You may not think of Airbnb (ABNB -1.20%) as a cheap stock.

After all, the home-sharing 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 sector in just a little more than a decade.

On a price-to-earnings (P/E) basis, Airbnb also doesn't seem particularly cheap, trading at a P/E of 38, but savvy investors know that free cash flow often gives a better picture of a company's profitability as cash is ultimately what counts.

Airbnb benefits from a favorable cash conversion cycle because the company collects money from guests before it pays it out to hosts and books it as revenue. In the last four quarters, the company had $3.3 billion in free cash flow, and its enterprise value, which is its market cap minus cash plus debt, is just $55 billion, giving it an enterprise-value-to-free-cash-flow (EV/FCF) ratio of just 16.7, below the S&P 500's P/E of 21. Even if you back out the company's share-based compensation of $676 million, its EV/FCF is just 20, making the stock look like a bargain for its growth potential.

So why is Airbnb's stock so cheap right now? Let's take a look at some of the market's fears about the stock.

A pool at an Airbnb in Milan.

Image source: Getty Images.

The risk factors behind Airbnb

Airbnb's stock fell nearly 50% last year despite its strong growth rate. While rising interest rates and the shift in market sentiment against growth stocks explain some of the sell-off, investors also seem to be taking a dim view of the company's prospects in 2023.

The market seems to believe that a recession is likely to derail the recovery in the travel sector and crash Airbnb's growth. Airbnb wasn't the only travel stock to pull back last year, either, as Expedia fell even further than it did, and Booking Holdings fell 16%, slightly outperforming the S&P 500.

Analysts are expecting Airbnb's revenue to grow just 12% in 2023 and see even slower growth in earnings per share, at just 7%.

Another threat facing the company is increased regulation. Airbnb remains controversial around much of the world as critics charge that the company takes away housing from locals who need it, while supporters say it gives locals a way of earning supplemental income and puts money back into the local economy. For example, a new law in New York City requiring hosts to register is expected to remove as many as 10,000 Airbnb listings. There's a public relations battle still brewing over Airbnb, and the company will need to win it to be successful over the long term.

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

Finally, there's also the argument that Airbnb is starting to saturate the market for home-sharing. Wall Street analysts have pointed to slowing growth in its supply as a headwind, and Airbnb's brand is also well-known around the world at this point. Without a significant increase in room supply, it may be difficult for the company to outgrow the industry.

Why Airbnb's stock is still a buy

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

Similarly, complaints about add-on fees like cleaning have dogged the platform before. Airbnb recently introduced a solution to this, giving guests the option of seeing the total price upfront rather than being hit with extra fees after clicking. That should help alleviate some of that criticism.

Additionally, Airbnb isn't going to replace hotels. In many ways, it's an alternative to hotels rather than a direct substitute. If you're staying alone or as a couple for a night or two and want to be in a downtown area or need to be near an airport, then hotels are probably a better option. On the other hand, an Airbnb is better suited to trips with a family or group of friends or to stay in areas or neighborhoods where there aren't hotels.

And finally, Airbnb actually seems better positioned to outperform in a recession than its peers since its inventory can quickly adapt to economic conditions. For example, the company said that single-room listings rose by 31% in the third quarter as people around the world looked for extra income to cope with the cost-of-living crisis. The company was launched during the last recession, after all, and the concept is appealing as both a way to make extra cash and to 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 looks oversold at its current price. As such, it's worth buying despite the pushback against the platform.