Should You Buy the Dip On Airbnb's Stock?

Airbnb's (ABNB -2.11%) stock has done quite well in 2023, up 30% so far. However, prior to its earnings release, it was up nearly 50%. With that significant pullback, some investors may wonder if it's time to purchase some Airbnb shares before another run-up begins.

Let's look at Airbnb's business and see if the stock is a buy.

Airbnb had a strong Q1 but will slow down in Q2

Airbnb's alternative stay platform has delivered strong results over the past year, even when many were worried that a weaker consumer wouldn't travel as much. Airbnb's first-quarter results directly contradict this notion, as gross booking volume was up 19% year over year, and revenue rose 20% to $1.8 billion.

Additionally, it posted a net income of $117 million -- its first Q1 profit ever. This is critical, as Airbnb's business spikes from spring through fall but doesn't perform as well during the winter. If Airbnb can stay profitable year-round, it will become a more resilient business.

With those positive factors, why is the stock down nearly 11% since its earnings report? It all has to do with the guidance management gave.

For the second quarter, management stated that its nights and experiences booked metric will have "unfavorable year-over-year comparisons," as Q2 2022 was when travel demand started to explode after more people felt safe to travel due to COVID subsiding. Still, they projected revenue to grow anywhere from 12% to 16%, which is still faster than market pace.

This seems like a relatively weak reason to sell the stock off, but it also implies that the rest of the year may not be as strong as the beginning. With the average Wall Street analyst now guiding for 13.4% revenue growth in 2023, Airbnb may not seem like the investment it used to be.

However, I think this is a mistake, as management tends to deliver results on the high end of guidance.

Data source: Airbnb.

Wall Street has also done a terrible job of predicting its profitability, as Airbnb has delivered nearly double the earnings per share (EPS) analysts expected in the past two quarters. So just because Wall Street isn't as keen on Airbnb's stock anymore doesn't mean you shouldn't be.

Looking at its valuation, I'd also say it's a screaming buy.

The stock looks attractively valued

There are multiple ways to value a business. You can use its revenue, EPS, or even free cash flow (FCF). Each has its flaws, but if a company has a legitimate reason to be valued by using all three metrics, I think examining them all is worthwhile.

From a price-to-sales (P/S) standpoint, Airbnb is trading at 8.6 times sales -- almost the lowest level in its entire life as a public company. Although that may seem like an expensive valuation for a travel company, Airbnb's margins are more akin to a software stock's, so that industry is a much better comparison. With 10 times sales usually the average in that field, Airbnb's stock doesn't look that expensive from that standpoint.

Switching to price-to-earnings (P/E), Airbnb's stock doesn't look as cheap.

ABNB PE Ratio data by YCharts

Even when forward earnings are used (which utilizes analyst projections), the stock isn't cheap at 30 times earnings. However, we've already covered how often Wall Street has been wrong in predicting Airbnb's earnings and that the company consistently exceeds expectations. Because of that, I'd say its P/E ratio is reasonable.

Finally, price-to-FCF makes the stock look like a screaming buy. At just 19 times FCF, Airbnb looks attractive. That's a lot of FCF generation for a cheap price and is significantly cheaper than other popular investments like Microsoft (41 times FCF), Apple (28 times FCF), and Alphabet (25 times FCF).

Although Airbnb is currently facing some headwinds, it's a proven executor in a growing industry. It's proved multiple times that it can exceed expectations, and with the stock trading at a great entry level, I think right now is an excellent time to purchase Airbnb shares.