Airbnb (NASDAQ: ABNB) soared on Friday after it turned its first earnings report as a publicly traded company.
Shares of the home-sharing giant jumped 13% as fourth quarter revenue blew past Wall Street estimates. The stock is now up 43% since its closing price at $144 on its IPO day in December, but it's still the best way to play the economic recovery. Here's why.
The travel market is going to explode
Vaccines have only started rolling out around the world, but there are already signs that pent-up demand is set to lift the travel industry to unprecedented levels later this year.
Airbnb's own survey found that leisure travel is the activity that Americans miss most during the pandemic, even more than going to bars and restaurants, and a a Trivago report found that 80% of respondents said that an inability to travel was the worst part of the pandemic. Respondents in both surveys said that thinking about travel lifts people's spirits and gives something to look forward to during a difficult time.
There's also evidence that the travel market is starting to recover. Airbnb said nights booked in North America were essentially flat in the fourth quarter, and that domestic travel on the site is up year over year as guests are traveling where the opportunity is available as cross-border trips are restricted around the world.
Booking Holdings CEO Glenn Fogel noted that bookings in Israel, which has already vaccinated more than half of its population, were up "solid double digits" in recent weeks as people are clearly anxious to see family and friends and to travel for pleasure once it's safe to do so.
Airbnb looks to be the best-positioned company to take advantage of the coming boom as its accommodations span a wide range of options across price, locale, and style, and include long-term stays, which have been popular during the pandemic. Since the model is built on individual hosts, it can also more easily ramp up capacity than competing chains, and homeowners are more likely to start hosting once it's safe to do so, especially as many are looking for income coming out of the recession.
Remote work will be a long-term tailwind
Perhaps the most permanent effect of the pandemic is the shift to remote work. White collar workers around the world have decamped from offices, and most have been able to work from home with similar levels of productivity. A number of companies have already told their employees they can work from home permanently, and such flexible work arrangements will be normal even when it's safe to return to the office.
This has significant implications for the travel industry as many young people will take this opportunity to travel and work from remote locations. With Airbnb, they can even rent out their own home to subsidize their trip.
CEO Brian Chesky had some thoughts about remote work, saying on the call:
A world with Zoom is a world where more people can work from home. In a world where more people have the flexibility to work from home, we're seeing more people say they can work from any home on Airbnb. And so we've seen a number of new use cases. People are living more nomadically. Some people are taking longer-term stays, one or two months at a time in Airbnb. People are taking extended three-, four-day weekends, like many weekends in a row because they don't have to be in the physical office.
Assuming the remote work trend sticks, Airbnb will be one of the biggest winners as the home-sharing platform again benefits from attributes, like having kitchens and accommodating long-term stays, that hotel chains can't offer.
The business is turning into a profit machine
Even as revenue fell 30% in 2020, Airbnb dramatically improved its bottom line, posting adjusted EBITDA of nearly $500 million in the second half of the year, compared to just $38 million in the same period of 2019. The company laid off about a quarter of its staff last May during the height of the lockdowns and has worked to trim expenses in other areas like marketing, focusing on becoming more efficient.
In its shareholder letter, management said, "We undertook an internal review of our cost structure and rapidly made changes, including material reductions to discretionary spending, suspension of performance marketing, and a reduction in our workforce."
The company expects to become more efficient in 2021, saying it plans "to improve our variable costs,
materially increase our marketing efficiency and tightly manage our fixed expenses," as it expands its adjusted EBITDA margin.
Considering the cost cuts and the jolt to revenue it's set to get from the reopening, Airbnb is likely to be significantly more profitable a year from now with run-rate EBITDA potentially in the billions.
The company is the clear leader in the home-sharing market and its business model, operating an e-commerce marketplace, affords wide margins at scale as well as competitive advantages like network effects and switching costs for hosts. As the first mover, Airbnb also has the biggest brand by far in the industry.
While the stock is pricey, Airbnb is disrupting a massive market, worth more than $1 trillion, and the company has demonstrated its ability to penetrate new markets, adding on businesses like experiences to its platform and offering more curated listings like Airbnb Luxe and Airbnb Plus.
With momentum building in vaccinations, the combination of Airbnb's market position and an industry that's poised to skyrocket with pent-up demand should reward investors handsomely over the next year and beyond.
