The updated Airbnb, Inc. (NASDAQ:ABNB) investors in early September, explaining that ABNB’s recovery looks strong, although the market likely had priced in its entry into the S&P 500 (SPX) (SPY). like as a result, I urge investors to consider waiting for a major pullback before considering the appropriate levels to add exposure.
This thesis developed as ABNB fell along with the broader market after reaching mid-September, falling more than 25% before forming the October 2023 lows. Therefore, keen bear buyers returned with conviction, given ABNB’s much improved risk/reward profile, supporting its prevailing medium-term uptrend.
I have now become more constructive on ABNB since February 2023, when I assigned a sell rating, which appeared after ABNB then fell to the May lows. However, I also indicated in my September update that “the bearish view on ABNB is no longer warranted, as the purchase feelings point to an imminent recovery”.
The company’s third quarter or Release of FQ3 earnings in early November confirmed my belief that it is on its way to a long-term cyclical recovery. Except this, of industry cyclical tailwinds are expected to drive further growth after digesting growth from the summer travel season.
I believe Airbnb is uniquely positioned to take advantage of its network effect gap, supported by strong supply growth from individual hosts. In addition, management highlighted that it has continued to observe strong demand dynamics from travelers looking to take advantage of Airbnb’s value proposition. As a result, families looking for an affordable stay find the company’s offerings attractive, even though it “CARE for a diverse range of travelers.”
Interestingly, the management pointed out that the evolution of its average daily rate or ADR is expected to remain “more moderate compared to hotels, which are expected to continue to raise prices”. Therefore, Airbnb should continue to find value-seeking travelers looking to mitigate the impact of rising macroeconomic uncertainties and high inflation rates. The company has also improved its pricing tools to help its hosts have more control over their prices and potentially stimulate demand. Management indicated that “higher ADR tends to result in lower overnight growth, while lower ADR leads to higher overnight growth.” As a result, I believe investors should not expect a significant increase in its ADR as Airbnb aims to gain market share in the next phase of expansion.
Attentive investors should know that Airbnb elevated its CFO, Dave Stephenson, to Chief Business Officer. CEO Brian Chesky emphasized that Airbnb “is in one inflection point, focusing on perfecting its core service in 2023 and now preparing to move forward.” The company was very clear about what “expanding beyond the core” meant when it updated investors in its shareholder letter third quarter. She emphasized her focus “. on international expansion and building differentiated offerings.” In addition, management also indicated that Airbnb remains “unpenetrated in international markets,” as it saw strong results in Germany, Brazil and Korea. In particular, Airbnb emphasized that in Korea, Airbnb posted a 54% increase in gross nights booked in the third quarter compared to the same period in 2019.
Airbnb is expected to deliver an adjusted EBITDA margin of 36% for FY23. Additionally, ABNB is expected to post a free cash flow or FCF margin of more than 44% this year. As a result, I agree with Chesky that the company should capitalize on its strong leverage to take on legacy OTAs and hotel operators in international markets in this next phase of growth, having proven its business model in impressively in the US.
However, regulatory challenges are likely to remain key obstacles during a more aggressive phase of global expansion. Therefore, hotel operators may cause a more intense reaction to Airbnb. Stephenson’s appointment is expected to be pivotal as the company embarks on what could be a more intensive investment phase, having led Airbnb’s extraordinary profit outflow from its pandemic challenges. Despite the caution, management noted that “80% of their top 200 markets have regulations in place.” As a result, management is optimistic about “viable solutions for home sharing, supporting Airbnb’s growth.” However, I believe that regulatory challenges in international markets are expected to be a key growth impediment that investors should watch closely, as ABNB commands a premium price.
ABNB last traded at a forward EBITDA multiple of 20.8x, well above its hospitality peers’ average of 12.1x (according to S&P Cap IQ data). As a result, the market continues to reflect a significant growth premium on ABNB to maintain its growth profile.
ABNB price action is constructive, with bearish buyers returning to aggressively defend the October low ($113 level). As a result, ABNB has maintained its uptrend bias, suggesting that we may break above its July 2023 high ($155 level) to confirm the continuation of the uptrend.
Despite my optimism, I must point out that ABNB’s buy level is no longer in the optimal buy zone unless investors manage to take advantage of the big selloff to mark the October low.
Despite this, I am increasingly confident that buying sentiment in ABNB remains constructive, suggesting that the recovery in its uptrend is still in its earlier stages. As a result, ABNB holders looking to add more shares should consider taking advantage of potential near-term pullbacks to buy more aggressively.
Rating: Improved to buy.
Important note: Investors are reminded to do their due diligence and not to rely on the information provided as financial advice. Please always apply independent judgment and note that assessment is not intended to assign a specific entry/exit to the writing point, unless otherwise specified.
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