10-K Financial Statement Analysis: Airbnb

Financial Statement Analysis: ABNB (Airbnb Inc.)

Income Statement Analysis

Airbnb has maintained consistent double digit revenue growth over the past 4 years, with 77% YOY growth in 2021, with 40% and 18% growth seen in 2022 and 2023 respectively. While the company is seeing slowing revenue growth, this trend is largely in line with the rest of the peer group. Drastic fluctuations in revenue growth are also likely to be contributed to by macroeconomic trends affecting consumer discretionary spending categories such as the Covid-19 pandemic and recessionary fears. Overall, the trend of positive revenue growth signifies the firm’s ability to expand its business in the short term. The decreasing nature of this revenue growth warrants caution as it indicates a potential industry-wide inability to grow. Decreasing revenues means that businesses will have to operate more efficiently, aggressively fight for market share, or could otherwise risk not having the proper funding to fuel expansion or distribute to shareholders.

Despite ABNB’s smaller generated revenue relative to its peers, the company boasts an extraordinarily high gross profit margin compared to the same peers. In 2023, ABNB’s gross profit margin was 83% compared to MAR and HLT’s gross profit margin of 22% and 29% respectively. ABNB’s historical trend of dominating its peers in respect to gross profit margin showcases the firm’s ability to limit “cost of revenue”. As the MD&A points out, ABNB’s core business relies on “hosts” and their privately owned properties. The firm’s ability to generate revenue and maintain low direct costs gives them a significant advantage over their peers. By leveraging host labor and limiting overhead and production costs, the firm faces less cost of revenue exposure compared to its brick-and-mortar centric peers.  

While the increase in net profit margin is substantial and indicates the company’s ability to retain revenue after all costs have been paid, it should be noted that the company does not report a corresponding substantial profit margin advantage compared to its peers. In fact, in 2023, the same year that ABNB beat peer net profits margins by 2x or greater, the company’s operating profit underperformed compared to peers. Upon further investigation, the company’s reported operating income for 2023 is also significantly less than its reported net income. The discrepancy between operating income and net income indicates that the company has recognized significant non-operating items which have positively affected net income. Upon further analysis, the company has reported a significant (greater than pretax income) tax provision credit for FY23 of nearly $2.7 billion which is positively skewing net income. Despite the relative strength of ABNB’s net profit margin, because this net profit is not being generated by day-to-day business operations, net profit margins of this caliber may not be sustainable into the future and represent less-than ideal earnings quality.

Balance Sheet Analysis

Cash ratios and quick ratios for ABNB, although appear to be exhibiting a slight downward trend in recent years, have been consistently greater than 1. The strength of these ratios demonstrates the firm’s ability to convert liquid assets to pay current liabilities and means the firm would be more likely to survive a crisis.

Typically, the growing discrepancy between cash ratio and quick ratio can indicate a potential warning sign, as a runaway quick ratio can signal that a firm is potentially aggressively recognizing revenue by accumulating receivables rather than collecting physical cash. This difference, however, is largely immaterial in this analysis as the discrepancy is apparently caused by an accounting decision dictating how the firm handles receivables. MD&A notes indicate that the companies higher than average receivables are comprised of a large fund of cash, reported under “Other Receivables”, which represents funds due to clients, paid ahead of check-in. These funds are held until check-in is completed and are accompanied by a corresponding entry in current liabilities. Even after adjusting for “Other Receivables” in the quick ratio, and the corresponding “Other Liabilities” in the cash ratio, both remain healthily above 1 throughout the years analyzed.

Further, the large flowing fund of cash can be incrementally leveraged to cover current liabilities or generate additional returns. The cash ratio is not sufficiently positive to indicate that the firm may be inefficiently keeping too much cash on hand.

Goodwill, Intangibles, and Net PPE for the firm have remained relatively stable for the company over the years. This is a positive sign for investors as stable Goodwill and Intangibles indicate that no significant impairments have been made, meaning that the intangible assets are retaining their value. Decreases in Net PPE are legitimate in nature, being caused by a true reduction in PPE and not by inflating accumulated depreciation figures. Accumulated depreciation has remained largely constant compared to Gross PPE. While the stability of these measures indicates the absence of misrepresentation or poor accounting practices, decreasing PPE may be a signal that the firm is not properly investing in long-term growth. Because the nature of the business is not as physical resource intensive as some of its peers this concern is slightly diminished as it is more justified in having lower Net PPE than brick and mortar competitors.

The debt to asset ratio for ABNB is consistently shrinking over time and as of 2023, total debt represented only 11% relative to total assets. Likewise, debt to equity measures have also consistently fallen with most recent figures showing a decrease in the ratio from .42 to .28. The healthy decrease and low nature of the debt-to-asset ratio means that the firm is increasingly generating assets from non-debt sources. Likewise, the health of the debt-to-equity ratio indicates that the company does not pose a leverage or financial risk to investors. Both measures show that the firm is well positioned to meet long-term debt obligations.

Additionally, ABNB posts negative retained earnings however shows positive growth. While a decrease in this deficit is generally a good sign, negative retained earnings can show that a firm is unable to generate profit to cover its expenses. However, ABNB reports a positive net income and historical decrease in total debt. Concerns surrounding negative earnings are nullified as the firm is profitable from a bottom-line perspective and appears to be using profit to pay down debt and buy back stock.

Statement of Cash Flow Analysis

The Statement of Cash Flows for ABNB showcases a consistently positive operating cash flow growth. Growing CFO figures are a positive sign as they signal that the firm is increasingly able to generate capital from the businesses’ core operations, reducing the need for investments or funding. Additionally, investing cash flow and financing cash flow are both reported as having net cash outflows. Net outflows from the CFI can be a positive sign if they are being used to pay down and retire debts or otherwise accumulate non-current assets. The company appears to be doing so as evidenced by decreasing total debt figures. Additionally, the company also reports incurring a non-current deferred tax asset of significant nature, corresponding to an unusually high tax provision in 2023. Likewise, recent net outflows from the CFF are seen as favorable in the case of ABNB as in the firm’s case it is utilizing its cash to repurchase stocks, as referenced in the financial statement notes. Actions such as these serve to increase the favorability of the companies’ leveraged position and raise value for shareholders by decreasing the total amount of common shares in circulation. Further dispelling concerns surrounding substantial negative CFI and CFF, the company posts a consistently positive change in cash flow indicating that CFO inflow adequately covers CFI and CFF inflow. While negative CFF and CFI appear to be common themes throughout the peer group, many peers during the same periods reported negative changes in cash. Companies which consistently show negative cash flows pose a more significant liquidity risk as the long-term strength of liquid assets may be threatened.

Further solidifying the company’s strong cash generating position is the fact that its cash conversion ratio is generally consistent with its peers. In 2022 and 2023 the company posted a ratio of 1.81 and .81 respectively. Ratios at or around one signal to the firm’s operational efficiency as the conversion ratio is a measure of the company’s ability to recognize real CFO inflows from reported Net Income.

 A CCR nearer to one is also a good indication that the company is not manipulating earnings as it shows for every dollar recognized as income, a corresponding $1 cash payment is received by the firm’s operations. Likewise, the measures strength in recent years also indicates that the company is not aggressively accumulating accounts receivable as confirmed by the Balance Sheet analysis.

Upon additional analysis of the of the net income vs. the cash flow from operations, throughout the 4-year span analyzed, CFO has generally remained above net income and both have grown at a consistent rate, signaling high earnings quality, generated through sustainable activities. However, according to the firm’s 2023 filings, we observe net income overtake a flatlining CFO, while maintaining a significantly higher growth rate. The formation of this pattern warrants caution as it signals that the firms accounting for recognized income is potentially not coming from sustainable business activities and is conceptual in nature. As mentioned above in the analysis of the Income Statement, the firm recognized a substantial tax provision credit in 2023 which positively affects net income. With this addition to net income being non-sustainable, the firm needs to increase operational cash flow or risk earnings quality degradation. (Note: Statement of cash flows presented in direct format, no conversions required)

Price Evaluation: Fair Value

At the time of this composition, the stock price for ABNB was $146.88. I believe that this is a fair valuation for the company currently. Relative to the firm’s peer group, it maintains a relatively low stock price in comparison. When examining the company’s P/E ratio, the firm at first glance appears to be priced at a bargain, at 19.5, compared to its peers with higher P/E ratios. However, it is important to recall that the firm has recognized a non-sustainable tax credit which has positively skewed net income significantly. If we were to remove the $2.7 billion dollar credit affecting net income, the company’s P/E ratio would change to 47.04, far higher than that of its peers. This is due to the significant drop in earnings per share The company’s stronger performance in areas such as cash flow management and historically solid CFO allow the ABNB to enjoy a higher speculative P/E ratio when combined with other items such as consistent revenue growth.

With a price to sales (P/S) ratio of 9.1 compared to MAR’s 3.09 and BKNG’s 6.64, it is indicated that at current price investors are paying more for each dollar of sales per stock outstanding. Additionally, ABNB is trading at a price to book value ratio of 11.41, indicating that the stock is trading at a premium. As noted above, financial statements indicate that the company is exhibiting some healthy signs of growth fueled by operations. Additionally, the company generates sufficient cash for continued operations and revenue gains have been consistent signaling continued market share penetration. With this, I believe that it is reasonable that ABNB stock trades at a premium compared to its peers. This premium accurately reflects the speculative potential for continued earnings for investors as the company continues to grow.

Significant Upsides and Concerns

Upsides

Of the most significant upsides for ABNB is the historical double digit revenue growth that the firm has experienced in recent years. ABNB generally outpaces its peers regarding revenue growth which showcases the ability of the company to consistently grow sales. General revenue growth experienced at the expense of competitors may signal that the firm is stealing market share from its like-industry peers. More concretely, the strength of revenue growth shows that the firm has been able to consistently expand its business, creating more potential opportunities to generate profit and invest in future growth.

Compared to its peers, ABNB maintains a significantly higher gross profit margin. Because of the nature of ABNB’s business it can enjoy much lower costs of revenue in comparison to its peers. Because of ABNB’s unique business model, much of the cost of production is incurred by private hosts which turnover, prepare, and maintain their own private property.

This high gross profit margin indicative of low cost of revenue means the cost of producing one additional dollar of revenue compared to peers is lower and thus conceptually scalable.

The firm appears to be appropriately liquid and maintains cash and quick ratios greater than one signaling that the firm is well positioned to cover short-term liabilities with quick assets. The elevated nature of the quick ratio comparison to the cash ratio is a non-issue and largely affected by accounting practices resulting from a large amount of cash on hand, earmarked but held for hosts upon check-in. Likewise, these figures indicate that the firm is not keeping too much cash on hand and is efficiently deploying capital. Additionally, debt to asset ratios and debt to equity ratios are falling, indicating that a growing amount of company assets are being derived from funding sources other than debt. The firm is also recognizing positive cash inflows as evidenced by the Statement of Cash Flow, and the CFO has historically risen above Net Income at a consistent pace. Likewise, net outflows in CFI and CFF appear to be appropriate as they correspond to greater stock repurchases, the accumulation of non-current assets and the paying down of debt.

Concerns

Of the most concerning issues regarding the position of ABNB lies in the company’s relative Net Profit Margin strength compared to its peers. Since posting a bottom-line profit in 2022, the company has consecutively beat its peers in the category and as of 2023, posts a significant advantage compared to the peer group. However, the firm does not hold the same advantage in operating profit, in fact underperforming compared to the peer group. For the two years that the firm has reported a positive net income, its net income has been higher than its operating income. This scenario presents a concern as it shows that the firm is recognizing accounting income from non-operating sources. In the case of ABNB, this appears to be due to a large tax provision credit which has positively skewed net income. Income realized from non-operating activities should not be considered sustainable and thus represents questionable earnings quality.

The same conclusion can be ascertained by analyzing the company’s cash flow statement. While the company has benefited from growing operations’ cash flow, CFO growth appears to be slowing as of recent. During the same period, net income has continued to rise at a very high rate in comparison and has recently overtaken CFO. This pattern is especially concerning as it further confirms that the firm is increasingly recognizing conceptual revenue without having a corresponding increase in operational cash inflow. Such an observation indicates that the company may struggle to maintain adequate liquidity in the future as it struggles to grow operating cash flow. Further, this represents less than ideal earnings quality as it showcases that the company is not recognizing net income gains from sustainable and cash generating operating activities.