Airbnb Stock Attracts Attention With Strong Cash Flow Strategy

Key Points

• Airbnb stock reported double-digit growth across all its KPIs. Still, investors should keep track of one bonus in the business model.
• Interest income, which is growing faster and faster, will lead to the value-compounding effects that Wall Street analysts expect from the company.
• With more momentum, these double-digit rallies could become a reality in the coming months.

Today’s stock market is still getting used to the new realities that have come to the economy since the United States presidential election. With inflation concerns rising and 10-year Treasury yields approaching 5% as the bond market reacts, some stocks may benefit from both trends.

Stocks like Airbnb Inc. NASDAQ: ABNB don’t sound like the ones that would do well during inflation and rising yields, but this consumer discretionary stock has an ace up its business model that helps it stand out from the pack and become relatively immune. Traditional leisure and hospitality names like Marriott International Inc. NASDAQ: MAR are directly exposed to the consumer trends of the economy; Airbnb, not so much.

Of course, volumes are affected, but profitability remains somewhat intact. Airbnb is the middleman between hosts and vacationers. In contrast, a traditional model like Marriott’s derives its success directly from how the daily rates rise and fall. Airbnb will collect its fee no matter what in a relatively risk-free manner, but then they took it one step further.

Airbnb Stock Shows Resilience in Quarterly Earnings

Even though Airbnb's earnings missed revenue and net income expectations, investors and Wall Street analysts have enough reasons to remain bullish on this stock. Some of these reasons are found in the recent quarterly earnings press release.

Starting with revenue, a net annual growth of 10% would offset the slight miss from expectations and show how resilient the brand is despite rising inflation fears and a seemingly weaker labor market in the United States. The 1.7 million new user sign-ups drove the revenue metrics.

However, new users don’t mean much until monetized, and Airbnb also did an excellent job monetizing new users. Gross booking value rose by 10% on the year as well. To explain the trend's strength further, investors can see that overall nights booked increased by 8% on the year to reach 122.8 million.

Combining this growth with the high-margin nature of the business resulted in a net income margin of up to 37% to reach $1.4 billion. While that’s a bullish factor in itself, Airbnb's most important factor is its free cash flow (operating cash flow minus capital expenditures).

Free cash flow grew to $1.1 billion for a 29% margin. What management did with this free capital is more important than the reading itself, and investors need to keep it front and center moving forward with this company.

All the free cash flow generated, all $1.1 billion, was allocated to Airbnb’s stock repurchase program. That is an immense benefit for shareholders investing in companies when they are just starting to generate stable and predictable cash flows, as buybacks compound the value and ownership for investors faster than other businesses.

They also imply that insiders believe the stock to be cheap enough to buy today. Management is also doing another smart thing with Airbnb's free cash flow, and that’s the secret behind future growth.

Rising Yields Set to Skyrocket Airbnb's Interest Income

As bond yields push closer to 5% for a net quarterly gain, Airbnb’s strategy could start to work in overdrive to deliver further earnings growth to investors. Here’s the strategy: When a person books a listing on Airbnb, the platform keeps that money until the service (the stay) is delivered, and the host will then receive his or her pay.

The interim period between customer payments and host payouts is where Airbnb works its financial magic. During this time, the company invests in fixed-income products and short-term, highly liquid instruments to generate additional returns before disbursing funds to hosts.

This strategy is evident in Airbnb’s recent income statement, with $207 million earned in interest income for the quarter—around 14% of net operating income. For comparison, last year’s interest income was $192 million, about 13% of operating revenue, underscoring this segment’s rapid growth.

Knowing that this strategy will eventually compound into a larger share of income and reach much more prominent figures, Wall Street analysts decided to remain bullish on Airbnb stock for now.

In particular, those at Mizuho Financial recently reiterated their Outperform rating on Airbnb stock while placing a $170 share price target. This new view would call for a rally of up to 16% from where it trades today.

For those still wondering, Airbnb should be considered a buy given how quickly its value can compound on the interest income strategy and its globalization to diversify away from one economy’s travel and vacation trends.