Even as the company has absolutely crushed every financial metric this past year, Airbnb (ABNB 1.03%) shares sit 53% below their all-time high. While the stock's valuation may have been slightly inflated to start 2022, that is no longer the case in 2023. Although Airbnb has only been public since late 2020, there has never been a better time to purchase the stock. Read on to find out why.
Free-cash-flow production is impressive
When investors last heard from the alternative stay and experience platform, Airbnb's numbers were quite impressive. Nights and experiences booked nearly crossed 100 million in the third quarter of 2022, growing at a 25% pace. This helped propel revenue 29% higher to $2.9 billion.
But investors care about profits, and Airbnb delivered on those too. It posted a net income of $1.2 billion -- indicating an impressive 41% profit margin. Furthermore, Airbnb has now produced $3.3 billion in free cash flow (FCF) over the past 12 months.
With its $64 billion market capitalization, Airbnb has an FCF yield (how much FCF a company produces per its market cap) of 5.2%. Essentially, Airbnb converts 5.2% of its market cap into FCF annually. Now, let's compare that number to others in the hospitality space.
| Company | FCF Yield |
|---|---|
| Airbnb | 5.2% |
| Marriott | 4% |
| Hilton | 3.3% |
| Hyatt | 2.8% |
Data source: Airbnb and YCharts. Table by author.
The higher the yield, the cheaper the stock is, so this metric is a testament to how cheap Airbnb's stock is currently.
While all four companies operate in the hospitality industry, Airbnb's margin profile also tops those of tech companies -- again indicating how cheap the stock is.
No matter how you slice it, Airbnb's stock isn't expensive and looks ripe for picking. But can Airbnb sustain its excellent business results throughout 2023?
| Company | FCF Yield |
|---|---|
| Airbnb | 5.2% |
| Apple | 5% |
| Microsoft | 3.6% |
| Alphabet | 5.1% |
Data source: Airbnb and YCharts. Table by author.
2023 will be a more challenging year
In 2023, the average Wall Street analyst projects Airbnb's revenue growth will slow to a 12.1% pace. So what's driving that projection? An economic slowdown.
Many investors are worried that Airbnb could have a tough time in 2023 thanks to consumers tightening their wallets and not spending on an exotic vacation. While this is a logical conclusion for the current economic environment, it doesn't match what management sees.
In Q3, management commented that demand remained strong and that the number of new hosts is growing. Additionally, they noted a strong backlog for future bookings that won't be realized until the stay ends.
Both are positive signs, and investors will learn more about Airbnb's current state and 2023 outlook when it reports fourth-quarter 2022 earnings in early February.
With where the stock is currently priced, if Airbnb gives an upbeat outlook for 2023, don't be surprised to see a quick pop in the stock price due to its low valuation. Regardless of the one-day stock movement, the long-term trends of the niche Airbnb operates in are strong, and I'm more concerned about what the stock will do over the long haul.
With Airbnb remaining highly profitable and still seeing strong demand and new customer growth, I'd say the investment thesis is on track. Couple that with a cheaply valued stock well off its all-time high, and Airbnb looks like a screaming buy to me.
