Short-term rental marketplace Airbnb (ABNB 0.75%) was a hot stock when it had its IPO in late 2020, but the technology and growth bear market in 2022 cooled investor sentiment. Today shares are down 40% from their highs, despite appreciating by 50% since January.
The euphoric times in 2020 and 2021 created some eye-popping valuations, and some stocks may take years to recapture highs -- if they ever do. But don't make the mistake of assuming Airbnb falls into that bucket.
Despite its recent rally, Airbnb is a stock you can buy today and still reap strong long-term investment returns from. Let's peel back the layers on this stock to find the opportunity in buying shares today.
A powerful brand with a lucrative business model
Airbnb is a short-term property rental marketplace that lets people rent out and occupy property through its digital marketplace, which users can access online or on a smartphone app. Airbnb funnels traffic and then makes money on fees it charges when people book a stay or an experience.
There are other competitors in this space, along with legacy hotels and other travel companies. But Airbnb has done a masterful job building its brand since its founding in 2008. It's reached the pinnacle of brand power, the point where a company or product becomes a household term to describe what you're selling -- for example, many consumers refer to facial tissue as Kleenex, even when using a different brand.
I've observed, and you might have too, that people are increasingly referring to short-term rentals as Airbnbs. How can you be sure? Go outside and ask 100 strangers if they know what Airbnb is, and then ask if they know what Vrbo is (a competitor). There's a good chance the results will be lopsided in Airbnb's favor.
What's great about the business is that Airbnb doesn't own any real estate. Instead, it's a marketplace that brings hosts and users together, profiting from the cross traffic. Since Airbnb has reached an impressive size with over 120 million nights and experiences booked per quarter, the company has become a profitable and cash-rich business.
Diving into the financials
If you look past Airbnb's collapse during the pandemic (travel essentially halted), the business has grown increasingly profitable as it's grown larger. Today Airbnb is pumping out nearly $4 billion in annual free cash flow, turning more than $0.40 of every revenue dollar into cash.
Airbnb is spending to drive growth; currently, sales and marketing are about 18% of revenue. This has declined over time from more than 30% in 2018. Since Airbnb enjoys increasingly robust brand recognition, one could expect this to continue decreasing as revenue grows, likely driving higher profit margins.
ABNB Revenue (TTM) data by YCharts
Investors can feel good about Airbnb's balance sheet, which is very strong today. There is $10.5 billion in cash on the books against $2 billion in debt. Without much need to continue investing in the marketplace product, management began share repurchases last year and announced a new $2.5 billion program in Q1. Outstanding shares had been increasing due to stock-based compensation (which hurts shareholders because it makes existing shares worth less). However, the repurchases have begun slowly shrinking the share count.
A reasonable price for a wonderful business
Ideally, investors bought shares months ago when the stock was less expensive. But don't fret; the buying window isn't necessarily closed. According to analyst estimates, Airbnb could earn approximately $3.53 per share in 2023. That values the stock at a price-to-earnings ratio (P/E) of 36. Admittedly, shares don't seem cheap at this point, but there's a case for long-term buyers here.
For starters, Airbnb is likely to continue growing. Analysts believe the company's revenue will grow at a low-teens rate for the foreseeable future. Combine that with the share repurchases and potential for higher profit margins as revenue grows, and analysts are looking for annual earnings-per-share (EPS) growth averaging 21% over the next three to five years.
That's a PEG ratio of 1.7. Again, not cheap -- but considering the brand power, substantial cash flows, strong balance sheet, and forward-looking growth, I would argue that's a fair price for an investor interested in holding the stock for five years or longer. In other words, Airbnb is an excellent business at a fair price, so don't be shy about accumulating slowly and letting its strong fundamentals compound your wealth over the coming years.
