Not every selloff is a buying opportunity, but when a high-quality stock is down, it's worth taking a closer look.
As a business, Airbnb (ABNB 0.75%) has had a stellar year, making a full recovery from the pandemic and then some. In the third quarter, revenue was up 29% to $2.9 billion, and net income jumped 46% to $1.2 billion. Despite those results, the stock has been moving in the opposite direction this year, down 44% year to date, as the chart below shows.
Airbnb's growth is slowing as the tailwinds from the economic reopening fade, and investors are fearful that a recession will sink the travel industry as travel tends to be sensitive to consumer and business spending.
But with Airbnb stock down by nearly half from the beginning of the year, and the company still rapidly expanding into a huge addressable market, the stock is attracting a lot of interest.
Is it a buy right now? Let's take a look at the charts.
Image source: Airbnb.
Airbnb's valuation
Airbnb, which unlike many growth stocks, reports earnings on a generally accepted accounting principles (GAAP) basis, has seen its valuation steadily shrink this year as earnings per share have soared, and the price has come down. The stock now trades at a price-to-earnings ratio of just under 40, around double that of the S&P 500.
As the chart below shows, the valuation has not only come down substantially over the last year, but it is also only modestly more expensive than its closest peers, Booking Holdings (BKNG 0.53%) and Expedia (EXPE -0.40%), and not too far from top hotel chains Marriott (Nasdaq: MAR), Hilton (HLT -0.89%), and InterContinental Hotels Group (IHG 0.22%). In fact, Hilton is the second most expensive in the group.
ABNB PE Ratio data by YCharts.
On a forward basis, which measures the stocks' valuations based on the next four quarters of earnings estimates, Airbnb also looks very reasonably priced.
ABNB PE Ratio (Forward) data by YCharts.
What's also notable about that chart is that every valuation is lower on a forward basis except for Marriott's, meaning Wall Street is still expecting solid growth in the sector in 2023.
If Airbnb is trading at a similar valuation to its peers, Wall Street seems to be saying that the company isn't much different from the typical online booking agency or even the major hotel chains, but that perspective seems flawed.
The growth story
Through the first three quarters of 2022, Airbnb's revenue is up 45.6% from a year ago and up 76% from the comparable period in 2019, showing the company's performance is well ahead of its pre-pandemic level.
The chart below also tells an important part of the growth story.
ABNB Revenue Growth Estimate for Current Fiscal Year data by YCharts.
In both 2021 and 2022, analysts significantly underestimated Airbnb's revenue growth, hiking their estimates over the course of each year as the company delivered strong results. What's also notable is that even as Airbnb exceeded estimates, the stock price fell sharply over the last two years, a reflection of the shift in market sentiment rather than the company's actual performance.
Next year, analysts are expecting revenue growth of just 12.5%, but given the pattern over the last two years, it wouldn't be surprising if the company easily beats those estimates again.
Comparing Airbnb with 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 has significantly outgrown them compared to 2019 results.
| Company | TTM revenue | 2019 revenue | Growth rate |
|---|---|---|---|
| Marriott | $19.3 billion | $21 billion | -8.1% |
| Booking Holdings | $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 out of four of Airbnb's biggest peers have actually lost revenue, and Booking Holdings has barely increased revenue since 2019. Airbnb's revenue, meanwhile, shows the company has taken significant market share, and it should continue to do that as the travel market evolves toward home-sharing.
Profitability is improving
Revenue growth is meaningless if a company can't convert it into profit. However, Airbnb's profit margins have ramped up as its revenue has.
The chart below shows the operating margins of Airbnb and its four closest peers.
ABNB Operating Margin (TTM) data by YCharts.
As you can see, Airbnb's peers mostly have high operating margins, but the home-sharing specialist saw its profit margin increase the fastest of its group, even as some of its peers experienced more of a recovery in their business over the last year.
Airbnb's profitability should continue to improve as it grows since the company's business model is highly scalable. It also has the benefit of spending almost nothing on capital expenditures, and it allows Airbnb to hold funds in between bookings and stays, on which the company earns interest. As a result, Airbnb's cash profits are even bigger than its GAAP profits.
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 seems likely to do it again next year.
As the company continues to gain market share in the travel industry, its profit margins should grow, and it has a good chance of outperforming both its peers and the overall stock market.
At a price-to-earnings ratio of less than 40, Airbnb looks significantly undervalued. It's a screaming buy at these prices.
