Founded just 15 years ago, Airbnb (ABNB -1.13%) has already changed the world and grown to impressive scale. On the other hand, the company's stock has seen some turbulent trading and now trades down roughly 27% from market close on the day of its late 2020 initial public offering and 51% from its all-time high.
While the stock could continue to face volatility in the near term, I believe Airbnb offers an attractive risk-reward profile for long-term investors at current prices. If you're on the hunt for reasonably valued growth stocks capable of delivering fantastic returns, read on to see why taking a buy-and-hold approach with Airbnb would be a smart move right now.
Image source: Getty Images.
Why is the stock down big?
Airbnb went public at a time when growth stocks were enjoying an almost unprecedented rally, thanks in large part to the low-interest-rate environment. With the subsequent surge of inflation and the Federal Reserve serving up rapid interest rate hikes to combat the trend, investors quickly pivoted away from companies with heavily growth-dependent valuations.
While Airbnb has generally served up very strong business results since its public debut, the market remains somewhat skittish when it comes to growth stocks -- and the possibility of a recession on the horizon means that investors should be exercising caution and only putting their money behind high-quality companies. Despite increasing revenue 20% year over year to reach $1.8 billion and beating Wall Street's sales and earnings targets for the first quarter, the rental specialist's forecast for the current quarter suggested some growth deceleration, and some investors reacted by dumping the stock.
With guidance for sales between $2.35 billion and $2.45 billion in Q2, management's target range calls for sales to increase between 12% and 16% year over year. Even though the business's growth rate is seemingly on track to moderate this quarter, it seems clear that Airbnb is a great company that's in strong shape. And crucially, it's trading at a great price.
Great margins set the stage for huge returns
Airbnb's asset-light business model is one of its greatest strengths. By connecting property renters with those looking for accommodations, the company's expenses are largely limited to platform activity, development, and upkeep costs and sales and marketing. Airbnb is serving up fantastic margins, and its business has become a cash-generating machine.
The rental specialist recorded $117 million in net income in Q1, marking its first ever GAAP profit in the period and improving from a loss of $19 million in last year's quarter. Meanwhile, free cash flow (FCF) rose 32% year over year to reach a record $1.6 billion. That performance brought the company's FCF over the trailing 12-month period to $3.8 billion, representing 44% of total sales across the period.
ABNB PE Ratio (Forward) data by YCharts
With a market cap of roughly $70 billion, Airbnb is now valued at a bargain 17.5 times trailing free cash flow. It also trades at about 30 times this year's expected earnings -- a level that looks cheap in the context of the company's strong earnings growth, market positioning, and long-term expansion opportunities.
A global leader that could supercharge your portfolio
Airbnb now operates in 220 countries and regions around the world and has established itself as a clear-cut leader in its corner of the travel and hospitality industry. Its core service model has proven to be easily adaptable to all the markets it operates in, and the business should be able to continue scaling cost-effectively in conjunction with rising rental-listing supply and increasing demand from renters.
On the heels of its post-earnings sell-off, Airbnb stock has been pushed down to levels that offer huge upside for long-term investors. While its share price has been battered by macroeconomic headwinds and some sales growth deceleration, the company has never looked stronger, and I believe that few stocks are offering a better overall risk-reward profile right now.
