According to founder Brian Chesky, the Airbnb (ABNB 0.10%) story has only just begun. The online travel and shelter hosting platform is planning major product, marketing, and geographical expansions in the coming years, which he hopes will boost revenue growth for years to come. In its first-quarter earnings announcement, Chesky went into greater detail on how the company plans to grow and updated investors on its financial performance through the first three months of 2023.
Wall Street was not pleased with the report. Shares of Airbnb are down over 10% the day following the announcement, likely because of weak guidance for this upcoming quarter. But as an investor focused on more than the next few months, short-term price drops can allow you to buy a piece of a company you like at a discounted price.
Let's see if now is a good time for investors to take a swing and buy some shares of Airbnb.
Strong but slowing growth
Airbnb's travel platform continued its recovery from the COVID-19 pandemic in the first quarter of 2023. Revenue grew 20% year over year to $1.8 billion, driven by a 19% growth in Nights and Experiences booked in the quarter. On the profitability front, Airbnb posted its first positive Q1 net income, hitting $117 million, with free cash flow of $1.6 billion.
Cash flow is significantly higher than net income in Q1 because of all the cash Airbnb collects from travelers before their stays, giving them a permanent working capital advantage. With interest rates rising, Airbnb can now earn a significant income on these cash balances that it holds for customers, hitting $146 million in interest income through the first three months of 2023.
While there was nothing to be concerned about with this quarter's results, it looks like investors were concerned with the company's second-quarter guidance, which called for revenue growth of between 12% and 16%. This would be a significant slowdown from Q1, as the company is now lapping the travel boom that occurred after the omicron COVID variant dissipated last summer.
Multiple expansion opportunities
With the travel recovery almost finished, investors are worried that Airbnb's growth will slow. But I think management has multiple levers it can pull to keep this business growing at a solid double-digit rate, some in the near term and others over the long term.
First, it recently revamped its "Rooms" category, which is where individuals can host a room in their house/apartment. These are much more affordable than full-home stays, with 80% of rooms costing under $100 a night. Management hopes this can help bridge the affordability gap for potential travelers, especially younger ones who may not have the budgets of wealthier families.
Second, Airbnb is running targeted marketing campaigns in international markets where the company does not currently have a strong presence. Right now, Germany and Brazil are getting major investments and are growing nights booked by 70% and 114% year over year, respectively. In future years, Airbnb plans to do this in other European, Latin American, and eventually Asian markets.
Regarding the longer term, Chesky gave some hints on the conference call that Airbnb wants to expand outside of its core shelter hosting service, with plans for product launches coming in 2024. We don't know the full details yet, but the hints on the call indicate it will involve loyalty programs, transportation, and entertainment. With tens of millions of customers routinely using the Airbnb platform every year, it should have an easy time upselling them with new products if it can get the experience right.
Valuation isn't unreasonable
Over the last 12 months, Airbnb has generated $1.9 billion in net income. At a market cap of $70 billion, the stock currently trades at an enterprise value of $61.4 billion if we subtract out its $8.4 billion net cash position. That gives the stock an enterprise value-to-earnings (EV/E) ratio of 32.3, significantly above the market average, which hovers between 20x and 25x.
ABNB Net Income (TTM) data by YCharts
In a vacuum, this could indicate that Airbnb is overvalued. But buying a stock is not just about what it earned last year -- it is about what it will earn in all future years. If the company can continue growing revenue by 10%+ a year with stable margins, an EV/E over 30 might look cheap a few years down the line. The stock isn't screamingly cheap, but long-term believers in Airbnb's business could do well by buying shares after this recent earnings dip.
