Airbnb double upgraded as analyst believes stock’s elevated valuation is ‘here to stay’

An Airbnb Inc. bear just flipped to bullish on the home-rental company, and gave seven reasons why he now thinks the stock’s relatively rich valuation is “here to stay.”

Analyst Robert Mollins at Gordon Haskett doubled upgraded Airbnb’s stock to buy, after being at underperform since the company went public in December 2020.

The stock slipped 1.0% in midday trading. Mollins now targets a 19% rally from current levels to $172, compared with his previous target for an 18% decline to $119.

Here are the seven reasons for Mollins’ about-face:

  • Recent proprietary data suggests global Airbnb app downloads have “materially improved” in recent months, which when combined with still-elevated average daily rates (ADRs) and lengthening stays indicates there is ample room for the company to beat second-quarter revenue expectations.

“While downloads don’t necessarily translate to increased engagement, we believe if consumers are downloading the app, they are interested in booking a lodging stay — either on the platform or elsewhere — which we view as increased consumer desire to travel,” Mollins wrote in a note to clients.

  • Engagement trends in key European countries, which combined have accounted for about three-quarters of Europe’s room nights in 2019, have witnessed “large” improvements in recent months, with most of the improvement taking place after Airbnb reported first-quarter results, on May 13.

The improvement in Europe is noteworthy, Mollins said, because the majority of nights booked came from international guests.

  • Vaccination rates in Europe are quickly catching up to rates seen in the U.S., which suggests that barring any new restrictions from rising COVID-19 cases related to the delta variant, travel trends in Europe should keep improving throughout the year.

Mollins said he believes continued vaccination progress, pent-up demand from European consumers and politicians fearing a backlash if lockdowns were to be reimposed “should keep demand trends moving in the right direction.”

  • Proprietary data indicates Airbnb “leaned back into paid marketing” in the second quarter, but said spending was still well below levels seen in 2019, “a gap that we believe is here to stay with ~90% of traffic coming through unpaid channels.”

Mollins expects Airbnb will keep enjoying “significant leverage” from sales and marketing given the company’s global brand recognition, “best-in-class” public relations strategy (Airbnb receives a lot of free publicity every time an announcement is made) and a loyal customer base.

  • A slow return to working in the office and indications that most companies will implement a hybrid work model should give U.S. consumers the ability to travel more frequently in the post-pandemic world. U.S. office occupancy as of the end of June was just 31% of pre-pandemic levels, Mollins said.

Although U.S. office occupancy can be expected to increase over the second half of the year, “we believe hybrid work models will become a meaningful piece of the back-to-office game plan with a PWC survey indicating that 60% of executives believe employees should be in the office three days a week or less,” Mollins wrote.

  • Upward revisions to financial metrics should continue, providing valuation support and keeping investors constructive on the stock, Mollins said. And he expects more of the same going forward.

For example, the FactSet consensus for second-quarter nights and experiences booked has improved to 77.9 million from 72.3 million at the end of the first quarter, the revenue consensus has improved to $1.19 billion from $955 million and the gross booking value (GBV) consensus has climbed to $11.16 billion from $8.93 billion.

  • Mollins believes Airbnb warrants a “very healthy” valuation premium relative to its peer group. He said it’s clear that investors don’t value Airbnb as an online travel agency (OTA), so he adjusted his own valuation of the company to be more representative of how the broader investment community values the stock.

The ratio of Airbnb’s enterprise value to consensus 2022 revenue estimates is 15.4%, according to FactSet, while the EV/sales ratio for OTAs Booking Holdings Inc.
is 10.0 and for Expedia Group Inc.
is 3.6.

“Our belief that Airbnb’s elevated valuation…is here to stay with the company possessing numerous arrows in its quiver to drive further topline upward revision momentum for years to come,” Mollins wrote.

Meanwhile, Airbnb’s stock has lost 1.0% year to date, while Booking shares have slipped 0.2% and Expedia’s stock has rallied 24.2%. The S&P 500 index
has climbed 16.9% this year.

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