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Introduction
Fears of recession leading to a decline in demand for travel continues to scare investors. Many investors thought that travel demand will quickly dissipate after the pent-up demand dries up, especially as consumer confidence is plummeting due to inflation and economic outlook. So far, this has not been the case. Numerous companies operating in the travel industry have reported a strong start to the summer season and continued its strong demand expectations throughout 2022. Therefore, I believe investors should take a look at Airbnb (NASDAQ:ABNB). A fast-growing company that is bounded by negative economic outlooks.
Airbnb reported a phenomenal earnings report on August 2nd, 2022. Everything including growth, efficiencies, free cash flow, and guidance was perfect. There was certainly room for further improvements and monetization potential, but I believe the results do not warrant a decline in share price post-earnings, which were heavily affected by future demand resulting from inflation and economic slowdown. Therefore, I am maintaining my buy rating on Airbnb as I believe strong travel demand will persist and Airbnb will continue its wonderous execution to generate strong cash flows.
Earnings Report
- Nights booked increased 25% y/y to 103.7 million
- Gross Book Value increased 27% y/y to $17 billion
- Revenue increased 58% to $2.1 billion
- Net income increased from -$68 million to $379 million
As the brief summary above shows, Airbnb reported another strong earnings report showing the strength of its business model. Not only did the company manage to grow its total nights booked, but the company was also able to increase the average daily rates and take rates. Due to favorable market conditions, gross book value increased faster than the total nights booked signifying an increase in average daily rates. More importantly, Airbnb was able to improve its take rate. The company’s revenue growth rate more than doubled the growth rate of gross book value increasing the take rate from 9.7% a year ago to 12.4% in the current quarter showing a successful monetization. As such, Airbnb was able to prove that its strength comes from both platform monetization ability and strong demand for vacation rental homes offered by individual hosts. Therefore, I continue to believe that Airbnb’s growth will continue. The company’s platform will likely see continued growth, improved operational efficiency, and monetization.
Outlook
Airbnb has estimated a strong outlook for the third quarter of 2022. The company is estimating its highest quarterly revenue in Airbnb history with average daily rates growing even higher. Further, Airbnb is expecting its gross book value growth to be consistent with second quarter levels showcasing the continuation of the strong demand environment.
Strong Industry Outlook
Despite Airbnb’s strong performance, many investors continue to speculate about the possibility of a recession. Consumer confidence is low, inflation is high, and geopolitical risks remain; however, the entire travel industry, not just Airbnb, is providing a strong outlook throughout 2022. I believe a favorable environment will continue for Airbnb.
Delta Airlines (DAL) in the airline industry provided a strong travel demand outlook throughout 2022. The company expected revenues above 2019 levels throughout 2022 with about 15% reduced capacity on strong demand leading to pricing power. Further, American Airlines (AAL) has also said that its third quarter revenue will likely be higher than 2019 levels despite its capacity being about 8-10% lower on higher travel demand.
Marriott International (MAR) in the hotel industry also provided a strong travel demand outlook throughout 2022. The company is expecting strong demand to keep its revenue per available room above 2019 levels. Further, 203,000 additional rooms are under construction, and 495,000 rooms are under the development pipeline showcasing the company’s confidence in continued future demand.
Finally, Visa (V) has reported a strong travel demand recovery as well. In the last reported quarter, Q3, the company’s cross-border volume, travel, increased 40% year-over-year while the total payment volume increased 12% year-over-year leading the entire growth in total payment volume.
These companies are all affected by the travel industry although they each have unique businesses. Thus, it may not be logical to claim that strong airline demand equates to strong Airbnb lodging demand. However, if varieties of companies operating in all depts of the travel industry expect a strong travel demand throughout 2022, I believe it is logical to argue that the demand environment for Airbnb will be equally strong as the company has estimated. Therefore, with the favorable environment likely to continue at least till the end of 2022, Airbnb is still a buy despite macroeconomic concerns.
Valuation & Financials
Airbnb’s valuation is receiving a premium today, but I believe it is justifiable. The company has a market capitalization of about $74 billion with a forward price-to-earnings ratio of about 60.7. Airbnb’s year-over-year revenue growth is strong at 58% or 64% without considering the headwinds from foreign exchange rates. Not only is the growth strong, but the company’s free cash flow is strong as well. The trailing twelve months of free cash flow is $2.9 billion bringing its free cash flow yield to about 39.2%. Further, given this strong cash flow, the management team has announced a $2 billion stock repurchase program to offset the stock-based compensation expense and lower the existing share count. Therefore, given the strong growth rate and cash flow with the continuation of a favorable demand environment likely to continue throughout 2022, I believe Airbnb’s valuation premium is justifiable.
Airbnb’s financial health is extremely strong. The company has total cash and short-term investment of about $9.9 billion with total assets of about $19 billion. On the other hand, Airbnb’s long-term debt liability stands at only about $2 billion. Given the strong cash flow and cash position with low long-term debt, I believe Airbnb’s balance sheet is in a favorable position to support Airbnb’s growth and operation.
Summary
Airbnb’s growth and operational efficiencies has been phenomenal with expectations for it to continue. Favorable travel industry outlook and Airbnb’s strong financial position and cash generation will likely continue supporting Airbnb’s premium valuation. Therefore, despite some fears of recession and reduced travel volume affecting Airbnb, I continue to believe that Airbnb is a buy.
