As economies gradually reopened and travel restrictions lifted earlier this year, Airbnb's (ABNB 0.08%) online vacation rental platform saw a flurry of activity that had come to a halt at the pandemic's onset last year. The latest announcement from the European Union Council, however, has the potential to slow this recovery.
The E.U. removed the United States from its safe-travel list, meaning people traveling from the U.S. to countries within the E.U. could face restrictions. Will that affect Airbnb's business again? Let's take a look.
Staying close to home
Compared to pre-pandemic levels, international travel remains muted. It's mostly domestic travel that has resumed. For Airbnb, 73% of gross nights booked in its fiscal second quarter were for domestic stays. The company has not disclosed its pre-pandemic international/domestic break-up, but it did note that current levels are substantially above the same quarter in 2019.
The E.U. announcement could however exacerbate that trend. Even fully vaccinated people may be discouraged from visiting E.U. member states for fear of spreading the Delta variant in Europe. Vaccines, after all, don't prevent coronavirus variants from spreading.
The pandemic is proving to be persistent, with different variants and waves sweeping across nations. Early in its third quarter, Airbnb was already feeling the effects of rising coronavirus cases leading to more travel restrictions. Even before the E.U. announcement, management had noted that the latest trends were negatively affecting cancellations and nights booked.
International travel is crucial for Airbnb's recovery, but without doubt this segment has a tough climb ahead.
Fortunately, domestic travel in highly vaccinated countries has been picking up the slack so far. In the second quarter, Airbnb reported a 10% increase in revenue versus the same quarter in 2019. In a sense, business has been recovering well from the devastation induced by travel restrictions. In fact, the company noted its backlog of reservations for stays in the near future are the highest they have ever been.
The E.U. announcement -- most likely -- means international travel will be slower to recover. That means an important segment at Airbnb will be a drag on its top and bottom lines for a while longer. Even though revenue is 10% above 2019 levels, that's slower growth than Airbnb's potential. In its fiscal 2018 and 2019, it grew revenue by 43% and 32%, respectively.
The E.U. announcement did not cause the stock to fall. It is trading at a forward price-to-sales ratio of 17, so it's not cheap. However, long-term prospects look excellent, thanks to its favorable customer value proposition, an asset-light business model with no hotels to operate, and a flexibility to offer long-term or short-term stays. Investors should put Airbnb on their watch list and look for an opportunity to buy the stock on a dip.