Airbnb Stock, a Look Ahead and What The Post-Earnings Dip Means

Key Points

• Shares of Airbnb are declining by as much as 13.25% in the after-market hours on Tuesday night; investors are reacting poorly to management outlooks for the second quarter.
• The company posted record revenue, its first profitable quarter, and free cash flow. Investors must include that Airbnb is no longer in its 'growth stage' and management outlooks are still bullish.
• A new share repurchase program suggests management believes the stock is cheap; analysts agree under current price targets partially. 

Shares of Airbnb NASDAQ: ABNB are sliding lower in the after-market hours on Tuesday night, declining by as much as 13.25% following the company's first quarter 2023 reports. The global economy is being affected by the United States FED raising interest rates in an attempt to slow down runaway inflation in the country. As a result of 'Quantitative Tightening,' some industries are affected more than others, especially the travel and leisure industries. 

In the United States, where Airbnb derives most of its revenue, the personal savings rate has rallied from its decade-low readings. Increasing individual savings rates and unaffordable rents in most of the country may have sparked Airbnb's management to keep listing ADRs (Average Daily Rates) flat on a twelve-month basis. In a year when the United States saw 3.4% rent inflation, Airbnb remained committed to its value proposition and provided affordable short and long-term housing while some await more affordable leases. 

By the Numbers

Despite the company keeping its average daily rates flat for the year, Airbnb reported revenue growth of 20.5% to end the quarter at $1.8 billion. The revenue growth came instead from increased volumes. The value proposition remains true within communities looking for affordability and flexibility during these challenging economic times.

According to the first quarter 2023 shareholder letter, Airbnb's nights and experiences booked totaled 121.1 million, which translates to a 19% increase from a year prior.

Airbnb posted its first-ever profitable first quarter, with a net income of $117 million compared to a net loss of $19 million in 2022. Achieving - and sustaining - profitability should mean a great deal to investors. The company can start to finance its operations through cash flows generated, removing the need to dilute shareholders by issuing additional shares.

On a free cash flow basis, the lifeblood of shareholder returns, Airbnb reported $1.6 billion for a record figure as guests continue to expand their preference for long-term stays (classified as 28 nights or longer), representing 18% of total nights booked in the first quarter 2023, the company's expected cash flows can be sustained and better managed internally.

Off to the Races

Management is focusing on marketing and product development, as a significant focus is making hosting properties more mainstream. These efforts have been paying off, as the company reported an 18% growth in total supply on a year-on-year comparison. As economies of scale are achieved by increasing supply and expanding demand via the company's value proposition, Airbnb can begin to develop deep moats around it. 

Equity investors will, of course, benefit from these trends, especially monetarily. As the company gets off its 'growth stage' and becomes a profitable business with predictable free cash flow, added benefits come to the underlying stock and its holders. Management has used this newly-found positive free cash flow to implement a $2 billion share repurchase throughout the past twelve months.

Additionally, there is an acute expectation of continued positive free cash flow. As a result, the board of directors has approved an additional share repurchase program, allowing up to $2.5 billion to be allocated to repurchasing shares. 

Airbnb analyst ratings point to a consensus price target of $140.38 per share. However, these targets may experience upgrades soon. Management means $2.35 billion to $2.45 billion in revenues for the second quarter of 2023, which translates to a 12-16% annual growth rate. While revenues are expected to grow decently bullish, nights and experiences booked volume is expected to decline compared to 2022, with average daily rates slumping.

The decline in average daily rates may seem negative at face value. However, these declines are only a side effect of increasing the number of hosts and economies of scale. There will be a tipping point where, due to the increasing amounts of properties hosted, the marketing efforts made today will be automated by word of mouth as more bookings and hosts occupy the marketplace.

Bears point to Airbnb posting declining revenue growth rates. Management expects 12-16% revenue growth for the second quarter of 2023; some expect similar growth to 2022's second quarter, with 58% annual revenue growth. Today's investors must remember that Airbnb's financials pointed to only $2.5 billion in revenue in 2017.

Reporting revenue above $8 billion today would imply a compounded average growth rate (CAGR) of 23%. Thus, a 12-16% expectation seems natural as the company matures into a profitable and cash-flowing business.

Historically, the stock has traded at a price-to-book value multiple of 25x to 30x. Now that book value can be expected to increase on the back of additional retained earnings and additional shares taken off the market, Airbnb may command a higher multiple.

Today the stock trades at 14.2x its book value, high by some measures, though reasonable considering double-digit growth rates and newly found profitability with due economies of scale in the works.