Airbnb’s Q1 Disappointed, But AI Could Be A Catalyst

Summary:

• Airbnb’s Q1 results show softer-than-anticipated margins, pointing to potential profitability issues, while its AI strategy promises a new era of personalized customer service and business efficiency.
• Airbnb’s AI implementation plan includes improving customer service, incorporating AI into its product, and boosting workforce productivity, with a potential 30% productivity improvement in the short to medium term.
• Despite promising growth projections, investors should be cautious of Airbnb’s high share-based compensation, lack of dividends, and premium valuation.

In the midst of a mixed Q1 earnings report, Airbnb (NASDAQ:ABNB) has set its sights on leveraging artificial intelligence as a key growth driver. The company’s ambitious AI strategy could potentially revolutionize the hospitality industry, much like the advent of the internet transformed commerce. However, this ambitious path isn’t without its challenges, with Airbnb facing some headwinds like a slowdown in nights booked and an increased need for marketing spend. We will delve into these matters in this article, evaluating the potential of Airbnb’s AI strategy while keeping an eye on the financial and operational challenges ahead. After careful consideration, we assigned a Neutral on the stock given its balanced risk-reward profile.

Q1 Takeaway: Guidance Disappoints

Airbnb’s Q1 earnings release presented a mixed picture that may have disappointed some investors, as evidenced by the stock’s ~11% decline following earnings. The number of nights booked fell short of expectations, and trends points to a larger-than-anticipated deceleration in growth for the second half of the year. Although Q1 EBITDA was in line with expectations, and revenue hit the higher end of guidance, margins came in somewhat softer than anticipated, pointing to potential challenges for the company’s profitability.

The outlook for Q2 seems to carry forward this trend of lukewarm results. EBITDA guidance for Q2 was below consensus estimates, largely due to a surge in marketing expenditure pressuring margin. This unfavorable Q2 guidance puts a significant amount of pressure on ABNB to deliver on its full-year goals in the second half of the year, namely achieving flat margin and maintaining sales and marketing expenses as a percentage of revenue.

Furthermore, while the average daily rate (ADR) performed better than feared in Q1, the guidance indicates potential for additional pressure throughout 2023.

In our view, the recent results and guidance underscore some potential headwinds for Airbnb. The slowdown in nights booked could be a sign of waning demand or intensifying competition in the space, which could weigh on future growth. Moreover, the need to ramp up marketing spend to drive growth could further squeeze margins, posing challenges for profitability.

Call Shines Spotlight On AI Opportunity

The Q1 earnings call shined a light on Airbnb’s ambitious plans to harness the power of artificial intelligence (AI). In our view, the company’s AI strategy could be a game-changer, potentially revolutionizing the way it operates and interacts with its customers. The recognition of AI as a significant platform shift, akin to the advent of the internet, illustrates the magnitude of the potential impact.

One of the key takeaways is Airbnb’s approach to AI. Instead of constructing the infrastructure akin to “building a highway” by developing base models like GPT-4, which would require major investments, Airbnb plans to “build the cars on the highway”. The company aims to build on top of these existing AI models, fine-tuning them according to their customers’ data, and designing interfaces that effectively utilize AI.

The company’s vision is to leverage AI to transform itself into the ultimate travel concierge, tailoring its services to individual customer needs and preferences. AI could allow Airbnb to evolve from asking basic questions such as ‘where are you going?’ to more personalized and impactful ones like ‘who are you?’ and ‘what do you want?’. This ambition, we believe, could lead Airbnb to an unparalleled level of customer understanding and service customization.

The company’s AI implementation plan includes improving customer service, incorporating AI into its product, and boosting workforce productivity. AI can significantly enhance Airbnb’s customer service by augmenting agents, potentially providing better, faster, and cheaper service. With millions of people staying at Airbnb every night, the implications of this change could be transformational.

Furthermore, ABNB is planning to integrate AI into its product, particularly through the incorporation of GPT-4 into its app. This could introduce a more immersive, multimodal, and rich media interface for users. Such a transformation could revolutionize the user experience, driving greater customer engagement and satisfaction.

Lastly, Airbnb is eyeing AI to boost developer productivity and general workforce efficiency, predicting a 30% productivity improvement in the short to medium term. This could translate into significant cost savings and operational efficiency.

We believe that Airbnb’s approach to AI represents a significant opportunity. The company’s focus on leveraging existing AI infrastructure to provide a more personalized, efficient, and engaging service could fundamentally transform its business model and competitive position. However, this ambitious plan will require careful execution and considerable investment in AI capabilities. As such, we will be closely monitoring Airbnb’s progress in implementing its AI strategy in the coming quarters.

Financial & Valuation

Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.

When we turn our attention to Airbnb’s financial outlook, we find room for optimism. The sell-side consensus forecasts a respectable revenue growth of 14.1% for this fiscal year, reaching $9.6 billion, and 15.2% for the following year. Meanwhile, the anticipated EBIT margin expansion is significant, rising by 152 basis points this fiscal year to 23.0% and further expanding to 25.2% the following fiscal year. The projected EPS increase also paints a rosy picture, expected to rise by 29.4% this fiscal year, and 17.8% the following year. In our opinion, these projections, if realized, could provide a significant boost to ABNB’s performance and help temper investors’ concerns over the company’s profit margins.

However, a potential red flag lies in ABNB’s share-based compensation (SBC) practices. Over the past three years, ABNB spent a concerning 27.2% of its revenue on SBC, a figure that we believe is excessively high and could erode shareholder value. It’s also worth noting that despite the strong return on invested capital at 25.3% and a healthy balance sheet with net cash of $8,306 million, ABNB does not pay dividends. This could be a sticking point for income-focused investors, particularly given the S&P 500’s dividend yield of 1.6%.

As for ABNB’s stock performance, it has been decent over the past year, outperforming the S&P 500 by 1% point with an absolute return of 6.5%. However, high short interest at 5.4% could suggest that some investors are betting against the stock, hinting at potential volatility.

Finally, ABNB’s current valuation multiples may be viewed as stretched. The stock is trading at a substantial premium relative to the S&P 500, with the exception of the FCF multiple, where it trades at a discount. Using consensus estimates for next fiscal year’s results (FY2), ABNB is currently trading at an EV/Sales multiple of 5.7, an EV/EBIT multiple of 22.8, a P/E multiple of 26.6, and an FCF multiple of 17.2. This suggests that the market is pricing in significant future growth. While ABNB’s PEG ratio of 1.5 is in line with the S&P 500, it is crucial for the company to deliver on the projected growth to justify these multiples.

While Airbnb has shown promising growth and is anticipated to continue on this trajectory, there are factors that could be of concern to investors, including its high SBC, lack of dividends, and premium valuation. Therefore, we believe that while Airbnb holds potential, it also comes with a fair share of risk that investors should be mindful of.

Conclusion

Airbnb’s ambitious AI strategy holds immense potential, with the company aiming to revolutionize the travel industry by creating personalized experiences for its users. However, the execution of this plan and the investment required should not be underestimated. Simultaneously, Airbnb’s financial outlook presents a mixed picture. While there is room for optimism given the projected growth and margin expansion, the company’s high share-based compensation is concerning. Furthermore, Airbnb’s stock valuation seems stretched, trading at a significant premium relative to the S&P 500. Hence, while the company seems poised to harness the power of AI to drive its next phase of growth, investors must also pay close attention to these potential risks. It is crucial for Airbnb to deliver on its AI promises while also addressing the financial and operational challenges to justify its current market valuation.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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