Airbnb: Temporary Tailwind (NASDAQ:ABNB) | Seeking alpha

Airbnb (Nasdaq: ABNB) The business has continued to perform well in recent quarters, even as economic conditions normalize, creating a less favorable demand environment. While Airbnb provided simple guidance for the second quarter, I expect the company To continue performing well in 2024, supported by a number of one-off events (solar eclipse, Olympic Games, etc.).

However, moving beyond 2024, there are potential headwinds. I’ve been suggesting for some time that the massive stock of housing currently under construction could eventually contribute to oversupply in the rental market in the short term. This has not actually happened yet, but the situation is still evolving. It should be noted that Airbnb will likely take advantage of the situation by upgrading listings on its platform while maintaining a healthy balance between supply and demand.

Market conditions

while Growth in tourism and travel appears to be moderating, and Airbnb continues to benefit from a reasonably healthy demand environment, recording a growth rate of 1.5% in 2019. An increase of 9.5% year-on-year in nights and experiences booked in the first quarter, driven by growth in all regions. There are also a number of events in 2024 that should be supportive of growth, such as the North American solar eclipse, the Paris Olympics, and the European Football Championship.

However, the supply of new housing entering the market in the US poses a potential threat, as I have been suggesting for some time. This has not been a problem so far, in part because the existing housing market is largely frozen. The increased supply, combined with declining demand, will likely start to cause problems over time.

While this may seem orthogonal to Airbnb’s business, excess housing in the long-term rental market may lead to an oversupply of rentals in the short term. This would put pressure on prices, and thus Airbnb’s profitability. Rental vacancy rates continue to increase at a fairly rapid pace and are already at a high level given the strong job market.

Supply growth on Airbnb has outpaced demand growth for some time now, although this has not caused pricing issues so far. Airbnb removed thousands of low-quality listings in the first quarter, part of a broader effort to improve the overall Airbnb experience and make it more consistent. Excluding that, active listings were up 17% year-over-year, with double-digit growth in all regions. Removing listings would likely have the secondary benefit of reducing excess supply and supporting prices.

Business updates on Airbnb

Airbnb has a number of strategic initiatives, including:

• Make hosting mainstream
• Improving basic service
• Expanding services

To support increased exposure on the platform, Airbnb continues to try to increase awareness, along with improved tools and support for hosts. It is difficult to argue that there is a shortage of supply on the platform, and Airbnb must be mindful of the balance between supply and demand. As a result, efforts to attract hosts appear to be driven more by a desire to improve the quality of listings on the platform and increase listing diversity.

Airbnb removed a large number of listings from the platform in the first quarter. The reduced supply is said to have had no impact on global bookings, which Airbnb suggested was because these low-quality properties were not receiving as many bookings and were lowering overall conversion rates.

In support of improving service quality, Airbnb has recently introduced several new features. The Guest Favorites feature was launched in November and is an attempt to attract users towards popular properties (ratings, reviews, reliability). More than 100 million nights have already been booked on preferred guest lists.

Airbnb has also introduced a Verified badge, which indicates that the listing has passed the verification process. More than 2 million listings in five countries have now earned this badge, and Airbnb plans to introduce new tools to make this process easier. These initiatives aim to help guests find high-quality, affordable stays, and Airbnb seems to believe that by improving quality it can gain market share from hotels.

In terms of product expansion, Airbnb recently introduced Icons which is a category of experiences from famous names in music, movies, sports, etc. Initial icons include Pixar’s Up House, an evening at the Ferrari Museum and a 2D replica of Marvel’s X-Mansion. The icons are supposed to increase awareness of Airbnb outside of its core accommodation use case, but they are unlikely to generate meaningful revenue and appear to be little more than a marketing move.

Airbnb has been talking about expanding products for some time but has made little tangible progress. Ideally, the company will gain traction in areas such as trip planning and experiences. There’s also a huge monetization opportunity from host tools, though Airbnb still seems to prioritize platform integrity over revenue maximization. At this point, it may be too early but product expansion will be an important part of the story moving forward and Airbnb should start showing progress soon.

Airbnb is trying to drive growth in its less mature markets and appears to be having success in this area. In the first quarter, nights booked in expansion markets increased at twice the rate of Airbnb’s core markets. This is likely to be an important driver of growth for the show on the platform as well. The most penetrated markets for Airbnb are the United States, Canada, Australia, France, and the United Kingdom. Markets with great growth potential include Mexico, Brazil, Germany, Italy, Spain, Switzerland, the Netherlands, Japan, Korea and India.

Airbnb also continues to support demand through product innovation, recently introducing a range of new features (messaging, invitations, property wishlist) for group trips. This is important because more than 80% of bookings on Airbnb are group trips. Airbnb’s attempts to increase the number of longer stays are also paying off, as the number of stays longer than 3 months has increased by approximately 25% year over year.

Airbnb also seems to be focusing on driving users towards its app. This makes sense since conversion rates are higher in the app, and will likely help reduce competition between platforms. Airbnb app downloads in the US increased 60% year-over-year in the first quarter, and nights booked through the app globally rose 21%. Airbnb suggested the increase in app downloads was organic. While this may not have a significant impact in the short term, it is important from a competitive and profitability perspective in the long term.

financial analysis

Airbnb generated revenue of $2.14 billion in the first quarter, an increase of 18% year over year, driven by strong demand, the timing of Easter and the fact that 2024 is a leap year. Absent an impact, revenue growth will likely continue to slow in the first quarter. 133 million nights and experiences were booked in the first quarter, an increase of 9.5% year-over-year, with strong growth across all regions. The average room rate rose 3% year over year to $173, with the average daily rate rising in all regions, largely driven by higher rates. The stability of ADR is somewhat surprising given the strong supply growth and rapid growth of Airbnb’s business outside of markets such as the US, Canada, Australia and the UK. The average price of hotel rooms globally rose 3% year over year in March, compared to a 2% decline in one-bedroom listings on Airbnb.

Airbnb expects its revenue to be between $2.68 and $2.74 billion in the second quarter, which represents revenue growth of 8 to 10% year over year. Given that first-quarter results were so strong, it appears that the recent weakness in stock prices was a result of Airbnb’s soft guidance. The second quarter should be supported by a solar eclipse, although there will be headwinds from Easter timing. Airbnb estimates that 500,000 guests stayed on the platform during the North American solar eclipse. The Summer Olympics in Paris should also provide tailwinds in Q3, along with the European Cup in Q2/Q3.

Airbnb’s profitability has declined slightly in recent quarters but is still good, especially from a cash flow perspective. Some of this difference is due to the fact that Airbnb’s stock-based compensation expense is still relatively high.

Looking ahead, increased supply and a less favorable demand environment could put pressure on Airbnb’s margins. Despite a large number of listings being removed in the first quarter, supply still outpaces demand on the platform, although this has had no real impact on ADRs so far. Removing listings and introducing features that push users toward higher-quality listings are levers that should support pricing. This is something I haven’t really thought about before, but Airbnb probably has a lot of room to maintain its ADRs through the hybrid shift, even if the price drops meaningfully. With that in mind, a significant decline in Airbnb’s stock price would likely require a widespread decline in demand, which would likely only occur due to economic weakness.

It’s also possible that the increased supply of listings will force Airbnb to invest more in sales and marketing. That hasn’t really happened yet, but Airbnb certainly isn’t generating operational leverage in this space anymore.

Conclusion

Airbnb will benefit from a number of temporary tailwinds in 2024, and the demand environment remains healthy for now. Consumer spending is likely to come under increasing pressure later in the year. The increased housing supply is also likely to cause problems at some point, and this may spill over into the rental market in the short term. Oversupply could reduce Airbnb’s gross margins and force the company to invest more in sales and marketing. Airbnb has the option of removing the offer from its platform to support ADR, but the company will likely be cautious in this regard as it would not want to create a backlash.