Airbnb (ABNB 1.02%) stock plunged 11% last Wednesday following the release of its Q1 earnings report. While its revenue and bookings grew at double-digit rates, investors seemed unsatisfied with the growth forecast for the second quarter and dumped the stock.
Nonetheless, Airbnb made financial improvements and has shown its ability to foster new lines of business within the short-term rental space. Hence, the question for investors is whether the pullback in the internet and direct marketing retail stock is an opportunity to add positions or a warning to stay away.
Slower growth could be ahead
On the surface, Airbnb seemed to have a solid report. Its revenue of $1.8 billion increased by 20%. New customers are booking Airbnb vacation rentals, and existing guests are staying longer in such properties. Those trends helped its revenue to grow.
Moreover, its profitability continues to rise. It earned a net income of $117 million, up from a $19 million loss in the year-ago quarter. Although it still reported a $5 million operating loss, its $146 million in interest income helped to make it profitable. Still, since its operating expenses include the $240 million in stock-based compensation, revenue is likely covering the company's operating expenses.
Furthermore, Airbnb's free cash flow far exceeded net income, reaching almost $1.6 billion. This is thanks to nearly $1 billion in unearned fees as well as cash from accrued expenses, stock-based compensation, and other sources. That left it considerable capital to invest in its business or return to shareholders.
However, what likely sent the stock plunging was the Q2 outlook. Airbnb forecast revenue between $2.35 billion and $2.45 billion for Q2, representing growth of 12% to 16%. While that represents a modest slowdown, pent-up demand due to the end of lockdowns appeared to lead to a temporary surge in revenue. This means the slower growth may not be as significant as it seems.
Management has a three-pronged plan
Still, even after the sell-off, the stock is down only 5% over the last year. Fortunately, most of the declines from the 2021 highs took place over a year ago, reducing the likelihood of another sustained drop in the stock price.
Additionally, Airbnb's P/E ratio stands at about 40. Though not cheap, it's less than Expedia, owner of Airbnb's most direct rival, Vrbo, which trades at 47 times earnings. And even though Vrbo was the first vacation rental site, Airbnb has done more to popularize the concept.
Now, Airbnb is outlining three strategic priorities. It is working to mainstream the hosting concept in order to increase the number of available properties. It also wants to protect its core service, mainly through tech innovation. To that end, it added over 50 new features or upgrades to improve customer satisfaction and has made plans to add ChatGPT to its platform over the next year.
Finally, it continues to expand beyond its core service. Although it operates in 220 countries on some level, it has not achieved a level of global saturation comparable to Meta Platforms' Facebook or Coca-Cola.
To expand its presence in its markets, it tested its playbook for accelerated growth in Germany and Brazil. Since those became two of the company's fastest-growing markets, it will now take that playbook to other countries. Such innovations should help Airbnb stock over time as it expands its potential customer base.
Consider Airbnb
Considering Airbnb's financial position and competitive advantages, the latest pullback in the stock is a likely buying opportunity. Despite some disappointment, the company continues to log double-digit revenue growth and massive free cash flow.
Moreover, its competitive advantages expand Airbnb's addressable market and help it compete against hotels and other forms of real estate for short-term usage. As Airbnb continues to grow its markets and free cash flow, the stock looks like a no-brainer for growth.
