The trifecta of a booming travel market, increased consumer spending, and a roaring stock market have propelled shares of Airbnb (ABNB 0.75%) much higher in 2023.
After a rough 2022 for growth companies, a resilient economy has caused many investors to flip their sentiments and become optimistic about the prospects for early-stage companies such as Airbnb, once again. The stock is up over 50% so far this year, handily outpacing the 15% return generated by the S&P 500.
Bulls will argue that the company is showing strong earnings growth and has a large market opportunity to grow into, making the stock a buy even after this huge price increase. Bears, on the other hand, will say that shares now trade at an earnings ratio well above the market average and are therefore overvalued.
So are shares of Airbnb overvalued? Or is this growth party just getting started?
ABNB Total Return Level data by YCharts.
Strong Q2 earnings, but slowing growth
One thing no investor can deny about Airbnb is its ability to grow and simultaneously generate a profit. In Q2 2023, it showed this strength, once again. Revenue grew 18% year over year in the period to $2.5 billion, while net income grew over 70% to $650 million. Its net income margin was a record 26%.
Expanding margins show that Airbnb has built a strong brand on both sides of its travel marketplace (guests and hosts), which allows it to grow without spending gargantuan amounts of money on performance marketing. This makes Airbnb unique, compared to travel-platform competitors such as Booking Holdings or Expedia, which have to spend much more on marketing in order to grow.
Airbnb's revenue is still growing at an 18% rate but is slowing down. This was the slowest revenue growth rate since coming out of the COVID-19 pandemic. Investors should look for Airbnb's revenue growth to stabilize somewhat soon as we get further away from the pandemic travel disruption.
To help the platform continue growing, Airbnb is focusing on getting more people to host their homes on the platform. So far, it looks like this strategy is working, with supply growing 19% year over year to over 7 million in the quarter.
The more supply there is on the platform, the more nights people will stay on Airbnb. The more nights people stay on Airbnb, the more money the company makes. This makes growing supply vital for Airbnb to grow its sales.
Expanding beyond lodging?
With the pandemic disrupting the travel market, Airbnb dropped most of its growth initiatives and focused on perfecting its core hosting service. Now, with the company on a proper footing and consistently profitable, management said it's planning to experiment with new products, once again.
Here's the full quote from the shareholder letter: "We have some big ideas for where to take Airbnb next, and we're building the foundational capabilities for new products and services that we plan to launch in the years to come."
There were no details on what these products will be, but a good guess is that the company will start investing in its "Experiences" category again. The company has paused new submissions for hosts in this category, which are generally tourist-based activities hosted by locals in cities.
Outside of this, your guess is as good as mine as to what the company is planning. But expect an announcement from the company at one of its upcoming product events, which happen twice a year.
It's uncertain whether any of these initiatives will create significant value for shareholders. But it demonstrates the optionality that Airbnb has with tens of millions of people visiting its platform on a regular basis. The company has a ton of room to experiment.
Is the stock overvalued?
Excluding the non-shelter experiments, which have no certainty of success, Airbnb still has a huge market opportunity ahead of it in the travel and shelter market. People spend over $2 trillion on tourism each year, and just a tad under $1 trillion alone on hotels. Last quarter, Airbnb customers spent just $17 billion on the platform around the world, which indicates there's still a lot of growth left for the company if it can continue gaining market share vs. legacy players.
At its current stock price, Airbnb trades at a price-to-earnings ratio (P/E) of 38, which is significantly higher than the S&P 500 average of 25. This isn't a crazy earnings ratio, but it does mean that investors are already pricing in some of this future growth.
ABNB PE Ratio data by YCharts.
If Airbnb can continue growing revenue at a double-digit rate for at least the next few years, the stock is fairly valued at these levels. But it's definitely not cheap unless you think it can become much bigger five to 10 years from now. That's not an impossible task, but also not an easy one for a company that's already quite large.
Airbnb may not be overvalued today, but it's no bargain, either.
