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Airbnb: Hedge Funds Are Bullish on Its Momentum
Stock Analysis & Ideas

Airbnb: Hedge Funds Are Bullish on Its Momentum

Airbnb (ABNB) is a peer-to-peer rental space for lodging, primary homestays, vacation rentals, and tourism activities. I am bullish on the stock. (See today’s best-performing stocks on TipRanks)

Hedge Fund Buying and Momentum

Hedge funds have piled up on the company’s stock of late as 807,600 shares were gobbled up by funds in the previous quarter. Among the noticeable names to have added Airbnb stock to their portfolios are George Soros of Soros Fund Management and Frank Sands of Sands Capital Management.

Airbnb has formed a momentum pattern lately, due to the increased traveling rhetoric. The stock is currently trading above its 10, 50, 100, and 200-day moving averages, which is indicative that strong momentum is at play.

Q3 Earnings Beat and Outlook

Airbnb managed to beat analysts’ revenue estimates by $180 million in its third-quarter earnings report. A 67.2% year-over-year increase in revenue resulted in Airbnb’s best-ever quarter on record.

Demand seems pent up, as the company had a 40% backlog at the end of September, while macroeconomic variables and recent COVID-19 policy easing also suggest that travel spending will remain robust going into 2022.

The company had the following to say regarding its Q4 outlook: “We expect Nights and Experiences Booked in Q4 2021 to significantly outperform Q4 2020 levels and approximate Q4 2019 levels. In Q3 2021, our ADR declined from Q2 2021 due to the recovery of lower ADR regions, but we expect our ADR will be relatively stable in Q4 2021 relative to Q3 2021. Consequently, we expect Q4 2021 GBV to be substantially above both Q4 2020 and Q4 2019 levels, and Q4 2021 GBV year-over-two-year growth to accelerate from Q3 2021.”

Pricing Metrics Could Be Key Drivers

Apart from eased travel policies and solid accommodation demand, it’s critical to look at the stock’s pricing metrics. The company currently has a high cost of debt at 12.5%, induced by debt restructuring in 2020 amid a crisis moment for the company.

The high cost of debt means that equity investors are theoretically only able to expect a 7.5% return per year based on the Capital Asset Pricing Model. I anticipate these two metrics to flip over positions soon as business conditions have improved for travel businesses. This could lead to increased residual value for Airbnb shareholders.

Lastly, the company’s free cash flow has grown by 470% year-over-year, and its total assets grew by more than 30% in the same period. Combining the previous two statistics with the possibility of debt repricing means that we could well be looking at an underpriced stock here.

Wall Street’s Take

Needham has upgraded its initial $200 price target to $210. According to the company’s analyst Bernie McTernan: “Revenue and adj. EBITDA were well ahead of consensus expectations, beating by 9%/34%, while GBV missed by 3%. ABNB continues to be bullish on the rebound in travel, noting acceleration of this theme in 3Q, with ABNB in pole position to capitalize on new use cases and new travel destinations while also noting strong 4Q trends such as Thanksgiving bookings running 40% ahead of 2019’s pace.”

Furthermore, the rest of Wall Street remains bullish on the stock and holds a Moderate Buy consensus rating. Out of 30 Wall Street ratings, there are 17 Buys, 12 Holds, and one Sell assigned in the past three months.

Aggregating Wall Street’s price targets provide an average Airbnb price target of $196.79, implying just 0.2% upside.

Concluding Thoughts

Airbnb is benefiting from more than pent-up demand. The company’s intrinsic value has grown significantly, and it may be able to reprice its debt soon. George Soros and Needham are both supportive of the stock, which provides substance to any bullish argument.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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