Wall Street thinks Airbnb stock is up 25%, should you buy?

As discretionary funds are depleted, many travelers may cut short their trips or at least reduce their length of stay. Another way they can look to reduce the cost of travel while maintaining travel is to stay at a Airbnb (ABNB -3.54%). I’m not talking about staying in a fancy house with a private pool, but maybe in the basement or some modest accommodation.

This catalyst can allow Airbnb to continue its growth trajectory, even if the economy plunges into a recession. With a 30 analyst average price target of $140.43, implying about a 25% upside, these Wall Street analysts may be thinking the same thing.

Should you participate and buy Airbnb shares?

A record quarter, with more growth to come

Although consumers felt the pressure of inflation during the second quarter, Airbnb still performed fantastically. In the second quarter, Airbnb hit several all-time highs: 103 million nights and experiences booked, $2.1 billion in revenue, and $379 million in net income. These numbers indicate fantastic year-over-year (YOY) and three-year (YO3Y) growth, which compares to pre-pandemic travel.

Metric Annual growth YO3Y growth
Reserved Nights and Experiences 25% 24%
Gross Book Value (GBV) 27% 73%
Revenue 58% 73%

Source: Airbnb.

To top off this excellent second quarter, the forecast for the third quarter was everything investors could hope for. Management expects quarterly revenue to be the highest on record and gross bookings to grow at a similar pace to the second quarter. While they gave no guidance on net profit, they did say the adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin would be around its all-time high of 49%.

It’s hard to argue with those predictions, but the economic situation hasn’t improved since Airbnb gave those predictions on August 2. However, analysts also expect Airbnb’s revenue to hit $2.84 billion, almost right in the middle of Airbnb’s forecast.

The business is running, but how’s the stock?

Airbnb is trading at a reasonable valuation

Airbnb stock is still down nearly 50% from its all-time high, so it’s clear investors don’t have the same outlook as management. However, much of that decline has to contend with Airbnb’s valuation plummeting from unreasonable highs. Airbnb used to trade 20+ times sales, which isn’t sustainable unless you’re growing at an extreme rate with a must-have, non-discretionary product.

The current 10 times the sales is more reasonable, and 25 times free movement of capital Nor is it expensive for a company that is growing as quickly as Airbnb.

However, until Airbnb can prove itself during a recession (not triggered by COVID-19, when little travel has taken place), there will always be skepticism from investors. The current slowdown and perhaps a potential future recession would allow Airbnb to prove its resilience.

Still, there is a bearish argument to be made against Airbnb.

The most important issue is the effect of short-term rentals on housing and rental supply. Dedicating a home to rental on Airbnb removes one from the market that would typically house a long-term tenant. With skyrocketing rents across the country, there are fewer places to look, which has angered many tenants and municipalities.

Cities may regulate the number of short-term rentals or tax them so much that it no longer makes sense to stay in a hotel rather than a traditional hotel. However, I would expect a long legal battle if this happened in one of Airbnb’s main travel cities, meaning the effect of something like this wouldn’t be felt for some time.

This change may not occur at all.

Still, it’s something to keep in mind before investing in Airbnb. The company has long-term tailwinds blowing in its favor and continues to aim for its best-ever quarter in the third quarter, despite the consumer having less discretionary cash on hand.

I think now it’s a an excellent opportunity to establish a position in Airbnb, as the stock has far more long-term upside than the analysts’ 25% project.

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