Airbnb's (ABNB -0.29%) stock is up over 10% in the last month after reporting a fantastic third-quarter earnings report. The travel hosting platform is seeing a strong recovery as we slowly come out of the COVID-19 pandemic restrictions around the world, which is providing a tailwind to the business. The company is seeing an increase in demand, higher average daily rates (ADR) for its hosts, and strong margin expansion.
The numbers Airbnb put up were impressive, and it looks like the business is firing on all cylinders at the moment. Here are three reasons to buy Airbnb stock right now and one reason to sell.
1. Strong financial growth and profitability
Airbnb is an online travel platform where people can put up rooms, apartments or entire homes for other people to pay to stay in. It is a classic two-sided marketplace that built a tremendous amount of momentum over the last decade. That was all true until the COVID-19 pandemic came along. The virus crushed travel worldwide, essentially halting all of Airbnb's business last spring. Over the last few quarters, with COVID-19 restrictions around the world slowly going away, Airbnb's business is returning to growth and putting up some solid financial numbers.
In Q3, revenue grew 67% year over year to $2.2 billion and, more importantly, was up 36% year over year from Q3 2019 (before the pandemic started). This recovery has come from an increase in ADR, which is the average rate a host charges for a room. ADRs are up 15% year over year from the same period in 2020.
Since Airbnb is only an online marketplace and doesn't own any of its inventory, the company is seeing robust operating leverage right now. The third-quarter adjusted EBITDA was $1.1 billion, a 49% margin, up from 37% last year and 19% in 2019. The company is also generating a positive net income and has generated $1.8 billion in free cash flow over the last 12 months.
2. Growth in travel flexibility
One of the big reasons Airbnb's business is surging right now is the growth in travel flexibility that has arisen with the work-from-home phenomenon. Millions of people around the world are now untethered from their offices. According to Airbnb's management, this allows many people to work from anywhere, and a lot of the time, they turn to Airbnb to help fulfill their lodging needs.
For example, in the most recent quarter, 20% of nights booked were for stays of 28 days or longer, up from only 14% in 2019. As this trend continues and people around the world are able to take monthly work trips on the Airbnb platform, this can provide a sustainable tailwind for Airbnb's business over the next decade.
3. Continued product innovation
A key reason why Airbnb has separated itself from the competition is the company continues to put out product updates to improve the platform. On Nov. 9, it released more than 50 new product updates to help hosts and guests improve their experiences on Airbnb. If these products keep hosts and guests happier, Airbnb should see better retention within its service, which means people wouldn't want to switch over to a competing platform.
Some of these product updates are small but will incrementally make the Airbnb service better. One update was AirCover, an improved protection service for hosts that provides $1 million in liability insurance, $1 million in damage protection, and quicker reimbursements. A big piece of friction for Airbnb is convincing hosts it's safe to put their places up on Airbnb, so providing better coverage will hopefully persuade more hosts to join the platform.
Other product updates include Wi-Fi speed verification, which is essential for people working from an Airbnb, and a better Translation Engine. Since Airbnb has hosts in almost every country around the world, making it easier for people to communicate with each other should help improve the customer experience. Especially once international travel gets back into full swing.
The one reason to sell: valuation
Airbnb is no doubt a fantastic business, but the stock is currently trading at an expensive valuation. The stock's market cap is $125 billion, which gives it a trailing price-to-free-cash flow (P/FCF) of 75. To make this clearer, if Airbnb grows its free cash flow at a compound annual growth rate (CAGR) of 20% over the next five years, the company will generate under $4 billion in annual free cash flow. This would give the stock a P/FCF of 30 based on the current share price.
That is still not cheap. Especially considering the company on a trailing-12-month basis appears unprofitable. Granted this is largely due to the COVID-19 impact, but an investor would be watching overall income closely. If you're invested in Airbnb, you need to expect super-high growth from this business for many years. With the new updates and prior profitability, it's highly likely the company can return to the black very soon. However, if that doesn't happen, the stock probably won't perform well for shareholders.