Not all liquidations are a buying opportunity, but when a high-quality stock is falling, it’s worth taking a closer look.
As a business, Airbnb (ABNB 1.91%) had a bumper year, fully recovering from the pandemic and more. In the third quarter, revenue rose 29% to $2.9 billion and net income jumped 46% to $1.2 billion. Despite these results, the stock has moved in the opposite direction this year, down 44% year-to-date, as seen in the chart below.
Airbnb’s growth is slowing as the tailwinds of economic reopening fade, and investors fear a recession could sink the travel industry, as travel tends to be sensitive to consumer spending and companies.
But with Airbnb’s stock down nearly half year-to-date, and the company still rapidly expanding into a huge addressable market, there’s a lot of interest in the stock.
Is it a buy right now? Let’s take a look at the charts.
Image source: Airbnb.
The valuation of Airbnb
Airbnb, which unlike many growth stocks, reports its earnings according to generally accepted accounting principles (GAAP), has seen its valuation steadily decline this year as earnings per share have soared and the price has fallen. The stock now trades at a price-to-earnings ratio of just under 40, roughly double that of the stock S&P500.
As the chart below shows, the valuation has not only fallen significantly over the past year, but is also only marginally more expensive than its closest peers, Reserve credits (BKNG 1.98%) and Expedia (EXPE 2.94%)and not too far from the big hotel chains Marriott (Nasdaq: MAR), hilton (HLT 1.39%)and InterContinental Hotel Group (IHG 1.64%). In fact, Hilton is the second most expensive of the bunch.
ABNB PE Ratio given by Y-Charts.
On a forward-looking basis, which measures stock valuations based on earnings estimates for the next four quarters, Airbnb also looks very reasonably priced.
ABNB PE Ratio (forward) given by Y-Charts.
What’s also noteworthy about this chart is that every valuation is lower on a forward-looking basis, with the exception of Marriott, meaning Wall Street still expects solid sector growth in 2023.
If Airbnb is trading at a similar valuation to its peers, Wall Street seems to say the company isn’t much different from the typical online booking agency or even large hotel chains, but that perspective seems misguided.
The growth story
In the first three quarters of 2022, Airbnb’s revenue grew 45.6% from a year ago and 76% from the comparable period of 2019, showing that Airbnb’s performance business are well above their pre-pandemic levels.
The chart below also tells an important part of the growth story.
Estimated revenue growth for ABNB for the current fiscal year given by Y-Charts.
In 2021 and 2022, analysts significantly underestimated Airbnb’s revenue growth, raising their estimates in each year as the company performed strongly. What’s also remarkable is that even though Airbnb has exceeded estimates, the share price has fallen sharply over the past two years, reflecting shifts in market sentiment rather than the company’s actual performance. business.
Next year, analysts are expecting revenue growth of just 12.5%, but given the trend over the past two years, it wouldn’t be surprising if the company easily beat those estimates again.
Comparing Airbnb to its peers based on this year’s revenue growth is difficult because although the home-sharing leader recovered from the pandemic earlier than its competitors, Airbnb significantly outperformed them against 2019 results. .
| Company | TTM turnover | 2019 turnover | Rate of growth |
|---|---|---|---|
| Marriott | $19.3 billion | $21 billion | -8.1% |
| Reserve credits | $16 billion | $15.1 billion | 5.9% |
| Expedia | $11.3 billion | $12.1 billion | -6.7% |
| hilton | $8.2 billion | $9.5 billion | -13.7% |
| Airbnb | $8 billion | $4.83 billion | 67.2% |
Source: YCharts
As you can see, three of Airbnb’s four largest peers have actually lost revenue, and Booking Holdings has barely increased revenue since 2019. Airbnb’s revenue, meanwhile, shows that the company has gained significant market share, and is expected to continue to do so as the travel market evolves towards home sharing.
Profitability improves
Revenue growth is meaningless if a company cannot convert it into profit. However, Airbnb’s profit margins have increased as has its revenue.
The graph below shows the operating margins of Airbnb and its four closest peers.
ABNB Operating Margin (TTM) given by Y-Charts.
As you can see, Airbnb’s peers mostly have high operating margins, but the colocation specialist has seen its profit margin grow the fastest of its group, even as some of its peers have experienced a greater recovery in their activity over the past year.
Airbnb’s profitability should continue to improve as it grows, as the company’s business model is highly scalable. It also has the advantage of spending almost nothing on capital expenditures, and this allows Airbnb to hold funds between bookings and stays, on which the company earns interest. As a result, Airbnb’s cash earnings are even greater than its GAAP earnings.
Is Airbnb a screaming buy?
Based on its valuation, growth rate, and profitability, there’s a lot to like about Airbnb stock right now. Wall Street has underestimated its growth rate in the past and looks set to start again next year.
As the company continues to gain market share in the travel industry, its profit margins should increase and it has a good chance of outperforming both its peers and the broader stock market.
With a price/earnings ratio below 40, Airbnb looks significantly undervalued. It’s a screaming buy at these prices.
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