Airbnb (ABNB 0.75%) wasn't supposed to thrive in an economic downturn, and yet it has. Despite what many predicted would be a down year for Airbnb (due to less discretionary spending thanks to inflation), it bucked the trend. This kind of resilience is what I look for in an investment since I don't want a company in my portfolio that is going to struggle during a recession.
Despite this strength, Airbnb's stock is quite cheap, and I think investors will be well-rewarded by taking a position now and holding on to it for many years.
Airbnb has some challenges in a few locations
Airbnb is a leader in alternate stays and experiences, and it showed its strength in the third quarter, with its "nights and experiences booked" segment rising 14%. Furthermore, all regions showed accelerating growth, indicating that Airbnb is still gaining market share on traditional hotels.
Another growth factor is that listings are increasing as well. They were up 19% in Q3, showing that the supply is still rising to meet the demand. This is crucial for Airbnb as fresh listings capture new markets and expand its presence in others.
However, a growing concern is increasing regulation on Airbnbs. For example, New York City has essentially banned Airbnb listings (with a few exceptions). However, the ban isn't working out as intended since fewer than 2% of previous listings are now registered, and some are popping up on unregulated sites like Facebook or Craigslist. Other cities are looking at implementing a similar style of ban, but if they don't work, this trend may reverse.
Regardless, Airbnb's growth rate indicates that losing a few markets hasn't hurt the company. While this is a critical trend to watch, there is enough evidence to show that Airbnb is still thriving.
Looking ahead, Airbnb expects to grow its revenue by around 12% to 14%, so its above-market-average growth should continue. But what makes Airbnb such a bargain buy now?
The stock is far too cheap for its profitability
Airbnb isn't like a traditional hotel in terms of profitability. It's more like a software company, which is why it has posted incredible margins over the past year.
ABNB Gross Profit Margin data by YCharts.
As a result, Airbnb should be valued at a somewhat elevated level. Yet, when you look at forward projections for Airbnb, the stock trades at 16 times forward earnings, less than the S&P 500's 19 times forward earnings.
ABNB P/E Ratio (Forward) data by YCharts.
This odd mismatch displays the market's pessimistic sentiment on the stock. As a result of its cheap stock price, Airbnb management is doing the smart thing and repurchasing shares hand over fist. In Q3, they repurchased $500 million in shares, but with $286 million in stock-based compensation, it boils down to $214 million in actual shares retired or about 0.3% of the company.
Airbnb produced $1.3 billion in free cash flow (FCF) during Q3, so don't be surprised if Airbnb ramps up these purchases once management believes its cash hoard has reached adequate levels.
At the end of the day, Airbnb may have some public relations problems, but its resilience has been noteworthy. With the company producing loads of cash plus trading at a cheap valuation, it makes for a no-brainer investment. Warren Buffett once said it's wise to "be fearful when others are greedy, and to be greedy only when others are fearful."
Many investors are fearful of Airbnb's stock, and it's time to get greedy.
