Airbnb Stock Outperformed the S&P 500
Investors in leading vacation rental company Airbnb, Inc. (NASDAQ:ABNB) have performed relatively well since my previous update in December. I highlighted that ABNB reached an inflection point, supported by robust buying sentiments. As a result, my timely upgrade has played out, as ABNB outperformed the S&P 500 (SP500) since then, notwithstanding its recent pullback.
Accordingly, ABNB last re-tested levels seen in April 2022. Buying sentiment has remained solid even as Airbnb management highlighted growth normalization trends at Airbnb’s fourth-quarter earnings release in February 2024. Leading competitors Booking Holdings (BKNG) and Expedia (EXPE) also highlighted caution over near-term travel industry growth dynamics, as tougher post-pandemic comps from “revenge spending” affected investor sentiment.
Consequently, Airbnb will intensify global expansion efforts, focusing on underpenetrated markets. The company will undertake a focused approach as Airbnb looks to localize its offerings to bolster its value proposition against its hotel competitors. Notwithstanding the challenge from travel aggregators and OTA peers like Booking and Expedia, Airbnb views hotels as its primary rivals.
In addition, Airbnb is looking to improve its value propositions through leveraging its experiences and services for its travelers. As a result, I assessed that Airbnb has strengthened its network effect with travelers, connecting them with 5M hosts in its supply network. Supply is a closely-watched metric in Airbnb’s platform. Notably, Airbnb posted an 18% increase in active listings in Q4, exceeding 7.7M.
Airbnb Needs To Expand To Maintain Growth
Airbnb management envisioned significant opportunities beyond the US, looking to invest in markets such as Germany, Brazil, Korea, and Japan in the initial expansion phase. LatAm and APAC were instrumental in driving growth for Airbnb in Q4, helping to mitigate the growth normalization phase. Accordingly, Airbnb posted a 22% growth in LatAm nights and experiences booked in Q4. The company also notched a 22% growth in nights and experiences booked in APAC in the same period, as cross-border travel recovered remarkably.
Nevertheless, investors must also anticipate higher execution risks, as Airbnb is expected to invest more aggressively in underpenetrated markets. While its robust network effect has driven significant unpaid traffic to its highly popular mobile app, management expects higher investments this year. Airbnb anticipates a “full-funnel marketing” approach in these markets, emphasizing driving “awareness, engagement, and conversions.” However, Airbnb assured investors that the company is cognizant of maintaining its profitable growth trajectory. As a result, Airbnb management committed to paying close attention to maintaining operating leverage growth. Therefore, investors shouldn’t expect this increased spending to “significantly increase the marketing spend as a percentage of revenue compared to the previous year.”
Airbnb’s Growth Is Expected To Slow
Airbnb’s Q1 guidance suggests that the growth normalization phase will continue, complicated by tougher comps from last year. Accordingly, Airbnb anticipates midpoint revenue of $2.05B in Q1, up 13% YoY. Revised analysts’ estimates are slightly higher, expecting Airbnb to outperform with revenue of $2.06B (up 13.2% YoY). However, Wall Street penciled in an ongoing slowdown, anticipating Airbnb to post revenue growth of 11.7% for the full year. I believe the near-term caution is justified, as we need to account for higher execution risks complicated by the need to invest more aggressively.
Despite that, Airbnb management committed to maintaining an adjusted EBITDA margin of at least 35% for FY24. While it’s below FY23’s 36.8% margin, it still demonstrates Airbnb’s fundamentally sound business model. Seeking Alpha’s best-in-class “A+” profitability grade underscores my conviction.
Notwithstanding my optimism, questions must still be asked whether ABNB deserves to be valued at a significant premium against its peers as growth is expected to slow further. Accordingly, ABNB is valued at a forward adjusted EBITDA multiple of 23.5x, well above its peers’ median of 12.3x (according to S&P Cap IQ data). Therefore, Airbnb must execute its growth strategy immaculately this year, justifying its steep growth premium. However, I assessed that the current valuation seems devoid of a reasonable margin of safety, suggesting we need to be cautious about being more aggressive here.
Is ABNB Stock A Buy, Sell, Or Hold?
I have not assessed red flags on ABNB’s price action, leading to the need to significantly reduce exposure. In other words, I view Airbnb as a fundamentally strong vacation rental platform that has convincingly demonstrated its network effect moat.
Management’s decision to reload its stock repurchase authorization with another $6B underscores the company’s ability to defend its stock during steep pullbacks. As a result, I assessed that ABNB should still attract dip buyers during more intense selling, as investors take profit.
With ABNB priced at a steep growth premium while navigating a more challenging expansion phase, I expect a period of consolidation. Investors will want to assess its execution in newer growth vectors and markets as Airbnb engineers its growth outside its core regions. Therefore, I believe a higher level of caution is necessary for ABNB as I move back to the sidelines.
Rating: Downgrade to Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
I Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
Read the full article here