Investors can't seem to make up their minds about Airbnb (ABNB 0.75%). When the home rental platform went public during the pandemic bubble, there was intense optimism for the stock, and its market capitalization reached over $125 billion. In 2022, shares collapsed, sending its market value down to around $50 billion by last December.
Then, this year, these declines reversed as its market value hit close to $100 billion earlier this summer. In recent weeks, investors have been selling off their Airbnb stakes again, with shares sitting at a current market capitalization of around $80 billion. That's some wild volatility in just a few short years.
Long-term-focused investors know that volatility can be your friend as it can give you the chance to buy a high-quality business at a cheap price. Is that what's happening to Airbnb stock right now? Let's take a deeper look.
Strong second quarter
Airbnb's business continued to grow in the second quarter, even after lapping the reopening bonanza in 2022. Revenue grew 18% year over year to $2.5 billion for the period, which is on top of 58% growth in Q2 2022.
The best part? Airbnb has been able to grow its revenue at a double-digit rate with high efficiency. In Q2 of this year, net income hit a record $650 million, or a margin of 26%. Very few companies can boast 18% revenue growth while simultaneously generating profit margins north of 25%, which shows the strength of Airbnb's brand around the globe.
However, even with these strong results, investors have sold off shares of Airbnb in recent weeks, sending the stock from $150 down to around $125, as of this writing. Why? It's hard to pinpoint, but some investors are concerned with decreasing average daily rates (ADRs) on the platform, which is the average cost of a room on Airbnb. ADRs soared during the pandemic and helped the company's revenue increase. A reversal in ADRs could present a headwind to revenue.
What some investors don't understand is that Airbnb is trying to intentionally lower its ADRs, especially in expensive markets like North America. It has purposefully tried to get more cost-conscious lodging onto the platform to improve its customer value proposition for a wide range of income demographics, which will be beneficial to revenue growth over the long term.
While ADRs are a key metric for investors to watch, it's not a make-or-break metric for Airbnb's business. As long as both revenue and profits are growing, the business will be just fine.
Setting up for long-term growth
Speaking of key metrics, perhaps the most important one for Airbnb is the supply on its platform. Hosts are the beginning of its network effect and flywheel. The more hosts there are offering stays on Airbnb around the world, the greater value the Airbnb platform can provide to its customers. This, in turn, increases customer spending (and therefore Airbnb's revenue) and entices even more hosts to join Airbnb to make money, building a virtuous cycle of engagement.
There's good news for shareholders -- management has an intense focus on growing hosting supply. Active listings hit 7 million in Q2 2023, up 19% year over year, with supply growth accelerating every quarter since the initial public offering (IPO). If supply can keep growing at a double-digit rate, Airbnb's revenue should as well. And if profit margins keep increasing, earnings will grow even faster.
On an even longer time horizon, Airbnb is investing in new products to expand beyond its core hosting service. We have scant details on what these products will be, but it will likely include a revamp of its Experiences product, which seemed to stagnate after the pandemic disruptions. CEO Brian Chesky has also mentioned multiple times about building an advertising service for the platform.
Is the stock cheap?
ABNB Revenue (TTM) data by YCharts.
A stock such as Airbnb is hard to value. Yes, it's generating some level of profit today, but it's unclear how fast its revenue and earnings will grow over the next few years. Will it grow 5%, 10%, or 15% a year? Your guess is as good as mine.
What we do know is that over the last 12 months Airbnb's business has generated $2.3 billion in net income. Compared to its market cap of $80 billion, the stock has a price-to-earnings ratio (P/E) of 32. This clearly would be expensive if Airbnb's business was low growth.
But with revenue rising 18% year over year and margins ticking higher, Airbnb has a chance to compound its earnings per share (EPS) at a high rate for many years. If net income doubles over the next five years, Airbnb's P/E would decline to 16, compared to its current market capitalization, which is much lower than the current average for the S&P 500.
Long story short, Airbnb shares look cheap if you believe the growth story will stay intact.
