Airbnb Update: The longer the base...
...the bigger the breakout? The company is still one of a kind, a category definer consolidating the travel & hospitality space with adaptability, strong moats and operating leverage.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
Two years have passed since my in-depth report on Airbnb ABNB 0.00%↑ . It started promising with a 50% run in the first few months after I published. But then the stock consolidated. It has been in a trading range ever since and essentially went nowhere. If you bought the IPO, you’d be under water as of today. Is just the stock temporarily broken or the entire story?
In my opinion, Airbnb is still digesting its pandemic era windfall gains that boosted its business both in volume and pricing terms. Cyclical forces overshadowed the structural growth story and the company’s financial performance got ahead of itself. Volume growth is still decelerating and pricing has even turned negative. The stock’s underperformance is a manifestation of deflating growth expectations.
Under the hood, the company is still one of a kind, a category definer that is consolidating the travel & hospitality space with a high degree of adaptability, strong moats and operating leverage. People will continue to allocate a rising share of their disposable income to their travelling and housing. No other company provides exposure to this megatrend the way Airbnb does.
At 5x forward revenues, 14x forward EBITDA and 24x forward earnings, the stock is trading at about a 20-25% discount to where it was two years ago when I first wrote about it. The longer this consolidation lasts, the more attractive I will find this company.
The original bull case
Two years ago, I published a 4,000 words in-depth report on Airbnb. I will provide a high level summary of the main points below. However, I recommend the entire article as a complementary read to this one. It is very comprehensive with lots of arguments that I can’t all repeat here and most of which I still stand by today.
Back then, I highlighted that the stock had fallen out of investor favor because the windfall gains from the pandemic era remote work bubble were gone and as a cyclical stock it was deemed untouchable due to recession fears. I found this curious because underlying fundamentals were actually strong. Their earnings were growing rapidly and surpassing expectations.
I called Airbnb a rare example of an Inflationary Disruptor. Disruptive innovation is typically cost driven just as much as it is utility driven. Newcomers win against incumbents because the offering is significantly cheaper than the traditional alternative. Their ascent is a constant race against deflationary pressures. Think about Google or Amazon or even Tesla.
Some companies can evade the disruptor’s deflation dilemma by riding underlying inflationary trends. Airbnb is taking a highly scalable share in travelling/hospitality/housing while at the same time riding monetary debasement driven real estate appreciation. And they are not even exposed to location risk. Wherever real estate demand pops up, Airbnb supply will follow.
I further argued that Airbnb is operating in the right verticals to demonstrate sustainable growth. Consumers will continue to allocate a rising share of their spending to products and services that provide prestige and self-actualization. Housing and traveling are manifestations of such.
I viewed this as a unique company, a category definer with lots of levers to grow its user base and enhance its monetization. 200 million people were on the platform already, 90% of whom accessed the offering organically, a huge asset waiting to be monetized via additional services. And in the long run, they could tap into huge new market segments, such as extremely fragmented long-term rental markets (28+ days).
I acknowledged that the company’s valuation was ambitious, but noted that it was not egregious anymore. At 7x EV/LTM Revenues and 33x Forward P/E, they were trading in line with hospitality peers, comprised of hotels and online travel agencies (OTAs). Compared to those peers, Airbnb’s business model is more scalable, more adaptable, there is more operating leverage to tap into, it is asset lighter and more defensible.
In terms of catalysts, I saw a good chance that bookings would surprise to the upside as recreation spending was still below prepandemic levels. I also suspected that the stock might catch a bid from institutions later that year from the upcoming S&P 500 inclusion.
How did it go for Airbnb thereafter?
Initially, the timing of my report was almost perfect. The stock immediately caught a bid and surged from $105 to $150 in just two months. This rally was driven by the anticipation of the S&P 500 inclusion which was announced on September 1, 2023 and became effective on September 18, 2023. After a temporary post inclusion sell-off, the stock rallied again and peaked at $168 in March 2024.
However, that’s when the story stalled. Today, it’s trading at $123. If you bought the IPO 4.5 years ago and sold today, you would have lost money.
So, why is this stock not performing?