Airbnb: Shorter Bookings Pattern Implies A Weak Shopper Spending (Ranking Downgrade) (NASDAQ:ABNB)

Funding Thesis

Airbnb (NASDAQ:NASDAQ:ABNB) noticed its inventory plummet by over 13% following blended 2Q FY2024 earnings outcomes and a disappointing 3Q income outlook. The corporate reported a slowdown in bookings progress as a consequence of a weakening shopper spending surroundings, coinciding with greater unemployment charges and decrease PMI knowledge, which triggered a big broad-based market selloff. In my final protection (purchase score) I highlighted that ABNB operates a cyclical enterprise. The expansion slowdown generally is a main indicator of financial weak point or a possible recession. Regardless of the post-earnings selloff, the inventory stays 9% above my prior publication worth however has underperformed the S&P 500 index by 19%.

Nevertheless, I consider a “progress scare” pushed selloff justifies a decrease valuation, as we have now additionally seen progress slowdowns in promoting income for Google (GOOGL) and Meta (META). Moreover, Amazon (AMZN)’s retail enterprise skilled some softness as nicely within the latest quarter. Whereas the guided single digit 3Q progress outlook might point out a cyclical headwind quite than a structural shift, it is unsure whether or not the macro danger will begin materializing from right here and additional impression bookings. I consider the Fed’s “greater for longer” charges coverage will create a considerable danger of slowing the financial system. Given the present financial knowledge, I’ve downgraded the inventory from purchase to carry, as its valuation remains to be not low cost.

Bookings Slowdown Displays Weak Financial Information

ABNB has skilled a pointy deceleration in income progress, dropping to 10.6% YoY in 2Q FY2024, in comparison with 17.8% YoY in 2Q FY2023. This slowdown was primarily as a consequence of a decline in bookings progress, as proven within the chart. Within the 2Q Shareholder Letter, the corporate supplied YoY progress numbers just for the Latin America and Asia-Pacific areas. It indicated that bookings progress within the EMEA area (which accounts for 39% of complete nights and experiences) was comparatively “steady,” whereas the North American area (33% of complete nights and experiences) confirmed a slight acceleration in YoY progress. I consider the language means that the EMEA area might have skilled flat or barely detrimental YoY progress in 2Q FY2024, regardless of the corporate talked about that nights booked for the Olympics by 2Q had been greater than double in comparison with the identical interval final yr.

For 3Q FY2024, the corporate supplied disappointing income steerage, indicating a midpoint of 9% YoY progress. This outlook is basically attributed to shorter reserving tendencies. Moreover, the corporate expects a continued sequential slowdown within the YoY progress of complete nights and experiences. Assuming 3Q FY2024 follows the identical % change of YoY progress as in 2Q (8.7%/9.5%-1), we will estimate that bookings for the present quarter would develop by 7.9% YoY. The administration additionally warned that the bookings outlook reveals indicators of slowing demand from U.S. company, which aligns with the deteriorating financial knowledge launched on this early August that triggered a big market selloff. If shopper spending pattern will get worsen, it’ll most probably replicate into ABNB’s bookings end in 2H FY2024.

Lastly, it’s unlikely that ABNB’s “above-trend” progress noticed from FY2020 to FY2022 will proceed. Through the 2Q earnings name, the administration famous that the corporate’s progress is starting to normalize following the post-pandemic journey surge when folks had been desirous to journey and booked nicely upfront.

Margin Barely Declines

As well as, ABNB’s adjusted EBITDA margin reveals a barely YoY contraction of fifty bps in 2Q FY2024. The corporate expects 3Q FY2024 adjusted EBITDA to be the identical degree as 3Q FY2023 of $1.83 billion. Contemplating the midpoint of income steerage of $3.7 billion, this means a 49.5% of adjusted EBITDA margin within the present quarter, which can point out a big contraction in comparison with 54% in 3Q FY2023. The administration defined a sooner progress of selling expense as a consequence of investments in new progress markets equivalent to Peru, Colombia, Chile, and Argentina. Moreover, ABNB forecasts a at the very least 35% of adjusted EBITDA margin in FY2024, which signifies a continued YoY margin contraction in 4Q FY2024. I believe these advertising investments will take time to translate into bookings progress.

The corporate additionally talked about that its FY2024 FCF margin could be a couple of bps above its 35% EBITDA margin steerage. I consider the administration’s ambiguous tone might indicate its FCF margin could be decrease than 38.7% seen in FY2023.

Inventory Based mostly Compensation Has Been Rising

It is essential to notice that ABNB skilled a YoY decline in working earnings and EPS on a GAAP foundation in Q2 FY2024. The corporate’s 9.2% YoY progress in adjusted EBITDA was pushed by a big YoY improve in stock-based compensation (SBC), as proven within the chart. SBC progress accelerated to 25.7% YoY in Q2 FY2024. Moreover, SBC as a proportion of complete income expanded to 13.9% within the final quarter, whereas the adjusted EBITDA margin contracted. This implies an much more extreme contraction within the GAAP margin.

Valuation

Regardless of the latest selloff, ABNB is buying and selling at a premium valuation on a TTM foundation to its friends. Contemplating the corporate’s FY2024 income consensus of $11.03 billion and assuming a flat YoY adjusted EBITDA margin of 36.8% in FY2024 (guided at the very least 35%), this means the inventory is buying and selling at an EV/adjusted EBITDA FY2024 of 15.6x, which remains to be greater than 14.3x of Reserving Holdings (BKNG) however barely beneath 16.9x of Hilton Worldwide Holdings Inc (HLT). This means that ABNB’s valuation shouldn’t be interesting but amid the potential financial slowdown.

We all know that the corporate’s SBC has been rising and inflates its non-GAAP metrics. If we take into account the FY2024 non-GAAP EPS consensus of $5.3, ABNB’s adjusted P/E FY2024 could be 21.7x, largely in step with the S&P 500 index’s 22x in FY2024 (5344/$242). Due to this fact, ABNB’s valuation doesn’t sign a shopping for alternative both. Nevertheless, the upside danger is that bookings might rebound sooner than the market presently expects if we obtain a comfortable touchdown within the financial system, which might justify the next a number of. Given the latest financial knowledge, the danger of a recession is growing.

Conclusion

In conclusion, ABNB’s slowdown in bookings progress, mixed with a weakening financial surroundings, raises issues a few additional deterioration in its income outlook. The numerous drop in its inventory worth truly mirrored a blended 2Q earnings and a disappointing 3Q outlook, as the corporate’s valuation stays elevated. The expansion acceleration in SBC and non-GAAP margin contraction confirmed that its adjusted earnings progress could also be deceptive. The present macro dangers and the Fed’s “greater for longer” recommend the next draw back danger. From a risk-reward perspective, ABNB, as a cyclical inventory, might current a extra engaging shopping for alternative throughout an early financial growth. Due to this fact, the inventory has been downgraded from a purchase to a maintain, as its valuation doesn’t but supply a compelling shopping for sign.