Airbnb stock: valuation remains a real challenge (NASDAQ:ABNB)


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Investment thesis

Airbnb, Inc. (NASDAQ: ABNB) the stock has gone nowhere since its IPO in December 2020. Instead, the stock has mostly traded in a considerable consolidation range, straddling its resistance and support levels.

Nevertheless, Airbnb has proven that he could survive what was probably his worst possible crisis imaginable due to the pandemic. Management was still on its feet and deftly steered the company toward commuter and long-stay use cases. As a result, the business has returned to pre-COVID performance. It even took advantage of its higher ADR tailwinds and remarkably gained operating leverage.

However, we believe that the growth premium for ABNB shares remains a challenge. While Airbnb would undoubtedly benefit from the reopening, its margins could be impacted. Additionally, the bifurcation between its valuation and its cheaper peers could affect its stock momentum. This could also explain why ABNB stock has not performed well, despite the robust recovery in its activity.

As a result, we have decided to move away from ABNB stock. Therefore, we are revising our rating on ABNB shares from Buy to Hold.

Tailwind ADR is likely to fade

Airbnb revenue

Airbnb revenue (S&P Capital IQ)

Airbnb ADR

Airbnb ADR (company records)

Airbnb reported another strong quarter in the fourth quarter, with revenue up 78.3% year-on-year. It maintained its remarkable recovery seen in its previous two quarters, demonstrating the resilience of its business model. Airbnb has differentiated itself from its OTA or hotel counterparts by managing to capitalize on the remote working trend in an impressive way.

The company also believes that the hybrid/remote work trend is set to continue. Additionally, Airbnb also expects the reopening to boost summer vacation spending, given pent-up demand. Notably, Airbnb did not expect a significant impact on travel demand despite the Russian-Ukrainian conflict.

However, we expect the upward trend of its ADRs to moderate in the future. The higher ADRs of longer stays should be normalized as the reopening gains momentum. Shorter stays could also impact its ADRs in the future. Notably, the company hasn’t provided clear guidance on its moderation, as CFO Dave Stephenson explained (edited):

ADRs may moderate this year and as our business mix changes, this will offset some of the further improvements in our fixed cost leverage and variable costs.

We expect urban to come back, and we continue to see urban accelerating every quarter and some of our lower ADR markets would start to come back.

So if the ADRs moderate a little less, there is room for an upside in EBITDA. But ADR is a bit difficult to predict. If ADRs stay higher and stronger, it’s a tailwind for EBITDA. But, if more urban yields, more low ADR regions return, it will be a continued headwind for our margins.

– Source: Airbnb FQ4’21 earnings call

In addition, GAAP profitability is low

% of Airbnb EBITDA margins

Airbnb EBITDA margins % (S&P Capital IQ, company filings)

Airbnb takes the rate %

Airbnb take rate % (company deposits)

We can already see the impact on his FQ4 participation rate. Consequently, this also affected its EBITDA margins. The company’s preferred guide is its adjusted or non-GAAP EBITDA margins. Airbnb reported an adjusted EBITDA margin of 21.8% in Q4, down significantly from 49.2% in Q3. It was quite an anomaly that the company never expected to replicate, even in a fantastic quarter. However, its GAAP EBITDA margins were relatively low. FQ4’s GAAP EBITDA margins were just 7%. Therefore, investors should be careful when using the company’s adjusted measures.

Nevertheless, Airbnb stressed that it is still in growth mode. Therefore, the company would carefully manage its balance between growth and profitability. We think that makes sense. The company trades with a built-in growth premium. Therefore, he must demonstrate superior revenue growth to justify his bonus. Consensus estimates suggest Airbnb’s FY22 revenue could rise 31.2% year-over-year to $7.86 billion. Notably, it was revised up from its pre-earnings estimate of $7.3 billion (up 21.8% year-on-year). Therefore, it was a significant upward revision, which pushed its stock higher after the earnings.

The Street also remains bullish on its adjusted EBITDA margins for FY22. It expects an adjusted EBITDA margin of 27%. But, we think there could be a noticeable downward pressure on his catch rate that needs to be carefully monitored. Additionally, given ABNB’s growth premium, its stock could suffer a squeeze if the impact on its profitability were greater than expected.

Is ABNB stock a buy, sell or hold?

ABNB share Yield NTM FCF %

ABNB share Yield NTM FCF % (TIKR)

ABNB Stock Vs. Peers

ABNB Share vs peers (Koyfin)

Airbnb is profitable FCF. He also has more than $8 billion in cash and cash equivalents. Therefore, the company is well placed to invest in its growth and product development.

However, its stock’s growth premium is implicit in its NTM FCF performance. ABNB stock traded at an FCF yield of 2.1%, below Booking (BKNG) stock’s 4.8%. It was also significantly lower than Expedia (EXPE) stock’s 13.4%. Given EXPE’s stock outperformance over ABNB over the past year, it’s hard to argue that valuation doesn’t matter.

In addition, the marked growth premium in ABNB stock has compelled the company to execute its growth strategies well. But we are concerned about its bottom line, which could also impact its FCF margins going forward. Therefore, we think the street might be overly optimistic.

Given the multitude of growth stock opportunities presented by the recent tech bear market, we have closed all of our positions in ABNB stocks. As a result, we are revising our rating on ABNB shares from Buy to Hold.


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