Airbnb (NASDAQ:ABNB) is evolving into a value-creation machine for shareholders. The company’s most recent results confirmed its ability to sustain incredibly high margins, which, along with robust revenue growth, exhibited Airbnb’s fantastic profitability prospects.
Interestingly, while investors grew increasingly confident in Airbnb following its Q4 results which spurred a strong rally, I continue to find the stock relatively undervalued against its future earnings growth prospects. Accordingly, I remain bullish on the stock.
In this article, I’ll look into the following:
- Why Airbnb’s Q4 revenue growth was impressive
- Why Airbnb’s profitability prospects are fascinating
- How Airbnb can sustain its momentum and grow shareholder value
Airbnb’s Q4 Growth Was Outstanding – Here’s Why
To demonstrate why Airbnb’s revenue was outstanding in Q4 2022, let’s take a journey back in time to Q4 of 2020, a time when the world was grappling with the COVID-19 pandemic. Travel restrictions were in full swing, and the travel industry, including giants like Airbnb, was hit hard.
During that period, Airbnb’s revenues took a massive hit, plummeting by 22% as people canceled their travel plans and stayed put. Flash forward to Q4 2021, and the world was a different place. With the easing of travel restrictions, investors were naturally expecting a rebound in revenues.
However, what Airbnb delivered was beyond impressive. In that quarter, the company not only managed to reclaim its pre-pandemic revenue levels but also reported massive revenue growth of 78%. That’s right, a staggering 78%. What’s even more remarkable is that in Q4 2021, Airbnb’s revenues were 38% higher compared to its pre-pandemic Q4 2019 results. This not only implies a full recovery but also displays inflated numbers since people spurred off traveling after months of restraining conditions.
Given such exceptional growth, it would have been understandable if Airbnb had reported flat revenues in Q4 2022, as it would essentially be homogenizing its growth trajectory. Yet, the company continued to deliver by reporting Q4-2022 revenue growth of 24% to $1.90 billion (or 31% higher in constant currency) on top of the previous year’s bloated numbers.
Airbnb’s Profitability Prospects are Fascinating
Beyond Airbnb’s remarkable revenue growth trajectory, what really stood out to me in its Q4 report was its profitability prospects. The company’s lean business model is proving to be a cash cow, and its net income margins are nothing short of impressive. In Q3 2022, we caught a glimpse of just how high-margin Airbnb’s lean business model can be, with a net income margin of 42%.
Then in Q4, Airbnb posted a net income of $319 million, a whopping 480% increase year-over-year. Note that Q4’s net income margin of 17% was a significant expansion from the prior year’s margin of 4%.
Although this margin is lower than Q3’s, this is because Q3 is Airbnb’s high season (summer holidays), where it can achieve its best economies of scale. What’s important is that we can expect the net income margin to average out to 25%+ under normalized conditions (22.6% in Fiscal 2022).
This is a level of profitability that few companies in the industry can claim. Also, it’s worth noting that these net margins include stock-based compensation expenses. Free cash flow margins are even higher, with Airbnb generating around $3.4 billion in free cash flow last year, resulting in a massive free cash flow margin of 40%!
This is because most of Airbnb’s operating cash flows end up on the bottom line due to its lean, asset-light business model. Such significant free cash flow margins can result in equally exciting shareholder value creation.
Airbnb’s Momentum Sustainability & Shareholder Value Creation
Looking ahead, Airbnb appears to be in a great position to maintain its growth trajectory. More and more people are opting for unique and unconventional accommodations over traditional hotels, while long-term stays and non-urban travel continue to gain popularity.
Even though the pandemic has mostly faded out, remote work and other trends that emerged during it are still going strong. This is evidenced by the fact that gross nights booked for stays longer than a week in Q4 2022 were a staggering 40% higher than in the same period in 2019. Plus, long-term stays of 28 nights or more made up an impressive 21% of all gross nights booked.
But what about the long term? Well, besides building a behemoth in the travel industry, Airbnb’s management is already returning value to shareholders through its share repurchase program.
The company repurchased $1.5 billion worth of stock during Fiscal 2022, which resulted in a reduction in the outstanding shares, as this amount exceeded the underlying stock-based compensation. I expect the share count to continue declining, especially given Airbnb’s tremendous free cash flow generation.
Is ABNB Stock a Buy, According to Analysts?
Turning to Wall Street, Airbnb has a Moderate Buy consensus rating based on 14 Buys, 14 Holds, and three Sells assigned in the past three months. At $140.69, the average Airbnb stock price target implies 10.6% upside potential.
The Takeaway
Airbnb closed Fiscal 2022 on an exhilarating high, with a promising outlook for growth and profitability. The momentum of the past year is set to continue through 2023, as management expects revenue growth between 16% to 21%.
With the company’s ongoing margin expansion, net income and free cash flow should grow at an even higher rate. This is why I believe that the 2023 consensus EPS growth estimate of 21% is a tad conservative, suggesting that there could be further upside for the stock.
