year was Airbnb (NASDAQ: ABNB). The well-known Silicon Valley darling went public in December 2020 and saw its stock skyrocket in the first few months of trading. Although its stocks gave up some of those gains, Airbnb still enjoys a market capitalization of nearly $ 110 billion, making it one of the largest companies in the world.

One of the main reasons investors are bullish about Airbnb is the potential for a global travel boom as the COVID-19 virus (hopefully) fades into history, this which should be of benefit to the entire travel industry.

In this bullish environment, can Airbnb meet the high expectations of investors?

Image source: Getty Images.

Pandemic recovery in progress

As you might expect, Airbnb has had a tough first half of 2020 with the world temporarily shutting down due to the COVID-19 pandemic. In 2021, its business recovered well, as evidenced by its strong second quarter earnings report. During that timeframe, nights and experiences booked reached 83.1 million, up 197% year on year and down just 1% from the same quarter of 2019. Revenue appeared even stronger, in up 299% year on year to $ 1.33 billion (and up 10% from a two-year basis).

Free cash flow was $ 784 million during the period, which is impressive at first glance. However, Airbnb is experiencing a high seasonal influx of booked rooms in the first half of the year, resulting in a short-term increase in guest cash flow. The free cash flow margin will balance out over a full year at a lower level.

With $ 7.43 billion in cash and just $ 1.98 billion in long-term debt, Airbnb has a solid war chest to invest for its growth in the coming quarters and years. Since the start of the COVID-19 pandemic, Airbnb has streamlined its operations and the company is focusing on a few key initiatives like attracting as many hosts as possible, improving customer travel, and improving customer service.

This means that the bulk of Airbnb’s growth, at least for the next several years, should come from an increase in nights and experiences booked on the platform.

Growth opportunity remaining

With travel restrictions still in place in many parts of the world, Airbnb is expected to have a good tailwind as the threat of COVID-19 eases in the coming months. There are also some trends Airbnb has talked about that indicate travelers are turning more to Airbnb style rentals due to the pandemic.

Growth in overnight stays in non-urban areas was much stronger than in urban areas in the second quarter. Unlike most hotels, which must adapt to areas with more travelers, Airbnb can evolve with the tastes and trends of its customers, even if they want to travel to more distant places. This is one of the main advantages of its decentralized platform.

Another benefit is flexibility over travel times, and this has been a huge growth driver in recent quarters. In the second quarter, management said that “stays of 28 days or more remained our fastest growing category in terms of travel time,” indicating that there were more people living or taking extended trips via Airbnb with the increase in remote work. These power users not only provide a great opportunity for the main platform, but Airbnb will eventually be able to sell them along with other products and services that further lock them into its ecosystem.

Investors should expect more

Airbnb’s business appears to be recovering well from COVID-19 shutdowns. However, with a market cap of $ 110 billion, investors should expect growth to accelerate over the next two to three years for this valuation to make sense.

If we look at competitor Airbnb Reserve assets, which runs a business model similar to Airbnb but with an emphasis on hotels, the stock was trading at a price-to-sales (P / S) of between six and eight before the pandemic, and it produced EBIT (profit before interest and taxes) margin of 30% to 35%.

With around $ 5.7 billion in expected revenue in 2021, Airbnb is trading at a P / S of 19. With a similar unit economy, it is likely that Airbnb will have roughly the same profit margin as Booking Holdings at large. ladder. This tells me that investors are pricing several years of strong sales growth at Airbnb’s current valuation.

Are these expectations too high? I am not sure. But if you’re an Airbnb shareholder or investor considering buying the stock at current levels, you’ll want income to grow rapidly over the next several years – reaching an annual rate of $ 10 billion or even $ 15 billion a year. billion dollars – if this investment is going to work for the long term.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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