Airbnb (NASDAQ:ABNB), one of the largest accommodation booking platforms in the world, saw its stock tumble 7% last week after reporting first-quarter earnings. Despite short-term challenges, Airbnb is poised for continued growth aided by its growing scale, which presents investors with another opportunity to consider investing in it.
The company has introduced several new features to lure new guests and hosts to the platform and is also investing in AI to boost the booking experience for both parties. I am bullish on Airbnb, as I believe the company will take market share from other online travel agencies in the next five years.
A Slowdown in Demand Is in the Cards
The travel industry made a soaring comeback in the last couple of years after dealing with COVID-related challenges in 2020 and 2021. The pent-up demand for travel helped Airbnb register exponential growth, but this year, travel demand is projected to normalize.
There are two main reasons behind these expectations for normalizing travel demand.
First, consumer spending power has rapidly deteriorated in recent times due to persistently elevated inflation. In the U.S., excess savings in the pandemic era have been fully depleted. According to data from the Bureau of Economic Analysis, cumulative pandemic-era excess savings hit a high of $2.1 trillion in August 2021, but by March 2024, excess savings declined to a negative $72 billion. Given this, consumers are highly unlikely to splurge on travel as they used to in the last two years.
Second, travel inflation is on the rise again, which suggests traveling will cost more money in the foreseeable future. This, in turn, will spook consumers. According to NerdWallet’s Travel Inflation Report for May, the cost of traveling is rising across key categories. In March, Airfare prices increased by 1% compared to February, while hotel room rates increased by a more pronounced 6.7%. Rental car prices also saw an uptick of 5.7%. Restaurant and theatre prices largely remained flat.
Travel costs are increasing, while consumers are taking a hit due to persistent inflation, and this combination is likely to deteriorate travel demand in the foreseeable future.
Asia Will be a Bright Spot
According to Skift Research, 2024 will be one of the best years in recent memory for the travel sector in Asia. After struggling with mobility restrictions, Chinese travelers are finally getting back to traveling, and the research firm expects the Asia travel market to grow this year while Europe takes a back seat.
Airbnb is strategically placing bets in Asia to benefit from this projected travel boom. The company has identified several growth markets, including India, China, and Korea, and is focused on investing in these markets to lure travelers. These investments include improving the localization of products to cater to locally popular payment methods and supporting more languages.
Additionally, the company is updating the mobile app in China to offer a more familiar experience to Chinese consumers. They are also marketing the platform as a youth-friendly online travel agency, appealing to young travelers who are likely to prefer Airbnb lodgings over hotel rooms.
Scale Will be a Growth Driver
Over the years, Airbnb has expanded its product offering and the end markets it serves. The company seems well-positioned to convert this scale advantage into tangible earnings.
According to company filings, Airbnb currently operates in 220 countries and regions. At the end of 2023, the platform had more than five million hosts and had accommodated over 1.5 billion guests since its founding in 2007. The company, therefore, seems to enjoy a network effect where the massive number of hosts attracts more guests and vice versa. This network effect may prove to be a long-lasting competitive advantage.
Airbnb’s expansion into new product categories should also help the company’s growth. The Experiences segment is one area the company is trying to reinvest itself in. Since mid-2022, Airbnb has slowly phased out the Experiences segment despite previously claiming that the addressable market opportunity in this segment eclipsed $1.4 trillion.
During the Q1 earnings call, CEO Brian Chesky revealed that the company is bringing Experiences back to the platform and trying to rebrand it to support not just stays but other travel booking verticals.
The launch of Airbnb Icons earlier this year resonates well with these ambitions. This new category allows users to book a wide array of experiences and events, from sports to music. Airbnb’s expansion into these new segments will expand its addressable market opportunity meaningfully in the coming years.
Airbnb Luxe, which caters to high-end travelers by offering luxury accommodation options, and Airbnb for Work, which caters to professionals who are on work trips or working remotely, are two other new products that are likely to contribute positively to earnings growth in the long run.
Airbnb’s growing scale will be its biggest growth driver in the next five years.
Is Airbnb a Buy, According to Analysts?
Wall Street analysts had mixed reactions to Airbnb’s first-quarter earnings. Jefferies analysts concluded that Airbnb’s failure to raise the outlook for expected Nights and Experiences for the next quarter suggests growth is slowing. The research firm also raised concerns about the seemingly disappointing outlook for EBITDA. Jefferies has a price target of $150 for Airbnb, along with a Hold rating.
JPMorgan (NYSE:JPM) raised the price target from $140 to $145, as it believes the company’s continued innovation will open new opportunities to grow.
Both Morgan Stanley (NYSE:MS) and Evercore ISI analysts highlighted growth concerns and identified the management’s lackluster guidance for Q2 as the biggest factor contributing to the negative market sentiment toward Airbnb following the earnings print.
Overall, based on the ratings of 36 Wall Street analysts, Airbnb stock comes in as a Hold, and the average ABNB stock price target is $152.97, which implies upside potential of just 4.9% from the current market price.
The Takeaway: Airbnb’s Long-Term Prospects Remain Bright
Airbnb seems fairly valued based on Wall Street rankings revealed in this analysis, and the company is facing short-term headwinds that may limit growth in the next few quarters. However, the company is well-positioned to grow in the long term, aided by its growing scale and diversification into new product categories.