Airbnb (ABNB) enables property owners to offer stays to travelers, and the company has strived to build a business model centered around product innovation. Airbnb competes with other vacation rental players such as Expedia (EXPE), TripAdvisor (TRIP), Booking Holdings (BKNG), and Travelzoo (TZOO).
Since the beginning of the year, Airbnb stock has declined 33%, although the revival of the travel industry has helped the company regain some lost momentum.
Growth stocks continue to get hammered amid interest rate hikes and geopolitical tensions, but this bloodbath presents an opportunity to invest in high-growth companies at a discounted price.
I am bullish on the prospects for Airbnb given the long runway for growth ahead of the company.
Recovery is Gaining Momentum
Nights and experiences booked and gross booking value, two important financial reporting metrics for Airbnb, are continuing to recover as the pent-up demand for travel kicks in.
In the first quarter of 2022, nights and experiences booked came to 102.1 million, surpassing pre-pandemic levels and impressively crossing the 100-million mark for the first time ever. This was a year-over-year improvement of 59%.
Gross booking value reached $17.2 billion, which represented annual growth of over 67%. The quarterly revenue of $1.5 billion was 80% higher in comparison to the pre-pandemic levels, which confirms the company has fully recovered from the virus-induced recession.
Adjusted EBITDA turned positive at $229 million after two consecutive years of EBITDA losses, which was another significant milestone the company achieved in the first quarter.
Airbnb currently has more than 5.6 million listings on its platform across 100,000 cities, covering almost every country and region across the globe.
The company has introduced several promising technical advancements and innovations to its platform while focusing on geographic diversification to retain its customers, which seems to be the right strategy.
An example is the introduction of the I am flexible option last year, which enabled travelers to expand their choices and pick less crowded places of their choice amid the pandemic. This option has currently been used over 2 billion times.
As the post-pandemic era emerges, people are becoming more interested in their travel plans. With many companies now offering much-needed flexibility to professionals by giving them remote working options, long-term vacation rentals are likely to be in high demand in the second half of this year.
In the recovery phase, travelers are preferring non-urban locations while planning extended stays as companies delay return to office plans. In the first quarter, Airbnb said that bookings for long-term stays accounted for almost 21% of its gross nights booked, which is almost double the pre-pandemic levels.
Airbnb has become the go-to online platform for long-term rentals because of the budget-friendly options that are listed on the platform, which suggests the company will thrive in the post-pandemic era.
Airbnb acquired HotelTonight, an online marketplace for boutique hotel rentals with low fares and competitive options, in early 2019. This acquisition has strengthened the company’s ability to expand its market position in the boutique and hotel accommodation space.
With a diverse offering that is more family-friendly in comparison to hotels, in the long run, Airbnb’s business model has a better chance of handling external shocks.
Airbnb, therefore, is well positioned to emerge as an industry leader in the coming years. If this happens, the company will naturally be valued at premium valuation multiples.
Risks to Monitor
Airbnb continues to invest millions of dollars in sales and marketing to attract more hosts and travelers to its platform, and these costs are essential to maintain stellar growth.
In the most recent quarter, sales and marketing expenses rose 50.4% year-over-year as the company aggressively boosted its marketing budget. As competition increases, Airbnb’s marketing costs will likely climb higher, and this could dent operating margins in the future.
Airbnb is constantly faced with intense competition from its peers such as Booking Holdings and Expedia, but newcomers such as Viator, GetYourGuide, Klook, and Traveloka are also proving to be noteworthy contenders for the market share of the vacation rental industry.
In the meantime, investors should not ignore the threat from Google (GOOG) as the company is fine-tuning its search engine while threatening to enter the vacation rental market. With its deep pockets, Alphabet might even consider acquiring a few smaller companies to take market share from Airbnb.
The rising rates environment is another risk that would be faced by Airbnb investors. Historically, growth stocks have been volatile in the beginning phase of contractionary monetary policy cycles. History seems to be repeating this time around as well.
Wall Street’s Take
After Airbnb reported stellar growth in the first quarter, many Wall Street analysts praised the company for the work it has done in the last couple of years to unlock new growth opportunities.
However, a few analysts cited valuation concerns and cut their price target for the company.
The volatility in the last few trading sessions has pushed Airbnb stock lower, creating a margin of safety today. Based on the ratings of 30 Wall Street analysts offering 12-month price targets, the average Airbnb price target comes to $191.57, which implies 64.9% upside from the current market price.
Airbnb is moving in the right direction to dominate the worldwide vacation rental market in the long run, despite temporary challenges faced by the company.
The recent decline in the stock price seems to have pushed the company into the deeply undervalued territory, presenting growth investors with a good opportunity to consider adding Airbnb stock to their portfolios.
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