Why are Airbnb shares so cheap?

You can’t think of Airbnb (ABNB 1.91%) like a cheap stock.

After all, the colocation leader is generally known as a growth stock. The company was founded during the Great Recession and has established itself as one of the most influential players in the travel industry in just over a decade.

On a price/earnings (P/E) basis, Airbnb doesn’t look particularly cheap either, trading at a P/E of 38, but savvy investors know that free movement of capital often gives a better picture of a company’s profitability because cash flow is ultimately what matters.

Airbnb enjoys a favorable cash conversion cycle, as the company collects money from guests before paying it out to hosts and recognizing it as revenue. Over the past four quarters, the company had $3.3 billion in free cash flow, and its enterprise value, which is its market capitalization minus cash plus debt, is just $55 billion. dollars, giving it a ratio of business value to free cash flow. (EV/FCF) of only 16.7, below the S&P500 P/E of 21. Even if you write off the company’s stock compensation of $676 million, its EV/FCF is only 20, which makes the stock look like a bargain for its upside potential. growth.

So why are Airbnb shares so cheap right now? Let’s take a look at some of the market fears surrounding the stock.

Image source: Getty Images.

The risk factors behind Airbnb

Airbnb’s stock fell almost 50% last year despite its strong growth rate. While rising interest rates and shifting market sentiment against growth stocks explain some of the selloff, investors also appear to have a negative view of the company’s prospects in 2023.

The market seems to believe that a recession is likely to derail the travel industry’s recovery and dent Airbnb’s growth. Airbnb wasn’t the only travel stock to pull back last year, either, as Expedia fell even further than he did, and Reservation of credits fell 16%, slightly outperforming the S&P 500.

Analysts expect Airbnb’s revenue to grow just 12% in 2023 and even slower earnings-per-share growth of just 7%.

Another threat facing the company is increased regulation. Airbnb remains controversial in much of the world as critics accuse the company of taking homes away from residents in need, while its supporters say it gives residents a way to earn extra income and reinject money into the local economy. For example, a new law in New York requiring hosts to register is expected to remove up to 10,000 Airbnb listings. A public relations battle is still going on over Airbnb, and the company will have to win it to be successful in the long term.

There is also the perception that Airbnb’s brand and value proposition has deteriorated. Travelers complain about higher prices on the platform as well as excessive cleaning fees. For example, this tweet got over 100 million likes on Twitter.

Finally, there’s also the argument that Airbnb is starting to saturate the roommate market. Wall Street analysts pointed to slowing growth in its supply as a headwind, and the Airbnb brand is also well known globally at this point. Without a significant increase in room supply, it may be difficult for the company to outpace the industry.

Why Airbnb shares are still a buy

These are all valid arguments against Airbnb. However, none of them are particularly new. The business and concept of home sharing has long been a lightning rod for controversy in local communities, many of which have already imposed restrictions on short-term rentals. Airbnb, however, continued to grow thanks to this.

Likewise, complaints about additional fees like cleaning have already hampered the platform. Airbnb recently introduced a solution to this, giving customers the option to see the total price up front rather than having to pay extra after clicking. That should help alleviate some of those criticisms.

Also, Airbnb will not replace hotels. In many ways, it’s an alternative to hotels rather than a direct substitute. If you are staying alone or as a couple for a night or two and want to be in a city center or need to be near an airport, hotels are probably a better option. On the other hand, an Airbnb is more suitable for trips with family or friends or for staying in areas or neighborhoods where there are no hotels.

And finally, Airbnb actually seems better positioned to outperform in recessionary times than its peers since its inventory can adapt quickly to economic conditions. For example, the company said listings for single rooms rose 31% in the third quarter as people around the world sought extra income to help with the cost-of-living crisis. The company was launched during the last recession, after all, and the concept is appealing both as a way to earn extra cash and save money when traveling.

As a disruptor, Airbnb will continue to receive criticism, but none of the threats seem significant enough to derail its long-term growth. The stock appears oversold at its current price. As such, it’s worth buying despite the pullback against the platform.

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