Airbnb: Why It’s Still Worth Catching The Falling Knife Now (Upgrade)

Summary:

• Airbnb investors who ignored overvaluation risks were hammered.
• Airbnb’s growth story is showing cracks, but there are no real reasons to sell in a panic.
• Airbnb’s growth inflection could take longer than expected. However, it’s also not standing still. I will explain why.
• More intense regulatory risks could hurt its ex-US expansion proposition.
• I argue why ABNB’s valuation and price action suggest its risk/reward profile is much more attractive now. Read on.

Airbnb Investors Shouldn’t Have Ignored Overvaluation Risks

Airbnb, Inc. (NASDAQ:ABNB) investors who ignored its potential overvaluation risks suffered a moment of reckoning this week as Airbnb’s Q2 earnings release disappointed. I had already cautioned ABNB investors in March 2024 not to throw caution to the wind. I indicated potentially slowing growth and margin-dilutive growth investments as the company seeks to expand beyond its core market and geographical segments. Coupled with the headwinds from its relatively expensive valuation, the investors who added then likely ignored potentially significant execution risks.

As a result, I’m not surprised with the recent hammering handed out to ABNB investors. Accordingly, ABNB is down more than 30% since my previous update. It has also crashed 35% since the stock topped out in March 2024, significantly underperforming the S&P 500 (SPX) (SPY).

Airbnb’s Q2 Shows Slowing Growth As Expected

With the stock revisiting lows last seen in October 2023, is it time for dip-buyers to catch the falling knife? Airbnb posted a revenue increase of 11% in Q2, reaching $2.75B. In addition, it also recorded a 9% uptick in adjusted EBITDA, hitting $894M. Airbnb’s results disappointed Wall Street, as the adverse market reaction underscores the need to de-rate ABNB’s expensive growth premium.

Consequently, Airbnb’s estimates have been downgraded, as the company’s outlook didn’t inspire confidence. Accordingly, ABNB guided to a midpoint revenue increase of 9% in Q3, which was weaker than expected. Therefore, it could also affect a second-half growth inflection, potentially hitting its full-year adjusted EBITDA guidance. While management is confident of achieving 35% in adjusted EBITDA margin on a full-year basis, the market has likely reflected a more gradual recovery from 2025.

Assessing The Outlook For Airbnb

There are reasons to be cautious about its ability to bottom out in 2024. Macroeconomic headwinds have intensified, potentially hurting consumer spending further. Recessionary risks have also increased, possibly hurting the market’s confidence in growth stocks like ABNB. It might not have been that bad if Airbnb’s execution demonstrated confidence. However, its recent financial results and weak outlook corroborate the need for the market to price in a weaker-than-expected FY2025 upturn. Unless economic conditions are better than anticipated, ABNB investors must be prepared for an extended travel slowdown, hurting the market’s confidence in the stock.

A disappointing outlook by Booking Holdings (BKNG) provided a preview for ABNB investors. Therefore, the OTA industry is likely facing higher-than-anticipated headwinds as longer-term travel booking trends have likely weakened. In Airbnb’s Q2 earnings conference, the company alluded to lower visibility as lead time has been reduced. Despite that, the company assured investors it doesn’t anticipate structural changes in consumer spending behavior, suggesting possible effects attributed to seasonality. However, I believe investors are likely not taking chances, given the well-documented impact on recent consumer spending across several industries. Airbnb’s weak execution and outlook are consistent with such observations, suggesting a need to reflect higher execution risks against management’s implied optimism.

Furthermore, more intense regulatory crackdowns against Airbnb’s short-term rental business have intensified the urgency of the company’s transition beyond its core offerings. Management emphasized that the transition has been relatively successful, as long-term stays account for 70% of the nights booked. Therefore, I wouldn’t write off the company’s ability to expand successfully beyond its original core business. The company has also committed to capitalizing on opportunities in its boutique hotels platform. As a result, it helps to diversify the regulatory risks embedded in its construct, although it also leads the company to compete more directly with its hotel competitors. Hence, whether Airbnb can replicate its “experiences” platform to differentiate its offerings from traditional hotel operators remains uncertain.

In addition, the company’s outlook of slowing domestic growth likely spooked investors. As the company ventures into potentially higher-growth markets, it must contend with more uncertain regulatory constructs. Coupled with less welcoming authorities in Airbnb’s current markets, I believe its ex-US expansion path could be more challenging than anticipated.

Furthermore, Airbnb highlighted that it will undertake more aggressive investments to reignite growth, potentially hurting near-term profitability. I believe the company is investing from a position of strength, having justified the viability of its business model (“A+” profitability grade). It has also become the platform of choice for the industry, as it “surpassed 8 million active listings driven by continued growth across all regions and market types” in Q2. Hence, I assess Airbnb’s commentary on lifting growth-focused investments as it expands beyond its core offering isn’t ill-conceived. Consequently, I find the market’s pessimism on possible near-term hits on its profitability to be myopic, offering potential buy-the-dip opportunities for long-term investors.

Notwithstanding my optimism, Airbnb’s revenue growth is expected to have normalized as it’s no longer a new upstart in the OTA industry. As seen above, the company’s annualized revenue growth estimates are expected to remain close to the 10% mark over the next two years.

Therefore, the market’s focus on ABNB’s ability to continue driving long-term margin accretion is likely critical to justifying its growth premium. Hence, bearish Airbnb investors might point out that more aggressive investments could hinder increased operating leverage, undermining its bullish proposition.

ABNB Stock: Less Expensive But Still Priced For Growth

With a “D+” valuation grade, it has improved from the “D-” grade it was assigned six months ago. Notwithstanding its disappointing outlook, the stock is still rated for growth (“B” growth grade), suggesting investors should consider the risk/reward profile from an appropriate growth-adjusted valuation metric.

Accordingly, ABNB’s forward adjusted PEG ratio of 1.8 suggests a more than 30% premium relative to its sector median. While the stock’s valuation metrics have improved, robust execution is essential to justify the market’s optimism. Thus, its “B” range earnings revisions grade over the past six months should support management’s optimism in executing well beyond its core offerings.

Is ABNB Stock A Buy, Sell, Or Hold?

ABNB’s price action indicates panic selling over the past two weeks. In addition, the selloff from its July 2024 highs was so rapid that the stock lost nine months of gains in just over one month. Therefore, I assess that massive fear struck ABNB investors, as the stock also lost its bullish bias quickly (now below the 50-week moving average).

Regaining decisive control of the 50-week MA (blue line) is fundamental to its uptrend continuation thesis. While I assess the risks of catching a falling knife as momentum investors likely bailed, its fundamental thesis remains intact.

Therefore, I have determined that ABNB’s risk/reward profile is much more attractive after the hammering and could benefit from a mean-reversion (back to the 50-week MA) opportunity. With that in mind, I assess it as timely for me to turn more constructive on ABNB now. However, possible near-term volatility cannot be ruled out even as a potential bear trap could form. The market might shake out more weak hands before potentially validating a bullish reversal.

Rating: Upgrade

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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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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