Few companies have rocketed out of the gate more powerfully than Airbnb (ABNB 0.10%) in 2023 -- the stock is up about 45% year to date. However, that quick jump might make investors think Airbnb has risen too fast.
Is that the case? Or is there another reason for Airbnb's stellar performance to start 2023? Let's find out.
Solid results and a cheap valuation have driven Airbnb's stock price appreciation
Airbnb is the industry leader in short-term rentals for travelers. It has a global reach, and customers booked 90 million nights booked in the fourth quarter. In fact, Q4 saw the highest number of active bookers in the company's history, demonstrating that its platform has appeal even during economic uncertainty.
To start 2022, I'd argue that Airbnb was significantly undervalued based on its growth rate.
Data source: YCharts.
A ratio of 16 times free cash flow (FCF) is too cheap for a company that grew FCF by 21% in Q4. The market realized this and started picking up shares at the beginning of 2023.
But what set off Airbnb's rise was its strong fourth-quarter results.
As mentioned, Airbnb saw huge demand in Q4, which helped the company deliver $1.9 billion in revenue, up 24%, and the most profitable Q4 ever, with $319 million in net income. Airbnb's 23% full-year profit margin is better than its competitors' gross margins.
| Company | Gross Profit Margin | Net Profit Margin |
|---|---|---|
| Airbnb | 82.2% | 22.5% |
| Marriott | 21.9% | 11.4% |
| Hilton | 30.8% | 14.3% |
| Hyatt | 21.9% | 7.7% |
Data source: YCharts.
Airbnb expects to continue this success into 2023. Thanks to a strong backlog, management projected revenue growth of about 19% for the first quarter. For the full year, Airbnb expects its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin to be roughly equal to 2022's value of 35%, so investors don't need to worry about profitability falling.
That's a solid outlook for a year many investors didn't expect would be great for Airbnb. As a result, the stock rose more than 13% on the day after the company reported earnings.
All of this is excellent news for existing shareholders, but what about those looking to add to their position or establish one?
Wall Street thinks Airbnb has a ton of growth ahead of it
Wall Street analysts on average expect rapid earnings growth for Airbnb during the next four years.
| Year | Earnings-Per-Share Forecast | YOY Growth |
|---|---|---|
| 2022 (Actual) | $2.80 | N/A |
| 2023 | $3.38 | 21% |
| 2024 | $4.04 | 30% |
| 2025 | $5.09 | 26% |
| 2026 | $6.42 | 26% |
Data source: Nasdaq.
That's a strong earnings forecast, and if Airbnb can hit these projections, investors shouldn't worry about the stock's most recent run-up. Valuation matters when you purchase a stock, but how much it matters decreases over time because business results power long-term performance.
So can investors buy Airbnb confidently right now? I'd say yes. The company has proved that it can thrive in less-than-perfect conditions, and it should deliver outstanding results as the economy recovers. Investors will need to watch Airbnb's results throughout 2023 to ensure it doesn't deviate from 2022's performance, but there are no indications that will happen.
Despite the run-up, if you're committed to holding Airbnb's stock for three to five years, right now could be an excellent time to take a position.
