Airbnb (ABNB): Still one of the most interesting bets in travel

When I last updated this narrative, I said the market was basically waiting for Airbnb to give it a real reason to move. Either growth needed to re-accelerate or margins needed to improve.

Well, we finally got both.

Airbnb's Q2 was probably the strongest evidence in a while that all the small product changes they've been making are actually starting to show up in the numbers. Revenue grew 17% to $3.6 billion, Gross Booking Value grew 16% to $27.2 billion, and Nights and Seats Booked grew 10%. Net income reached $816 million and adjusted EBITDA grew 21% to $1.3 billion, with margins expanding to 35%.

More importantly, Airbnb raised its full-year outlook. They now expect at least mid-teens revenue growth and an adjusted EBITDA margin of at least 35.5%. That's very different from the "earnings were fine but guidance was meh" situation I wrote about earlier.

So why did the stock suddenly jump?

The stock jumped around 17% the day after earnings, from roughly $152 to $178, and has since traded above $190 before pulling back a little. This wasn't just investors getting excited about one EPS beat. The market got evidence that the Airbnb growth story might actually be getting stronger again.

The biggest thing for me is that growth isn't only coming from places like Brazil or India anymore.

The US, France, UK and Australia all accelerated during the quarter. North American nights grew at the fastest rate in almost three years. At the same time, Airbnb's expansion markets are still growing roughly twice as fast as its mature markets. Brazil grew more than 30%, India grew around 60%, and first-time bookers globally increased 11%, the best growth Airbnb has seen in four years.

That basically removes one of my bigger concerns from the previous update: that Airbnb was becoming too dependent on international expansion because its mature markets were running out of steam.

For now at least, that isn't happening.

The boring product improvements are working

I originally wanted Airbnb to find some huge new growth engine.

Funny enough, the answer might just be hundreds of smaller things.

They've redesigned search, simplified login, improved checkout, made cancellation policies clearer, improved host pricing tools and expanded Reserve Now, Pay Later.

None of those sound revolutionary individually, but together they're improving conversion.

Mobile is becoming especially important. Nights booked through the app grew 23% and now represent 64% of total nights booked, compared with 59% last year. Airbnb is slowly becoming less like a website you occasionally visit and more like an actual travel app people keep around.

AI is finally doing something useful

I was already positive about Airbnb using AI, but now there's actual evidence behind it.

Airbnb says it can develop some products as much as 60% faster than before, and it shipped nearly 80% more features and improvements compared with the same period last year.

More importantly, its AI customer service assistant now resolves nearly 45% of the issues that start with it without needing a human. Customer support cost per booking fell around 16%.

That's the kind of AI story I like. Not "we added a chatbot." Actual lower costs and faster product development.

The platform idea is becoming more believable

This was one of the main reasons I liked Airbnb originally.

They're still trying to become more than an app for renting someone's house.

Airbnb has expanded Services into things like airport pickups, grocery delivery, luggage storage, car rentals and resort passes.

Experiences are still small, so I'm definitely not giving them much valuation credit yet, but supply grew almost 80% year over year and bookings accelerated both sequentially and year over year. That's at least moving in the right direction.

Hotels might actually be more interesting.

Airbnb has added thousands of boutique and independent hotels across more than 20 major destinations. Hotel nights are currently growing around three times faster than the homes business, even though they're still only a small percentage of total bookings.

And around 35% of first-time guests who initially book a hotel through Airbnb later return and book a home.

That's interesting because hotels aren't necessarily cannibalizing the original business. They can actually become another acquisition channel for Airbnb.

One thing I got slightly wrong

I was pretty interested in long-term stays and the whole remote-work / live-anywhere trend.

That's still part of Airbnb, but it doesn't look like the main driver right now.

Short-term stays are actually growing faster than stays of 28 days or more, and large entire homes with four or more bedrooms are doing particularly well.

Group travel might be one of Airbnb's strongest structural advantages against traditional hotels. A family or group of friends can rent one large house, split the cost and stay together. Airbnb says guests booked more than 1 billion bedroom nights over the last twelve months.

So I'd shift that part of my thesis away from "remote work changes how people live" and more toward "Airbnb has a product hotels can't perfectly replicate."

There's still plenty that can go wrong

I'm more positive than I was in January, but I wouldn't pretend everything suddenly looks perfect.

The World Cup definitely helped Q2. Airbnb hosted millions of guests and more than 150,000 homes were listed by first-time hosts across host cities. That's great for acquiring users and hosts, but it's also a one-off event and we shouldn't extrapolate all of that growth forever.

The headline 17% revenue growth also included currency benefits. Revenue growth was closer to 13% excluding FX.

Management expects Q3 adjusted EBITDA margin to decline slightly year over year because they're continuing to invest.

Experiences and Services still haven't proven they can become major businesses.

Regulation is also absolutely still a problem. There have been some wins, including Spain's Supreme Court striking down the country's national tourist-rental registry, but cities around the world are still pushing tougher short-term rental restrictions and Airbnb continues to fight enforcement in individual markets.

And the $1.3 billion IRS dispute I mentioned before still hasn't gone away. Airbnb continues to contest it in the US Tax Court.

The financial side looks much better though

Airbnb generated about $4.8 billion of free cash flow over the last twelve months, equal to roughly a 37% FCF margin.

They also repurchased another $1.1 billion of stock during Q2. Since Airbnb started buying shares back in 2022, fully diluted share count has fallen around 10%.

That's actually meaningful. They're not just producing a lot of cash, they're using some of it to offset dilution and gradually shrink the share count.

Updated valuation

I'm increasing my fair value from $119.83 to around $170 per share.

That's a pretty big change, but the business has earned some of it.

My previous valuation assumed roughly 10% revenue growth, a 22% future profit margin and a 25x future P/E.

I'm now more comfortable using roughly:

• 12% annual revenue growth
• 24.5% long-term net margin
• 27x future P/E
• Continued share count reduction toward roughly 560 million shares
• Around an 8.5% discount rate

Airbnb is currently generating significantly better growth and cash flow than I expected when I made the previous update, and there's now more evidence that the product investments are improving both conversion and operating efficiency. Current analyst estimates also have Airbnb reaching roughly $17.5 billion of revenue and $4.2 billion of earnings by 2028.

At around $184, I don't think Airbnb is ridiculously overpriced anymore, but I also don't think the recent rally suddenly makes it cheap.

The stock has gone from being ignored to being loved pretty quickly.

Current mood

This is the first time in a while where Airbnb isn't asking investors to believe that the next growth engine is coming.

Some of it is actually showing up.

Core markets are accelerating again. International markets are still growing quickly. AI is reducing costs. The core product is converting better. Hotels are gaining traction. Experiences are at least moving in the right direction. And profitability remains very strong.

That's a much better setup than six months ago.

I'm more bullish on the business.

I'm just not quite as bullish on the price.