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Airbnb (ABNB) lost more than 11% after releasing its earnings report on May 9th. What happened, and is the double-digit drop a buying opportunity? Let's talk about that! I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to research companies that are down significantly from their all-time highs to decide whether to buy more or sell and allocate money to other companies. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) and Shopify (SHOP). I'll continue with this series for a few more weeks. Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask you name and email address when you sign up. Airbnb's Fundamental AnalysisAs usual to conduct fundamental stock analysis, we would review six things:
Airbnb's Fundamental Analysis: Airbnb started as a way to rent your extra room to others for a few nights, and grew into a travel industry disruptor, eating into legacy hotel chains' market share. It's much easier to rent an entire house for you and your family instead of cramping into an expensive hotel room where your lovable giant pooch or your kids can run around while you can make a five-course meal all from the comfort of a professionally-designed and well-kept house in a new city or country. At least, that's what my family does when we travel and stay at an Airbnb. Airbnb's Top Line: Airbnb makes money by charging people a booking fee when they reserve a home through its platform. Later, the company launched a way for locals to offer tours and experiences to travelers and added a new source of booking fees. In Q1 2023, the company generated $1.8B in fees, up by 24%, excluding the impact of the currency exchange rate. Customers booked 19% more nights and experiences this quarter than in Q1 2022. The company is rapidly growing across all regions, including China, the E.U., and Latin America, with Brazil and Germany being two of the fastest-growing markets. Airbnb's Bottom Line: Airbnb turned a positive net income this quarter thanks to higher interest income on its $8.2B in cash and cash equivalent. However, its operational loss was negative $5M in Q1 2022. There lies the first red alert. Why did the company lose the same amount of money if its revenue grew by 24%? If we dig into the profit and loss statement, you'll notice some costs, such as Product Development and Operations and Support are up a few million dollars. But nothing comes close to a $105M increase in sales and marketing. In other words, the revenue was up by $309M in exchange for $105M in incremental sales and marketing. Why? Most of the increases are due to good old advertising campaigns. Airbnb has recently gone back to its origins, enhancing and promoting the room-rental experience (as opposed to an entire home) and that's one of the reasons investors are worried. Airbnb plans on investing more on advertising to promote its room-rental refocus among other things. Let's have that in mind as a risk. To grow, Airbnb has to keep piling up on digital marketing. Airbnb's Moat: Even though the core operations aren't profitable, Airbnb has a unique competitive advantage, its business model. You may have heard or read this statement that the world's biggest travel company (i.e., Airbnb) doesn't own or run any property. Indeed if you compare Airbnb with the list of lodging stocks by typing "lodging" in the search bar on Stock Card's website, you'll see lodging stocks, and the biggest one on the list is Marriott (MAR) with $54B in the market cap, compared to Airbnb's $70B. Using the lodging stock list, you can easily see such a unique business model's advantage in Airbnb's financial figures. The company generates an impressive free cash flow. In Q1 2023, it generated $1.6B in free cash flow, up from $1.2B. This is extraordinary. Airbnb made $1.8B in revenue and $1.6B in free cash flow. That's an 88% free cash flow to revenue ratio. Of course, if you dig into the company's Cash Flow statement, this is mostly because the company received nearly $1B in bookings, which is not recognized as revenue this quarter. After all, people book travel well ahead of time. Airbnb's business model is a cash-generating machine because it doesn't have to spend capital on purchasing and maintaining real estate and properties. Why Airbnb's Stock Is Down After Its Earnings Report on May 9thAirbnb stock was down significantly after the earnings report because it warned investors of slower growth in Q2. The company explained it is due to a very difficult comparison with 2022 when people started to travel after COVID. Airbnb is also talking about a lot of new product developments. You can see that in its investment in product development. We also heard CEO Brian Chesky talking about so many new and interesting product ideas coming through the product development pipeline to expand beyond its core vacation rental business. It gave investors a bit of pause to wait and see what happens and comes out in the next few quarters. One Big Risk Of Investing In Airbnb (ABNB)Discussing Airbnb's fundamental strengths above, it's no wonder the stock is priced 10X its sales. With the price decline on May 9th, that ratio goes down slightly, but still, it's an expensive stock. A 10 times increase in value puts its market cap in the $800B range, higher than META's current $700B market cap, which makes $117B in revenue, $7B in free cash flow, and $6B in profit. So at a 10X P/S ratio, investors expect Airbnb to grow its revenue by 100X or generate more than 6B in profits, or more than triple its free cash flow. That's a tall order, to say the least. Summary of Airbnb's Fundamental AnalysisWe can summarize Airbnb's stock in five bullets:
Knowing all that, what should we do with the shares? Is Airbnb's Stock A Buy?As a long-term investor, I'm not worried about the stock price drop and its earnings report. Airbnb's management team has proven itself year after year to be able to innovate and improve the product. However, I'm concerned about the high P/S ratio we discussed earlier. For my personal portfolio, I don't see any room for Airbnb. My investment strategy has four main components:
Because of such an investment strategy, I don't add Airbnb to my portfolio. But for the reasons we discussed earlier, Airbnb can be a great investment for patient long-term investors who can accept the risk of buying a stock with a 10X price-to-sales ratio. Now, it's your turn to look up Airbnb's Stock Card to start your research. See you next time!
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