Airbnb ‘structurally transformed by the pandemic,’ analyst says

Needham Managing Director Bernie McTernan joins Yahoo Finance Live to discuss reiterating a Buy rating on Airbnb stock, investor sentiment, pent-up travel demand, recessionary fears, and the outlook for Airbnb.

Video Transcript

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- Needham is reiterating its buy rating on Airbnb, citing strong signs of demand despite fears of peak travel. Airbnb, by the way, reports its earnings after the close of trading tomorrow-- Valentine's Day. Let's get to Needham managing director Bernie McTernan for more on this bullish call. Hey, Bernie. Good to see you. So as we try to figure out where we are in this travel cycle, where does Airbnb fit in?

BERNIE MCTERNAN: Yeah, no, that's certainly the key debate on shares-- on if we're at peak travel or not. What's interesting to me is that we had Expedia just report. They called out-- even though the reported numbers were impacted by the hurricane, the organic trends were solid, with demand accelerating throughout December-- importantly into January as well.

Google also talked about travel supporting their search business. So that's the key debate on shares is, is are we at peak travel on the other side of it? It seems like we're still on this wave where we're not there yet, but that's certainly what investors and the bear are focused on, just because the massive shift in ADRs that have happened.

So as demand starts to fall, you could have this snowball effect that impacts ADRs. That impacts gross margins. It flows through to the bottom line.

- Bernie, do investors also want to see cost cuts from Airbnb, and do you anticipate them?

BERNIE MCTERNAN: I don't. One of the amazing things about this company is just really the belt-tightening that they've kept from the pandemic. They had major cost cuts happen in 2020, and that's the reason why they have 30% EBITDA margins now. And they have $3.3 billion of trailing 12-month free cash flow. They're buying back $1 billion stock.

I mean, one of the, quite honestly, simplest questions we get about our coverage is, is this a good thing or not. And Airbnb is undoubtedly a good company that was structurally transformed by the pandemic. And again, this belt-tightening that they did, they've kept it through allowing margins to flow through. So not expecting any additional cost cuts from the company because of the great job that Brian and team have done.

- What about all the tweaks that they've been doing both for hosts and for people staying at Airbnb's, right? It feels like they've been-- there's been a lot of sort of rejiggering at the margins. Has that mostly been in a positive direction. Is there one thing you can pick out that's sort of been most helpful for them?

BERNIE MCTERNAN: Yeah, no, I think the categories that they've launched is really interesting. And so what categories is is that you say, OK, I want to stay at a beach front or a ski-on, ski-out. So you start there instead of saying I want to start in Tahoe, and then go from there.

Why that's interesting is that it allows Airbnb to better push demand to where they have supply. Ultimately, longer term, too, I think this is a really interesting opportunity, because as the consumer's journey, let's say, for booking travel starts at Airbnb, then there's all these other opportunities that they can act as a retail media network. And you can book your travel through Airbnb, book more experiences through Airbnb. Maybe that's what unlocks this experience opportunity for them as well that they speak about. So I think categories is really interesting, and I think it's a great consumer product as well, too. I've really enjoyed every time that I've used it.

- And Bernie, how does a recession impact Airbnb?

BERNIE MCTERNAN: Negatively, right? That would be the peak travel fear is that we're on the other side of it. So another thing that we're focused on is supply. And I bring this up because, on Uber's earnings, both Uber and Lyft, they had record supply and record drivers on their platform.

One of the things that DARA spoke about was that the increased supply was actually in response to inflation and consumers needing that platform. Airbnb, their supply accelerated last quarter to plus-15% year over year. So I wonder if there is a countercyclical nature in terms of supply where you could have actually more supply come.

So even though you have the demand hit from a recession, it could be helpful for supply and make the platform stronger. But look, this is consumer discretionary spending. So that would be that peak travel fee you're bearing out, and that estimates are just way too high if we are heading into a recession.

- Hey, Bernie, just to put a fine point on it here, you obviously have a buy rating. You would recommend buying the shares going into the earnings report, I assume.

BERNIE MCTERNAN: Yeah. I mean, look, it's not a short-term call. We have a buy rating. Those are 12-month price targets.

I look at a company that's trading at 22 times our '23 EBITDA estimates. I think there's still a lot of upside there if you think about that this company will continue to grow. So I think this is, frankly, one of the best companies that we cover.

And so this isn't a short-term call. The buy rating, it's more. This is a longer-term. This is a secular grower that has years of runway in front of it. Even though bookings from 2019 to 2023 are going to double, there's still a long way to go to impact this $1.5 trillion travel TAM.

- Needham managing director Bernie McTernan. Always good to see you. Good luck on that call tomorrow night.

BERNIE MCTERNAN: Thanks, guys.