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Airbnb: Profits Prove Elusive
Stock Analysis & Ideas

Airbnb: Profits Prove Elusive

Airbnb, Inc (ABNB) operates a platform that connects hosts with those looking to rent vacation homes on a short-term basis.

It operates in the United States and internationally. ABNB makes money on both sides of the transaction: the company charges the renters a fee, and charges the hosts a separate fee for use of the platform.

I am neutral on ABNB stock.

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Revenue Trends Interrupted

Airbnb went public in December 2020 after a tumultuous year – to say the least. National and international travel was interrupted by the COVID-19 pandemic like never seen before in modern times. However, Airbnb was able to weather the storm quite admirably.

The company’s net debt decreased from fiscal year end 2019 through June 2021. This was assisted by the capital raise upon IPO. The company did dilute shareholders, however this is typical of a company immediately post-IPO. The company also utilizes much stock-based compensation (SBC) which increases the diluted shares outstanding. More on that later.

From 2018 to 2019, annual revenues were growing swiftly. Revenue of $3.65B in 2018 rose to $4.81B in 2019 and increase over 31%. The pandemic was a major setback, as revenues fell below 2018 levels to just $3.38B for the year ended December 2020. Consensus estimates for 2021 call for $5.7B. This is a healthy 19% increase, however is not enough to move the needle on a growth stock with a very high valuation.

Profits Elusive, Expenses Ballooning

Net loss also exploded from $674M for fiscal 2019 to a whopping $4.58B in fiscal 2020. Net loss over the first six months of 2021 was another $1.2B. This is on pace to be much better than 2020, however it’s still a significant loss.

As the company scales, it is spending much more on selling, general, and administrative (SG&A) expenses each period. Total expenses have grown from $3.6B in 2018 to $6.97B in 2020. Given the revenue estimates, profits are a long way off.

This trend is concerning, especially as Airbnb was unable to reign in expenses during the pandemic when many companies saved on costs. The company spent 31% more in 2020 than in 2019 despite bookings declining sharply. Indeed, net losses have increased each year in Airbnb’s short public reporting existence. The company might be able to reverse the trend of increased losses in 2021, however it will still likely lose billions.

Stock-based Comp Done Right

Many companies use stock-based compensation as a way to compensate employees. Options or restricted stock units (RSUs) are given to executives and high level employees in lieu of cash.

There are positive and negative aspects of this for shareholders. On the positive side, giving out stock options to insiders can align their goals with that of shareholders. After all, the higher the stock goes, the more their RSUs will be worth. It is also a great motivator and encourages employees to stay with the company. The RSUs often have a vesting period of several years.

On the negative side, these options can massively dilute shareholders over time.

For the three months ended March 31, 2021 the company reported over $229M in SBC (stock-based compensation). This increased slightly to $236M in the period ended June 30, 2021. Still, this is not an obscene amount.

It also contributes to the $1.3B in positive operating cash flows reported for the first six months of 2021. This is opposed to the $826M in negative cash from operations for the same period in 2020. Generating these cash flows should allow for the company to grow without significant debt-issuances to fund operations – a clear positive.

Valuation is Not Optimal For Investors

Airbnb trades very high for a company with no clear path to profitability. The company also has many risks. While COVID-19 is not as interruptive as it was in 2020, there is always risk of another variant or other resurgence. Growth is also not guaranteed to pick up where it left off and the moat is not significant. A new competitor would be detrimental to growth.

The stock currently trades at 23x price-to-sales (PS). This reduces to 19x on a forward basis. The forward 1 year PS ratio is 15x. Forward estimates are based on analysts consensus estimations. This high valuation is not attractive until SG&A expenses begin to level off and bookings increase in meaningful numbers from 2019 levels.

For this valuation to be attractive to new investors, growth would also need to revert back to 30% or more on an annual basis.

Website Traffic

According to TipRanks’ website traffic tool, Airbnb’s website has seen a 6.05% decrease in traffic, quarter-over-quarter. In the U.S., quarter-over-quarter website visits are down by 9.95%.

Summary on Airbnb

Airbnb has an opportunity to reemerge as a high quality growth stock; however, several things must happen first. The company must once again see revenues increase substantially on the back of increased bookings. Airbnb must also scale operations to the point where SG&A expenses are growing slower than revenues, otherwise there is not a path to profitability.

All in all, management weathered the COVID-19 storm better than many. This was helped mightily by the IPO capital raise in 2020. Now it must show that it can rebuild the narrative.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.

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