In this bear market, even posting great business results hasn't been enough to stop many companies with growth-dependent valuations from experiencing big stock sell-offs. The Nasdaq Composite index is down by roughly 29.4% from its all-time high (after having been down even further just a few weeks ago), and many growth stocks have seen even steeper pullbacks.
For long-term investors, when a company's business and stock performances diverge, it can provide the potential for strong gains. And if you're seeking opportunities of that type, Airbnb (ABNB 1.17%) looks like a great buy right now. With the stock trading down roughly 53% from its high, long-term investors can build a position in a great company at a price that opens the door for tremendous returns down the line.
Image source: Getty Images.
Airbnb offers plenty for long-term investors to be optimistic about
In terms of its business performance, 2022 was an incredible year for Airbnb. The company emerged from the pandemic-induced travel slowdown to post its best financial results ever, and the strengths and promise of its model were on full display. The third quarter, which includes the heart of the summer travel season, is typically Airbnb's biggest performance driver, and the quality of its results during that period speaks to the strength of the business at large.
Despite currency-exchange headwinds and other challenges, Airbnb grew its revenue 29% year over year in the third quarter to roughly $2.9 billion. The number of nights booked through its platform in Q3 jumped 25% year over year to 99.7 million, total gross booking volume rose 31% to $15.6 billion, and the company posted an impressive 86% gross margin in the quarter.
Shaped by catalysts along these lines, the rental specialist's Q3 net income soared 46% year over year to approximately $1.2 billion -- representing a 42% margin. Adjusting for foreign currency headwinds, its net income in Q3 was up 61% compared to the prior-year period.
ABNB PE Ratio (Forward) data by YCharts.
Airbnb stock trades at roughly 32.5 expected forward earnings, which might look like an overly growth-dependent valuation given today's turbulent market climate. But the company posted net income of roughly $1.57 billion over the trailing 12-month period -- a big swing from the $406.5 million loss it posted across the comparable stretch a year prior.
Its valuation looks even more attractive from a free-cash-flow (FCF) perspective. FCF grew by more than 80% year over year to $960 million in the third quarter, and over the past four reported quarters, Airbnb generated more than $3.3 billion in free cash flow and recorded a margin of 41%. Its current market capitalization of $64 billion has shares trading at about 19.4 times its trailing 12-month FCF -- a valuation that looks quite appealing given that its free cash flow will likely continue to grow in 2023 even with headwinds on the horizon.
Long-term opportunities outweigh near-term challenges
In light of the increasingly difficult macroeconomic backdrop, Airbnb's management guided for sales to increase by between 17% and 23% year over year in the fourth quarter. That admittedly would be a significant deceleration from the growth it posted in Q3, but it's also far from being an indication that the company's long-term growth trajectory has been derailed.
Like most companies, Airbnb would face some challenges in the event of a sustained economic downturn, but it has already shown that it can respond flexibly to adversity and also lay the foundations for profitable growth. When the business faced demand-crushing challenges at the height of pandemic-related social-distancing and shelter-in-place conditions, it drastically reduced its sales and marketing expenses, and made moves to bolster its property listings in rural areas where people could go in order to escape from pressures of being located in densely populated cities.
Airbnb's asset-light business model allows it to respond nimbly to shifting market conditions, and the simple fact is that living and short-term rental accommodations will remain highly in demand. Now that the company's valuation has been pushed down to levels that leave room for big upsides, and with its business looking quite strong on balance, Airbnb stock is a strong buy for long-term investors.
