Sometimes beating expectations is not enough to wow investors. Consider the case of Airbnb (ABNB 0.75%), which just reported revenue of $2.5 billion for the three-month period ended June 30 and diluted earnings per share of $0.98. Both results were up double digits over the prior-year period and exceeded Wall Street estimates.
Yet, shares of the vacation rental site slid more than 5% immediately following the announcement. Of course, that's after skyrocketing 66% since the start of 2023. So should investors buy Airbnb shares right now? Let's take a closer look at these latest financial results and try to draw some conclusions about this travel stock.
Slowing growth
Nights and experiences booked, a key performance indicator to understand the health of Airbnb's business, totaled 115.1 million last quarter, up 11% over Q2 2022. That's a massive sum, to be fair, but it was lower than analysts' expectations. And gross booking value (GBV), the dollar amount of all the bookings during the period, increased 13% to $19.1 billion.
The problems is that revenue, nights and experiences booked, and GBV all posted decelerating gains in Q2. This continues a trend that started in the first quarter of 2022. This might be scaring some investors into concluding that the travel surge is starting to come to an end.
And as inflation continues cooling across the economy, Airbnb is seeing this impact firsthand. The average daily rate of $166 was up just 1% year over year.
Despite the notable growth slowdown, management's Q3 guidance, which calls for revenue to increase 16% (at the midpoint), was better than consensus analyst estimates. From the company's perspective, the economic backdrop is solid, even though there are still some recessionary fears out there.
"We're seeing a strong resilience in travel that people are prioritizing travel over other things," CFO Dave Stephenson highlighted on the company's Q2 2023 earnings call. That should give investors confidence.
Looking to the future
A bright note is that the innovation engine keeps running at Airbnb. The business introduced Rooms, allowing travelers to book a private bedroom from a host at an average nightly price of $67. The leadership team views this product introduction as timely, given the uncertain macro environment and consumers' willingness to find affordable accommodations.
Like any tech business out there, artificial intelligence (AI) is becoming a key focal point. For Airbnb, an immediate use case would be to use the technology in a customer service setting in the near term to drive efficiency gains. And over the long term, it could create growth opportunities.
"We do have some pretty big ideas," co-founder and CEO Brian Chesky said on the earnings call. "I think AI is basically like a once-in-a-generation platform shift, probably bigger than the shift to mobile, probably more akin to something like the internet as far as what it can do for new businesses and new business opportunities."
That's a bold statement. But investors should certainly be encouraged by his forward-thinking mentality, with the intention that Airbnb can be a leader when it comes to the new technology.
Network effects
With such a big focus on how businesses are navigating the uncertain economic environment, it can be very easy to get caught up in a single quarter's numbers. As long-term investors, however, it's always critical to take a step back and focus on the bigger picture. This will provide a better perspective about a company's potential.
With that said, one of the most obvious reasons to fall in love with Airbnb is the presence of network effects. By growing the number of hosts and guests on the platform, Airbnb becomes more valuable to its user base over time, a competitive advantage that is getting stronger. And all this scaling can happen without much in the way of reinvestment.
Capital expenditures, in the form of purchases of property and equipment, totaled only $9 million in Q2. This resulted in Airbnb generating $900 million of free cash flow last quarter, equal to 36% of revenue
What about the valuation?
With so much cash in its coffers, Airbnb was able to repurchase $2.5 billion of stock in the trailing-12-month period, a boon for shareholders. Meanwhile, the stock trades at a forward price-to-earnings ratio of 37. That's not cheap, but given Airbnb's proven profitability, coupled with sizable growth prospects, it might be worth paying a premium valuation.
This company is a category disruptor, has a globally dominant presence, and is always trying to find new ways to expand.
