There was no #Airbnbust for Airbnb (ABNB 0.82%) in its fourth-quarter earnings report.
Despite trending complaints about cleaning fees and chore lists on the home-sharing platform, the company reported strong numbers Tuesday night, outpacing both its own guidance and Wall Street estimates, and the stock jumped 10% in after-hours trading on the earnings report.
In the fourth quarter, revenue rose 24%, or 31% on a currency-neutral basis, to $1.9 billion -- better than the company's own guidance at 17%-22% revenue growth and ahead of analyst estimates at $1.86 billion.
Airbnb's performance on the bottom line was even more impressive as adjusted EBITDA rose 52% to $506 million, free cash flow increased 21% to $455 million, and GAAP net income reached $319 million. On a per-share basis, earnings jumped from $0.08 to $0.48, easily topping expectations at $0.25.
In its guidance for the first quarter, Airbnb expects revenue to increase 16%-21% to $1.75 billion-$1.82 billion, which was ahead of the consensus at $1.69 billion.
The fourth quarter continued a long pattern of ramping profitability for Airbnb after it laid off 25% of its staff at the start of the pandemic and committed to running a leaner company. Let's break down the key factors driving its profit margins higher.
Image source: Airbnb.
A scalable business model
Airbnb benefits from a number of competitive advantages, including switching costs, network effects, and a well-known brand name that is synonymous with home-sharing.
Because of the nature of Airbnb's two-sided marketplace, the incremental cost of an additional booking is minimal compared to the income it brings in as most of the company's expenses go to employee salaries, computing costs, improvements to the website, and marketing and other growth initiatives.
That means that, in general, investors should expect the company's profitability to expand as revenue grows. CEO Brian Chesky noted on the earnings call that the company is focused on being a lean organization, and Airbnb's headcount is down 5% from 2019 even as revenue has jumped 75%.
In the fourth quarter, revenue growth outpaced every expense line item except for general and administrative, which rose because of higher bad debt expenses and changes in reserves for tax and legal matters.
The benefit of higher interest rates
Management didn't discuss this in the shareholder letter or the earnings call, but the company benefits from higher interest rates because it collects interest on the money it holds in between guest bookings and stays.
In the fourth quarter, it finished with $4.8 billion in amounts held on behalf of customers. That and rising interest rates allowed the company to collect $103 million in interest income, a significant percentage of its pre-tax income of $344 million.
That perk of its business model isn't a reason alone to invest in Airbnb, as that profit stream would decline if interest rates fell again. But it makes Airbnb robust in a high-interest rate environment, especially compared to unprofitable tech stocks since that interest income essentially represents a cost-free revenue stream.
Is Airbnb stock a buy?
Airbnb is a unique travel brand, and its focus on home-sharing gives it several advantages over online travel agency competitors like Booking Holdings and Expedia. For example, 90% of guests on Airbnb come directly to the platform to book, rather than starting their search on Google. That shows Airbnb has a strong brand relationship with its customers and helps it save on marketing expenses. As a home-sharing provider, its inventory is also unique, distinguishing the experience it offers from hotel-booking platforms.
The fourth-quarter results and the surge in profitability show Airbnb's business model is delivering results, and that momentum should continue as the company grows.
With the gains after hours, Airbnb stock is now up more than 50% from its bottom in December, but shares still look cheap according to some conventional metrics. Its price-to-earnings ratio is 43, which is very reasonable for a company with its growth potential, and according to its enterprise value to free cash flow ratio, which factors in its balance sheet and cash generation, it trades at just 20, looking even cheaper.
With its impressive set of competitive advantages, steady revenue growth, and ramping profitability, Airbnb stock looks set for more gains in 2023.
