Airbnb (ABNB 0.75%) investors will get the next round of earnings results from the room and home rental giant in early August. In that second-quarter report, the company will likely show off solid travel demand for the early summer period.
Optimism around that report is one reason Airbnb stock has rallied so strongly in 2023, even trouncing the roughly 30% spike in the Nasdaq Composite Index.
But that enthusiasm might have pushed shares too high for investors to reasonably expect market-beating returns. With that risk in mind, let's take a closer look at whether Airbnb stock is still a buy given its long-term growth and earnings prospects.
Positive momentum
The company's last earnings update hit all the notes that investors love to hear. Growth was surprisingly strong in the first quarter with sales up 20% year over year to $1.8 billion. Nights and experiences booked were also up 19%. For the current period, management is projecting between 12% and 16% sales growth with revenue improving to about $2.4 billion.
A key question heading into the early August announcement is whether a shift in Airbnb's marketing spending cadence will deliver higher returns. In early 2023, management decided to push more spending into the first two quarters of the year on the expectation it will fill the pipeline of rentals into 2024. Follow Airbnb's bookings metric for signs of success on this strategic shift.
Profit margins
Growth alone wouldn't be enough to maintain Airbnb's strong stock price rally. The company has also been impressing Wall Street on the financial front, and it needs to continue excelling here. Free cash flow hit $1.6 billion last quarter, up 32% year over year and up nearly 500% from 2019.
The company only recently became profitable on a GAAP basis, but its last few quarters have shown tantalizing potential. Airbnb's net income margin landed at 6% last quarter, up from a 1% loss in the year-ago period. As the business scales over the coming years, investors are hoping this figure will continue to rise to match the momentum from 2022's full-year margin of 23%.
Looking ahead
Airbnb made dozens of changes to its platform in recent months, including around pricing. It also is aiming to significantly expand supply, in part by adding more apartments and making it easier for more casual hosts to turn extra space into additional income.
We'll learn in a few weeks whether these shifts affected key metrics like average nightly spending, profitability, and bookings volumes. In the meantime, there's no denying this is an expensive stock. Shares are valued at 10 times annual sales, which is roughly what you'd pay to own a dominant, highly profitable tech stock like Microsoft.
This valuation carries the expectation that Airbnb will see many more years of double-digit sales growth as its profitability also rises. The declining prospect of an imminent recession has Wall Street excited about the idea these improvements could arrive rather quickly. On the other hand, such a premium means the stock could tumble if the company announces lackluster growth or warns of a period of elevated spending ahead.
Given this potential for volatility, investors might want to simply watch the stock for now. Several key questions will be answered about its business by mid-August, and you might see a more attractive entry point for shares if the stock falls on short-term concerns.
