Airbnb (ABNB -0.14%) has fallen on hard times as a public company. It was first made public in December 2020, and within just a few months, the company’s stock price rose above $200. However, it has since fallen due to widespread selling among fast-growing companies, and shares have fallen more than 45% from that peak.
Shares have continued to slide since the company released its largely upbeat first-quarter earnings report. Here’s why this drop could be a buying opportunity and what the company’s strong quarter signals for its long-term success.
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Airbnb capitalizes on pent-up travel demand
Record travel demand has swept across the United States in recent months, and Airbnb was able to capitalize on this. The company saw the number of nights and experiences booked on its platform hit a quarterly high of 103.7 million, up 25% from the prior year period.
This translated into impressive financial results for the company. Second-quarter revenue rose 58% year-over-year to $2.1 billion, but what really shined was the company’s profitability. Q2 net profit reached $379 million, while free movement of capital exceeded $795 million, representing margins of 18% and 38%, respectively. This is the second highest quarterly net income recorded by Airbnb in the past three years, showing an improving trend towards sustained profitability.
What’s even more remarkable is that Airbnb believes it will continue to benefit from pent-up travel demand in the coming quarters. Management expects third-quarter revenue to grow 26.5% year-over-year to $2.83 billion, and fourth-quarter travel bookings also look strong.
Due to ongoing COVID-19 related lockdowns, travel demand in China and the rest of Asia-Pacific is high, but activity remains depressed. The company is heavily focused on capitalizing on this. Airbnb believes outbound travel demand from consumers in China could increase as the shutdowns ease, and Airbnb CEO Brian Chesky is bracing for that:
One way to prepare for overseas business in China is to make sure we have a very good supply in the neighborhoods where people in China go. This includes Japan and Korea, Southeast Asia and beyond. The next step is just to make sure that once people are ready to travel, our product continues to be updated and the marketing campaign is ready to go.
His innovation pays off
Creating a product that consumers love has been a cornerstone of Airbnb, and this quarter has begun to show signs that this principle is paying off. One of Airbnb’s recent innovations is AirCover, which provides free top-to-bottom coverage for hosts and guests. For hosts, it protects against damage, provides liability insurance, and more. For travelers, it protects against unexpected host cancellations and listings that don’t match what’s advertised, while ensuring safety when vacationing with Airbnb.
Although they may seem small, these additions have been very valuable to Airbnb. The company host Net Promoter Score (NPS) jumped 70 points since introducing AirCover for hosts last year. Additionally, AirCover for customers drove 10% more new bookings.
The company plans to announce even more innovations this winter, showing its continued commitment to creating the industry’s best platform for consumers and hosts.
Is Airbnb a buy?
An announcement that reinvigorated investors this quarter was the buyback program, allowing Airbnb to repurchase up to $2 billion in stock. Some investors might have reservations about this and would prefer Airbnb to invest that money in innovation. However, with $9.9 billion in cash and securities on the balance sheet, Airbnb can afford to do both.
Despite these excellent financial results, the company is trading at a cheap price. Shares trade at 25.6 times free cash flow, well below others traditional hotel inventory As Marriott International (TUE 0.31%) and Hilton around the world (HLT 0.20%).
Not only does the short term look attractive, but the long term does too, given Airbnb’s commitment to innovation. This could allow the company to take market share from competitors that don’t have the same focus on consumers and hosts. Add to that the company’s sustained cash generation and profitability, and Airbnb looks poised to innovate more than anyone in the space.
At this deflated valuation, Airbnb looks like a good deal. I plan to add more stocks to my portfolio soon, and you may want to consider doing the same.
Jamie Louko has positions at Airbnb, Inc. The Motley Fool has positions and recommends Airbnb, Inc. The Motley Fool recommends Marriott International and recommends the following options: Long January 2023 $115 calls on Marriott International. The Motley Fool has a disclosure policy.
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