Airbnb: Not Staying Here (NASDAQ:ABNB)

Shares of Airbnb, Inc. (ABNB) are a bit different from most technology names. For one is the fact that the company only went public late in 2020, taking the opportunistic timing provided by a recovery in the market, as the company was not listed at the time when the pandemic was taking the world in its grasp.

Shares rallied to the $200 mark on two occasions in 2021 but have fallen substantially ever since, now trading at $93, near their lows, even as many other (technology) names have recovered a bit in recent weeks and months.

2021 – Somewhat Of A Base

Airbnb has seen a strong recovery in the 2021 results for obvious reasons, a year in which revenues rose from $3.3 billion to $6.0 billion, a number on which an operating profit of $429 million was reported. The company posted GAAP losses on the back of higher interest expenses and some other charges, but the underlying business was modestly profitable.

This revenue number was based on roughly $46 billion in underlying bookings, indicating that the company stakes a steep cut of around 13%, somewhat similar, or even a bit lower, compared to Booking Holdings, Inc. (BKNG), but it can be argued that the value-added here by Airbnb is a bit higher. The image of a touristy boutique experience is disappointing at a rapid pace, with average spend per night coming in around $150 per night, indicating that this is not necessarily very cheap.

With shares trading at $150 towards the end of 2020, and around the same level by the end of 2021, valuations were more than full. The 680 million shares outstanding translated into a valuation which topped the $100 billion mark, even though the valuation came in just below that mark following a substantial net cash position post the public offering.

Slower Growth Through 2022

Based on the discussion above, it is very clear that valuations were demanding. With a roughly $100 billion valuation by year-end 2021, with revenues reported at $6 billion, the company traded at a sales multiple around 15 times. This is a steep valuation, even as the shares recovered spectacularly in 2021, yet earnings power was rather limited.

The company grew first quarter sales in 2022 by 70% to $1.5 billion, yet despite the spectacular increase in sales the company still posted a GAAP operating loss of $5 million for the quarter. Revenues in the seasonally stronger second quarter rose by 58% to $2.10 billion, coming in just ahead of the initial guidance which called for sales at a midpoint of $2.08 billion. The company posted a solid $369 million operating profit number on this sales base, a decent result.

Third quarter sales rose 29% to $2.88 billion, albeit that currency headwinds increased to 7% in the quarter. The company has seen strong leverage so far with operating profits posted at $1.20 billion for the quarter. This means that revenues so far this year are up by around $2.0 billion to $6.5 billion as strict cost control allowed for a $1.2 billion increase in operating earnings on the back of this.

Concluding Thought

Right now shares of Airbnb have fallen to $93, which translates into an equity valuation of $63 billion, or about $56 billion if we account for a sizeable $7.5 billion net cash position. With growth seen around 20% in the fourth quarter, hurt by still fierce dollar headwinds, tougher comparables and perhaps some indications of slower growth (and hence slower travel related spending), we can look at the pro forma implications.

At this pace, Airbnb, Inc. is on track to post operating earnings of around $2 billion on nearly $8.5 billion in sales, resulting in very profitable and impressive margins. After all, after applying a 25% tax rate, this works down to earnings power of $1.5 billion, or about $2.20 per share. With net cash coming in around $11 per share, an operating asset valuation of $82 per share still works down to a near-40 times earnings multiple.

This multiple remains a bit high, too high to see strong appeal here, albeit that I am impressed with the margins posted by Airbnb, which is the undisputed leader in is category. That said, there are many moving parts in the business. On the one hand, it could continue to grow, driven by increased penetration across the globe, or roll out to short-term rentals in other real estate properties.

On the other hand, regulatory scrutiny is toughening up on the business, with owners being required to keep records, pay taxes, and limiting the number of nights which owners can list their property on the platform, notably in the European region.

Weighing it all together, I am impressed with the financial performance of the Airbnb, Inc. platform. However, I fear that Airbnb growth will come down meaningfully amidst already solid margins and tougher sales comparables, leaving the current high-thirty times earnings multiple perhaps too high to see real appeal in Airbnb, Inc. here just yet.