Airbnb: Perfect Time To Buy Before The Rebound

Summary

• Shares of Airbnb remain down ~30% from all-time highs, despite the fact that its fundamentals are rebounding sharply.
• Bookings are up, average stay lengths are increasing, average daily rates are rising, and travel to non-urban areas is also boosting.
• Airbnb is becoming a platform for both recreational travel as well as "work from anywhere"
• In addition, Airbnb notched huge adjusted EBITDA margins in its most recent quarter, reflecting how profitable this business can become at scale.
• The company next reports earnings on Tuesday, May 3.
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Though the pandemic has permanently crippled some businesses, on others it has had the opposite effect: on Airbnb (NASDAQ:ABNB), for example, though COVID-19 temporarily dampened travel demand, the lasting impact of the pandemic is actually to boost demand for new types of travel, including long-term remote work arrangements and short domestic jaunts.

Airbnb, in other words, is riding on a high. In its most recent quarter, bookings notched new records, while the company has also proclaimed that the impacts of the late-winter Omicron surge has had a much more modest impact on travel demand than it initially expected. Despite the robust commentary, however, Airbnb stock remains in a downtrend. Year to date, the stock has shed "only" 12% of its value (roughly matching the decline of the S&P 500), but it remains ~30% down from all-time highs above $210. In my view, it's a perfect time for investors to reassess the bullish thesis for this company.

Data by YCharts

A very clear bull case for Airbnb

I've been adding more to my position in Airbnb on the dips, and I remain stoutly bullish on this stock. Airbnb's dominance in the global travel and lodging sector has been well pronounced for years, and in an age where many larger-scale hotels have been weakened because of the pandemic, Airbnb's cadre of small-business hosts is well-positioned to pick up the slack.

Here's a refresher of what I believe to be the key bullish drivers for Airbnb:

• Travel is rebounding, and Airbnb has almost become the default mode of lodging for most travelers. Omicron's impact on reopening and global travel has been much more muted than Delta or than Airbnb initially anticipated. As people get back into the swing of travel, Airbnb is well-positioned to absorb that demand and gain market share, thanks to its growing pool of hosts, its broader network of availability in different regions, and its various "Experiences" offerings.
• Airbnb may not just be for vacation anymore. With so many companies announcing permanent remote or hybrid work structures, many workers have leaped at the chance to become digital nomads and work from anywhere. In the spirit of this trend, even Airbnb itself has also announced that it is allowing its staff to work from any location (including up to 90 days internationally, limited for tax purposes). This trend may see Airbnb picking up not just travel demand, but essentially "rent" budgets from digital nomads as well. As a result of this trend, average trip lengths are increasing quite substantially
• Chance to absorb hotel business through promoted listings. It's not a great time to be in the hotel game right now. After facing two years of heightened vacancy, hotels have always dealt with high third-party booking fees through platforms like Expedia (EXPE) and Booking (BKNG). Airbnb already allows boutique hotels to list on its platform for a fee; over time Airbnb could fully throw its hat in the ring to compete against the high-fee OTA giants.
• Profitability in mind. During the immediate aftermath of the pandemic, Airbnb laid off about 20% of its staff. While it is now continuing to hire, this profit-centric mindset and the fact that Airbnb is structurally leaner than it was pre-pandemic has allowed the company to make sizable profitability gains.

In my view, Airbnb remains a solid long-term bet. Ten years from now, I still see Airbnb being the dominant lodging choice, especially as a new generation of younger travelers who grew up with Airbnb being a household name enters into their prime travel years.

Right now, the drop in Airbnb's stock is due largely to sentiment turning against growth stocks than it is due to Airbnb's own fundamentals. I'd take advantage of that timing mismatch to build up a position here. Airbnb next reports Q1 earnings on Tuesday, May 3; I expect good news on that front will kick off a healthy rebound for this name.

Incredibly healthy bookings trends

Through Q4, we've seen Airbnb demonstrate tremendous post-pandemic recovery as well as capitalize on permanent, positive travel tailwinds. In Q4, the company achieved $1.53 billion in revenue (beating Wall Street's $1.46 billion expectations), growing 78% y/y as well as growing 38% y/y against a non-pandemic-impacted Q4 2019:

Airbnb 2-year revenue stack (Airbnb Q4 shareholder letter)

The number of nights and experiences booked was approximately flat to 2019, but up 59% y/y versus 2020. The big driver for the boost in revenue, then, was a big jump in ADR (average daily rates), which is up 20% y/y and 36% over 2019 as shown in the chart below:

Airbnb bookings metrics (Airbnb Q4 shareholder letter)

Travel has also experienced a surge of inflation, though rising flight and lodging costs haven't seemed to dampen demand so far. Alongside average prices increasing, the below factors are contributing to strong bookings demand for Airbnb:

• Shorter/local trips. During the pandemic, when flights were limited and people weren't willing to travel, many took shorter driving vacations to nearby towns or national parks. Even in the post-pandemic era, this type of trip has continued to be popular on Airbnb. The company notes that non-urban (stays not located in a city) bookings are up 45% versus 2019.
• Trip lengths are elongating. As previously discussed, digital nomads are taking advantage of more flexible policies to live on Airbnb. The number of trips booked over seven days has now increased to more than half of Airbnb's total bookings, while bookings of more than four consecutive weeks now represent 22% of total booking nights and are up 16% versus 2019. For Airbnb as a whole, average trip lengths are up 15% versus 2019. Airbnb has responded to this shift in demand by making additions to its platform including the "I'm Flexible" feature, which allows travelers to indicate they are flexible on dates and/or location to better match them with available stays.
• Supply growth. Airbnb has been active in recruiting new hosts, and now has more than 6 million active on the platform. Non-urban hosts are also increasing dramatically, with 20% growth over 2019. The company has also boosted its listings profile in Latin America and Europe.

Surging profitability

Unsurprisingly, alongside the boosted travel demand, Airbnb has also notched tremendous profitability gains. In Q4, Airbnb hit $333 million of adjusted EBITDA, representing a rich 22% adjusted EBITDA margin - versus breakeven in 2020 (achieved through layoffs and cost cuts) and a -25% margin in the fourth quarter of 2019:

Airbnb adjusted EBITDA (Airbnb Q4 shareholder letter)

Here's some further color on adjusted EBITDA from CFO Dave Stephenson's comments during the Q&A portion of the Q4 earnings call (key points highlighted):

We’re very proud of the progress we’ve made in our margins in 2021. I mean, we increased them from minus 5% back in 2019 to 27% in 2021. And so, it’s obviously a huge improvement and very proud of the work that we’ve done across the board. But also remember that we’re managing for profitability while investing for growth. We’re still very much in the growth mode investing for the future, and that’s key for us. And what we saw in 2021 was that we had a step change in our marketing expenses and achieved a new level of overall marketing investment as a percentage of revenue. And we’ve already achieved that new baseline and likely not to achieve substantial improvement in the marketing expenses as a percentage of revenue this year. And we also made a step change in our fixed costs and continue to improving our variable costs. We’ll continue to do that. We’ll get more leverage on fixed and keep improving our variable costs. But last year, we also saw the tailwind of average daily rate which definitely helped our margins. And as ADRs may moderate this year and as a mix of our business changes, that will be an offset to some of the further improvements in our fixed cost leverage and variable costs. So if ADRs moderate a little bit less, there’s room for some upside in EBITDA."

It's worth noting that Airbnb is expecting to deliver its first positive adjusted EBITDA in Q1 of this year.

Key takeaways

It's an optimal time, in my view, to swoop in on shares of Airbnb while the stock is still trailing behind its all-time highs. I continue to view Airbnb as the dominant travel/lodging provider of the next few decades, with additional upside as it picks up long-term stays and digital nomad demand. Stay long here.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABNB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.