Airbnb (ABNB 1.88%) is a global travel facilitator. Unsurprisingly, its business had a negative shock at the pandemic onset. People worldwide were a lot less interested in traveling to new destinations with a deadly virus rapidly circulating.
However, since vaccines against COVID-19 started being administered, Airbnb's business is bouncing back. It's arguably stronger than before the pandemic onset, but the stock price has not yet adjusted accordingly.
Airbnb is ahead in the travel rebound
Airbnb reported revenue of $2.2 billion in the third quarter. That was 36% higher than in the same quarter in 2019 before the outbreak. If revenue is this high while the pandemic is not yet over, it could go even higher once the threat of contracting COVID-19 diminishes.
Folks are attracted to Airbnb because of its excellent customer value proposition. The broad selection of listings consumers can choose from is at the core of that value. The choice is expansive, not just in geography but also in the type of property. Whether you are looking to book an entire home or just a tiny room, you are likely to find plenty of selection on Airbnb.
That can partly explain why Airbnb is gaining traction in the massive market it's serving. Before the pandemic disrupted travel, annual revenue generated by hotels and resorts was an estimated $1.47 trillion in 2019. While the industry as a whole has not rebounded to levels before the outbreak, Airbnb has eclipsed its pre-pandemic sales level. That highlights that travelers prefer the convenience of the selection Airbnb offers.
Rapidly rising free cash flow makes Airbnb look like a bargain
When Airbnb's business was devastated at the pandemic onset, management did not sit still. They improved the cost structure by reducing marketing, controlling variable expenses, and eliminating fixed costs where they could. As a result, when Airbnb's revenue rebounded above pre-pandemic levels, profits soared. Indeed, Airbnb reported a net income of $834 million in Q3, compared to $267 million in the same quarter in 2019.
Moreover, robust profit growth is increasing free cash flow as well. In Q3, Airbnb's trailing 12-month free cash flow reached $1.6 billion. That's a more than tenfold improvement from the $194 million at the same time in 2019.
Considering all of that excellent progress, it's a little perplexing to see Airbnb's stock has not risen much faster -- it's only up 12% in 2021 so far. Perhaps persistently high levels of COVID-19 infection are putting a lid on enthusiasm for Airbnb shares. Nevertheless, rapidly increasing free cash flow coupled with muted stock price gains has the stock selling at a relative bargain.
Airbnb is trading at a price to free cash flow ratio of 62, near its lows all year. Investors looking for a great business selling at a bargain price have found one in Airbnb.