What happened
Shares of Airbnb (ABNB 0.68%) jumped by 30% in January compared to where they closed out 2022, according to data provided by S&P Global Market Intelligence, as the short-term rental and vacation travel platform continued to benefit from the recovery in the travel sector.
However, Wall Street remains cautious about how far that recovery will go, with investors particularly concerned about how it might impact leisure travel if the U.S. economy slips into a recession.
Image source: Getty Images.
So what
Airbnb stock lost nearly half its value last year as inflation, rising energy costs, and higher interest rates took a toll on consumers. Yet it's also true that since the travel stock's IPO in late 2020, its trajectory has largely been one of heading lower, occasionally offset by brief spikes higher.
That suggests that rather than reflecting a problem with its business, which has been expanding rather consistently, its declining share price had more to do with the market dialing back an excessive valuation. Airbnb had attained a better than $100 billion market cap despite being a money-losing operation, even if it was trying to achieve scale and was willing to sacrifice profits for growth.
Yet on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Airbnb generated $1.5 billion in the third quarter of 2022, a 32% increase from the prior-year period.
That's why the stock still looks pricey today, trading at 47 times trailing earnings, 40 times next year's estimates, and 2 times its sales. It's also trading at 21 times its free cash flow, which certainly doesn't make it a bargain basement stock. But Airbnb is turning into a prodigious generator of free cash flow -- $960 million worth in the third quarter alone -- which should give investors hope about its ability to survive any potential economic downturns.
Now what
As noted, though, analysts remain skeptical about the company's immediate future. Although a number of those following the stock have raised their price targets for it solely because of how far it had fallen, they've mostly set their ratings on it to neutral as we wait to see how the broader economic situation plays itself out this year.
Bank of America analyst Justin Post is also concerned about the potential for a shift in customer preference back to hotels from rental properties. Anecdotally, there are indications that travelers are beginning to balk at the abundance of fees Airbnb charges, the potential scrutiny from property owners, and the narrowing gap between the cost of an Airbnb stay and a hotel stay.
With the Federal Reserve committed to raising interest rates further, macro conditions over the next few months may determine the direction Airbnb heads.
