Airbnb (ABNB 0.75%) stock has become a Wall Street favorite this year. Shares of the home rental giant are up over 50% so far in 2023, beating the 30% rally in the Nasdaq Composite index.
Some factors supporting that rally are well known by investors, including Airbnb's impressive earnings and sales growth. But there are other good reasons to feel bullish about the stock, too.
Let's take a closer look at two trends that suggest a long runway for growth ahead, along with one reason why investors might consider selling the stock anyway.
Cash is king
The main headlines out of Airbnb's last earnings report revolved around its impressive sales trends. Revenue jumped nearly 20% in the selling period that ran through late June, pushing second-quarter sales to $2.5 billion. Management cited strong travel demand in the U.S., plus a continuing rebound internationally, as support for those gains.
Cash flow is an even better reason to like the stock. Free cash flow hit $900 million last quarter, up 13% year over year. And Airbnb has generated nearly $4 billion of cash in the past full year, translating into an impressive 43% of sales. Those figures imply unusually strong efficiency for the marketplace business, which can spend freely on growth initiatives today. They also suggest increasing cash returns to shareholders over time.
Long-term wins
Airbnb's success at boosting both demand and supply of rentals has been key to its growth. Yet there's another important expansion avenue for the business: the shift toward longer stays. Management said in a recent conference call with analysts that this tilt is showing up in several ways.
People are increasingly adding an extra night or two to their weekend stays, for example. And there was an acceleration in Q2 of bookings for monthly stays compared to a year earlier. "I think this is just evidence of the incremental flexibility people have post-pandemic," CEO Brian Chesky said.
Combined with Airbnb's growing portfolio of seller and buyer services, this move can help the company outgrow the travel industry for many years.
The reason for caution
The biggest risk for investors here is in overpaying for this high-performing business. And that possibility has increased in recent months. You'd have to shell out roughly 10 times annual sales to own Airbnb stock right now, or several times the valuation of marketplace specialists like eBay.
It's also near the elevated valuation of better-established businesses that Wall Street loves today such as Tesla and Microsoft. In that context, selling Airbnb shares to capture some recent gains doesn't seem unreasonable. It's a consumer discretionary stock located in a highly competitive industry, after all, and shares could become cheaper when the next cyclical downturn hits the travel sector.
Ultimately, though, the positive factors support a premium valuation for this business. If Airbnb can maintain its positive momentum in areas like booking volumes, then its influence will grow in the industry. Its financial strength should expand as well, leading to higher stock buyback spending and a dividend down the line. That's why, if the choice is between buying or selling, the bulls have the stronger argument right now.
