Airbnb After Earnings, Key Question: What Kind Of Environment Does It Operate In?

Down 31% so far this year, Airbnb (NASDAQ:ABNB) stock looks cheap enough to own. Back out $6 billion in cash from the balance sheet, and on a trailing 12-month basis, ABNB trades at about 22x free cash flow and roughly 27x adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

To be fair, both multiples are somewhat inflated. Free cash flow benefits from the receipt of unearned fees, where Airbnb has collected the cash but not yet reported the revenue. That benefit will fade and eventually reverse over time. Both metrics exclude heavy stock-based compensation, which totaled more than $800 million over the past four quarters, over one-third of adjusted EBITDA.

Still, even normalizing for those effects, Airbnb’s valuation — something like 40x EBITDA and roughly 60x free cash flow — is at least reasonable for a company growing at this rate. In the second quarter, revenue was up 73% from its level in the second quarter of 2019, an annualized rate right at 20%. Adjusted EBITDA margins in the quarter were 34% against -4% three years earlier; Airbnb projects 48%-49% in the third quarter, which is historically the company’s strongest report.

In a normal, settled environment, this overall profile would suggest Airbnb stock is a buy. Indeed, Wall Street seems to believe as much: the average price target sits just shy of $170, suggesting 48% upside from Wednesday’s close.

Source: Investing.com

However, this is anything but a normal or settled environment. The question is whether the current environment is helping Airbnb or hurting it. The fact that ABNB stock barely moved after earnings suggests investors are still trying to figure out the answer to that question.

Is Airbnb Overearning?

The bear case for ABNB stock is that Airbnb revenue — and more importantly, its profits — are benefiting from everything going on outside the company.

Despite the constant talk of a recession, the consumer remains reasonably strong. More importantly, most consumers worldwide are desperate to travel. Southwest Airlines (NYSE:LUV) posted record profit in the second quarter. In the same quarter, United Airlines (NASDAQ:UAL) hit an all-time high in revenue.

Airbnb’s revenue growth of 73% against 2019 metrics sounds impressive. But a 20% annualized increase for a company that before the pandemic was growing reasonably quickly — full-year revenue increased 29% in 2019 — is solid, but not necessarily spectacular. That’s particularly true if demand right now is unsustainably high.

The same concern holds surrounding Airbnb profits. The lion’s share of the revenue increase since 2019 did not come from increased visits, but from higher prices. Per commentary on the second-quarter conference call, average daily rates increased 40% between the first half of 2019 and the first half of 2022. That implies that the number of visits only increased about 7-8% per year.

Given that the last year represents a still-strong economy, particularly for Airbnb’s core clientele, that growth looks a bit tepid. Indeed, investors initially sold off ABNB stock after earnings apparently due to concern about the outlook for visits in Q3.

The obvious concern is that pricing power isn’t going to hold. Hosts can charge more because demand is at a peak. It does not take long on social media to see numerous complaints about supposedly excessive Airbnb fees. Right now, customers will pay those fees. In a normalized demand environment — and/or a recession — they may not.

Airbnb gets a chunk of those higher rates — and the nature of a platform business means those incremental revenues drop almost straight to the bottom line.

Again, Airbnb stock looks reasonably valued based on current profits. But if those profits drop, or even stagnate, Airbnb stock is going to do the same.

The Case For ABNB Stock

Those widely held concerns are enough to explain a reasonably high short interest in ABNB stock. More than 6% of the float — $2.6 billion at the current ABNB stock price — is sold short.

But there’s an argument that those concerns are overblown. Certainly, aspects of the operating environment are beneficial for Airbnb. Other aspects are not.

Most notably, the novel coronavirus pandemic is still impacting demand. The macroeconomic situation outside the U.S. weakened in the first half of the year. Higher energy prices are depressing demand in Europe. Chief financial officer David Stephenson said on the Q2 call that the Asia Pacific region remains “significantly depressed,” largely due to the pandemic. Worldwide, urban markets still haven’t completely recovered.

Meanwhile, Airbnb has improved its business in recent years. The search for categories, instead of just locations, opens up new options for guests. Airbnb planned to ramp its Experience offer in 2020; those plans obviously were interrupted, but the company has the ability to drive growth in that revenue stream as well.

Work for home augurs another source of demand. Long-term stays of more than 28 days have nearly doubled in the past three years. So-called “digital nomads” can become repeat, profitable customers.

There’s no doubt that hosts — and, thus, Airbnb — are benefiting from pricing power that will weaken to some degree going forward. But there’s also little doubt that the environment for the company and its hosts is not quite as perfect as bears would argue.

Particularly near the lows, it does seem like the bull case here has legs. There’s going to be volatility, and investors need to trust the broad market to buy the stock here.

Long-term, however, this still looks like a relatively young, improving and growing company. It might not be quite as good as results in recent quarters suggest. But, at this price, if Airbnb executes, it doesn’t have to be.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.