Airbnb is a cash flow beast but the stock is fully valued

The continued strength of the US and global economy despite the tightening monetary environment has massively benefited cyclical stocks that are sensitive to economic cycles. Airbnb ($ABNB) is one of them.

While the travel company's Q2 guidance missed estimates and sent the stock sharply lower after Q1 earnings results, the stock has fully recovered since then and has rallied to 52-week highs. This recovery is driven by the overall market rebound and the resilience of the US economy.

Airbnb's financial performance has also contributed to the stock's recovery. While it missed Q2 growth estimates, its financial performance is enviable and shows that the company is well-managed and has great brand power that is difficult to replicate. ABNB has good growth prospects, but it also faces challenges – and the stock is not cheap. It's a hold until it proves that it deserves its premium valuation, here's why.

Leader In The Age Of Flexibility

Airbnb is one of the most well-known companies in the world. On the most recent call, the CEO said that 90% of their traffic is direct or unpaid, which confirms that the travel giant boasts top-of-mind awareness. This is a competitive advantage on its own as consumers are more likely to buy products and services from companies they're familiar with and Airbnb is now a household name, making its expansion easier.

ABNB is in the right place at the right time because we're in the age of flexibility. Flexible working, living, and affordable domestic and cross-border travel are all powerful growth tailwinds that can help the company to continue to grow even though it may be saturated in some places. While the company doesn’t disclose the number of listings quarterly, there are over 5.6 million active listings worldwide according to estimates, half of which are in the US. The company has saturated the US market, which is now its slowest-growing region as revenue in the US increased by "only" 13% y/y in Q1.

The company is growing faster in Europe and Asia, where Nights and Experiences booked increased 22% and 48% y/y in Q1, respectively. In other words, Airbnb can sustain above-average growth rates as it's still underpenetrated in many parts of the world. In the US, the growth will be closer to the industry average given the high penetration. This year, the travel and tourism industry in the country is expected to grow by 8.6%, while Airbnb will likely grow a bit faster. In short, Airbnb's high-growth era is over in the US, meaning that the company needs to continue to grow rapidly in other parts of the world to sustain double digit growth rates.

Given the strong and increasing demand for vacation rentals, the supply can continue to grow internationally, but the company will certainly face regulatory issues and opposition from different groups that may slow its growth. For example, the company is in a fight with NYC, one of its largest markets as it has proposed a new law that will require hosts to register their homes as short-term rentals. The company claims NYC’s strict new rules could spur a ‘de facto ban’ on service citywide. As short-term rentals expand, the regulatory pressures will only increase and could slow the company's growth which has already started to slow due to its size.

Solid Financial Performance

Airbnb has a very efficient and profitable business that allows it to grow rapidly and keep its operating expenses down. As a platform company, it just needs to balance supply and demand, which is easy according to the management team. The CEO said on the recent earnings call that the fastest-growing markets of supply also turn out to be the fastest-growing markets for demand. This means that both the supply and demand grow organically, which helps Airbnb grow efficiently.

In Q1, revenue grew 20% y/y to $1.8 billion and was driven by the nice growth in Night and Experiences booked globally. The company saw marketing deleverage during the quarter as sales and marketing expenses increased 30% y/y. This is because it pulled forward the timing of marketing spend to support the peak summer travel season while it also increased the global brand marketing to continue to grow its international supply. The marketing deleverage caused total operating deleverage during the quarter – the Q1 adjusted income margin fell 1% y/y to 14%.

Airbnb is one of the most successful and profitable companies founded in the past 15 years thanks to its organic-driven growth model and asset-light operations. In Q1, its Free Cash Flow came in at $1.6 billion, up 33% y/y, translating to an FCF margin of 87% thanks to strong pre-bookings.

What About Valuation

Airbnb stock has rallied more than 60% this year and the stock seems to be fully valued. For some reason, investors price ABNB at a huge premium to Booking.com ($BKNG), its direct competitor, even though the two companies have similar financials, growth rates, and growth prospects. As you can see below, ABNB is currently priced at a PS ratio of around 10x, while BKNG's PS ratio is almost half that. Perhaps investors are pricing ABNB at a premium because it's a smaller company than Booking.com, meaning that it has stronger growth potential. But if the company doesn’t grow faster than Booking in the coming years the stock could suffer given the premium valuation.

What Else

Airbnb is a high-quality business with nice growth prospects. While many companies have started to ask employees to return to in-person work, the remote-work trend is here to stay, which is one of the main bull cases for Airbnb. Also, the company is still underpenetrated in many parts of the world. However, ABNB is actually a mature company now as revenue is expected to grow in the low to mid-teens in the years ahead, meaning that its current valuation is quite expensive.

I've no positions in the stocks mentioned.

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