Airbnb (ABNB 2.77%) has defeated the naysayers once again. Despite various loud complaints from some hosts and guests, the company's financials once again proved its services are incredibly en vogue right now. Fourth-quarter 2022 revenue, earnings per share, and free cash flow were up 24%, 500%, and 21%, respectively, compared to the year prior.
But what about the expensive valuation on Airbnb stock? Sizzling growth like what the company managed the last few years will be tougher to come by, and profit margins are already quite high at Airbnb. Is this top travel and entertainment stock too expensive to buy now?
The case for Airbnb being "cheap"
First, I'd like to acknowledge that Airbnb does trade for a premium when looking at the last trailing-12-month period. Shares trade for 46 times trailing-12-month earnings per share (EPS), or 25 times free cash flow. (On a free cash flow basis, this looks pretty reasonable; more on that momentarily.)
But high valuations in the online travel booking space are commonplace. Just look at giant Booking Holdings (BKNG 2.05%), which isn't a high-growth company like it was in years past. Average Wall Street analysts expect Booking to average a high-single-digit percentage revenue growth rate over the next few years. Yet Booking still trades for a similar premium to faster-growing Airbnb.
Data by YCharts.
Why the premium price for these companies at all? They're asset-light businesses (they don't own any real estate or other travel-related assets themselves) and generate massive profits from their web presence. Airbnb is reaching this type of impressive scale. As CEO Brian Chesky mentioned on the last earnings call, Airbnb's employee headcount was 5% lower at the end of 2022 compared to where it was in 2019, though revenue has increased 75% from that point in time. The free-cash-flow profit margin was a lucrative 40% in 2022.
Given that Airbnb will be investing some cash in the coming years to improve its core service and add some new ones (Chesky said the Airbnb "Summer Release" will feature lots of exciting new things), I think free-cash-flow profit margins could contract a bit from here. But if the company can keep growing revenue at a double-digit pace (the first-quarter 2023 outlook calls for revenue to increase 16% to 21% year over year, which includes anticipated headwinds from a strong U.S. dollar), free cash flow in dollar terms will keep going up.
Therefore, I call shares a reasonable value based on free cash flow.
What of the high price-to-EPS multiple of 46? That will improve, too -- and especially in Q1 2023. In the first quarter of 2022, Airbnb reported EPS of -$0.03. The company is now profitable, so that negative quarter will fall off and be replaced with a positive EPS figure for the first quarter of this year. Based on analysts' one-year forward earnings expectations, Airbnb stock trades for 31 times EPS.
Again, I call shares reasonably valued given the company's outlook and long-term travel trends working in Airbnb's favor. Net income margins and EPS are headed up from here.
Suddenly a shareholder-friendly business
There's another reason Airbnb stock looks reasonable. As soon as it began cranking out consistent profits, management put a stock repurchase plan in place to begin returning excess cash to shareholders. Chesky noted that Airbnb repurchased $1.5 billion in shares in the past five months alone (since autumn 2022).
Stock buybacks are a wonderful bonus, as they reduce a company's share count over time. That means higher EPS and free cash flow on a per-share basis for shareholders. I remain a buyer of Airbnb at this juncture.
Booking Holdings (formerly called Priceline) taught me a valuable lesson in the 2010s: You could wait a very long time for a high-quality business to trade for a cheap valuation. In the meantime, you could be missing out on massive gains in the stock.
Data by YCharts.
Granted, Airbnb isn't the steal-of-a-deal it was a couple of months ago. Nevertheless, if you like the company but are worried about the current stock price, consider a dollar-cost average plan, perhaps buying on a monthly or quarterly basis as you build up to a larger position.
