Airbnb: The Bull Case

Few sectors suffered quite as much as the travel industry during the recent coronavirus pandemic. But as the world begins to return to normal again, one company, Airbnb (NASDAQ:ABNB), has emerged as a resounding success story in the lodgings and vacation rental space.

Indeed, in spite of a worsening economic environment and some pretty tough comps, the firm just reported its strongest second quarter on record, with, among other highlights, a more than $400 million improvement in its net income year-on-year.
Moreover, Airbnb strives to stay ahead of its rivals by maintaining discipline and focus where it matters most. As a result, the company posted its highest ever quarterly Nights and Experiences Booked, at 103.7 million.
And while this figure’s obviously impressive, it says something about how highly regarded Airbnb is that this came in short of Wall Street’s original expectations.
In fact, there are plenty of reasons why Airbnb’s getting so many analysts and investors excited right now. So let’s dive in, and see what makes this special company a must-buy stock today.
Source: Unsplash

An Agile And Adaptable Business Model

It’s an odd feature of the new economy that some of the most prominent corporate brands are doing business so radically different from their traditional forebears.
Take, for example, Uber: it’s the largest taxi company on earth but operates little in the way of its own vehicle fleet. Or Alibaba, which, as Asia’s most valuable retailer, retains no inventory on its balance sheet either.
And yet the pattern here is simple – these companies are, in fact, interface owners. And just like Uber and Alibaba before it, Airbnb is also the world’s largest rental provider with no real estate property to its name.
But despite this seemingly paradoxical situation, the arrangement suits ABNB just fine.

For instance, the company’s online marketplace crowdsources potential landlords and puts them in contact with suitable renters. What’s more, because the business model is so asset-light, ABNB can react to changing consumer desires much more easily, allowing it to do in an instant what it takes a legacy outfit months or years to achieve.
Furthermore, it’s not just speed that’s at stake. Airbnb recognized a number of encouraging business trends in the second quarter, ones that helped drive its strong performance during the period.
As a matter of fact, active listings for non-urban destinations grew by nearly 50%, which was certainly great news for ABNB. However, for a big hotel chain, running a property at this kind of location might not be feasible, given that demand could disappear tomorrow, and the costs to maintain such accommodation with no custom would ultimately be ruinous.

A Need To “Relentlessly Innovate”

In addition, ABNB has introduced several new features in the last twelve months, with those updates already reaping the rewards for the company.
For example, its AirCover product, which offered free liability insurance and damage protection for hosts, was introduced in 2021, and, having proven so successful, was rolled out for guests this year too.
Overall, the initiative helped Airbnb unlock an all-time high of 6 million active listings while spiking rebookings by 10%.

ABNB Is Generating Enormous Cash Flows

Although Airbnb’s second quarter broke a number of records for the company, the solid results it garnered across the board were arguably its most outstanding accomplishment.
Indeed, despite the firm missing its consensus estimate, ABNB’s revenue grew 58% in the second quarter, bringing in a total sales volume of $2.1 billion. The $379 million in net income was Airbnb’s most profitable Q2 ever, representing an almost $700 million increase on the loss of $297 million it recorded in the second quarter of 2019.
Crucially, however, is ABNB’s excellent cash position. The company stated it had generated $795 million in free cash flow, with its total cash balance close to $10 billion.
What’s fascinating, though, is that Airbnb receives interest payments on the cash it holds after a guest first books a reservation to the time they physically check-in.
Indeed, as the firm revealed in its annual SEC filing, it holds “a substantial amount of funds” in the form of treasury bills and bank deposit accounts. A
BNB estimates it has about $7.5 billion of customers’ money, which, at the average treasury bill rate of around 1.5%, would yield well over $100 million in interest.

Share Price And Valuation

Although Airbnb’s stock price peaked at around $212 in early 2021, the company witnessed a pretty big sell-off in the intervening period. Shares in the firm have declined over 40%, and now change hands today for a little above $126.
However, despite this drop in price, ABNB’s valuation metrics still trade at what are relatively high numbers. Its forward non-GAAP PE ratio is above 44x, while its trailing twelve-month price-to-cash flow fraction is over double the sector median at 28x.

That said, for a disruptive business with such massive growth potential, Airbnb’s forward sales multiple of 9.6x seems reassuringly low.
Furthermore, when you consider that its year-on-year operating cash flow growth stands at a huge 76% – while the median for the Consumer Discretionary sector is regressing at a negative 22% – you can see how the firm performs when it comes to producing those crucial money flows.
But what’s most compelling about ABNB’s growth narrative is its rapidly improving profit margins. For instance, Airbnb’s gross margin is a dizzying 82%, and, with an EBITDA margin of 18%, the company is obviously competent enough at turning its top line into a meaningful bottom line too.
Interestingly, the firm’s levered FCF margin is also high at 31%. This is significant because this calculation measures how much discretionary net cash flows the business can return to its stakeholders after tax and interest payment obligations have been made.
Given that ABNB just announced it would embark on a $2 billion share repurchase program, it seems that success in this regard is already paying dividends for the company’s investors.

Airbnb Bull Case: Wrap-up

Airbnb is a business that generates copious quantities of cash. It is growing almost every metric worth counting, and delivering on its vital bottom line too. The stock has fallen significantly in price recently, and, despite still trading at a premium, presents a perfect buying opportunity before the company really starts to take off.

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