The Nasdaq-100 Technology Sector index turned in impressive gains, appreciating 20% so far in 2023. These come thanks to favorable signals such as cooling inflation and a resilient jobs market that kept the economy from sliding into a potential recession.
The tech stock rally rubbed off positively on shares of Airbnb (ABNB 1.17%). The stock is up by double-digit percentages so far this year. But its latest quarterly report led investors to press the panic button, and shares of Airbnb fell 17% over the past week as a result.
Let's look at what happened and whether this could be a buying opportunity for savvy investors.
Airbnb delivers solid results, but investors are worried about the guidance
Airbnb stock rallied this year on the back of improving travel demand, but the company's first-quarter 2023 results released on May 9 brought its terrific rally to a screeching halt. Wall Street wasn't satisfied with the company's second-quarter guidance, which points toward a slowdown in growth. But a closer look indicates that investors may have overreacted.
After all, Airbnb delivered healthy year-over-year revenue growth of 20% in Q1 to $1.8 billion. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 14% year over year to $262 million. Even better, Airbnb delivered earnings of $0.18 per share as compared to a loss of $0.03 per share in the year-ago period.
It is worth noting that all these numbers were ahead of expectations. Wall Street would have settled for $0.17 per share in earnings on $1.79 billion in revenue. The company's healthy growth can be attributed to a 19% year-over-year increase in the number of nights and experiences booked on its platform to 121 million. Airbnb witnessed a 3% jump in the average daily rate (ADR) over the prior-year period, excluding the effect of foreign currency changes.
The guidance, however, played spoilsport. Airbnb expects second-quarter revenue to increase 14% over the year-ago quarter to $2.4 billion at the midpoint of its guidance range. That's slightly below the consensus estimate of $2.42 billion. While that wasn't a big miss, it looks like investors are spooked about Airbnb's slowing growth in a quarter that coincides with the start of the peak summer travel season.
Elevated airline fares, high mortgage payments, tech layoffs, and recent bank failures are said to be some of the reasons why Airbnb management delivered a muted outlook. The company points out that its ADR is expected to drop in the current quarter, suggesting that the demand for lower-priced rooms could increase and negatively affect Airbnb's mix.
This can also be attributed to the company's strategy of offering cheaper rooms with an average price of $67 a night so that it can reach more customers. This move could eventually play in Airbnb's favor and help it record an increase in bookings despite potential economic pressures. Also, with the vacation rental market expected to clock annual growth of 17% through the end of the decade, according to Precedence Research, Airbnb's focus on boosting affordability on its platform could turn out to be a smart long-term move.
Don't miss the big picture on Airbnb
By adding new categories such as Airbnb Rooms (which allows customers to book a single room instead of a whole property), lower platform fees, and giving hosts the ability to offer more discounts, Airbnb is setting itself up to take a bigger share of the market in which it operates.
Analysts expect Airbnb to generate $9.5 billion in revenue this year, an improvement of 13% over 2022. This suggests Airbnb has cornered a quarter of the vacation rental space that's expected to generate $36 billion in revenue this year. By 2030, this market is forecast to generate $111 billion in annual revenue. If Airbnb controls even 20% of this space by then (assuming a drop in market share), its annual revenue could increase to more than $22 billion.
Airbnb currently trades at 8.3 times sales, which is on the expensive side. The stock finished 2022 with a price-to-sales ratio of 7.3 following a 50% decline. If we assume that Airbnb trades at a discounted sales multiple of 7 at the end of the decade, its market cap could jump to $154 billion (based on the 2030 revenue estimate discussed above).
That would be more than double the company's current market cap. However, Airbnb's efforts to improve affordability and the health of the market in which it operates could help it deliver a healthy upside, which is why investors should consider using the dip in the company's stock price to buy more shares.
