There are lots of takes on why we are at peak Airbnb (ABNB 1.07%). I, for one, think most of them are overstated although U.S. housing market turbulence could cause some hiccups. Airbnb looks well-positioned to keep growing over the long term as travel and experiences become top priorities, especially for younger generations.
That said, there is one risk that could hit Airbnb in 2024. As a result, by one metric, the stock isn't nearly as cheap as it looks. Here's what investors need to know.
NASDAQ: ABNB
Key Data Points
Don't overlook the tax line item
As I recently wrote about with my colleagues Anders Bylund and Billy Duberstein, Airbnb just had another solid quarter in Q3 2023. Revenue was up 14% year over year (excluding currency exchange rates), driven especially by a push into more international markets where Airbnb still has a small presence.
Through the first nine months of the year, revenue gained nearly 19% to $7.7 billion. What makes Airbnb's 2023 run so impressive is that it's been expanding despite rising interest rates and weakening consumer spending in some markets due to those higher rates. Larger peer Booking Holdings has been performing phenomenally well, too (revenue up 27% so far this year), further emphasizing the importance many households have put on travel these days.
Airbnb's net income -- based on generally accepted accounting principles (GAAP) -- has also soared, increasing to $5.1 billion from a little under $1.6 billion during the first three quarters of 2022. However, an important line item needs to be called out here.
Of the $5.14 billion in net income, nearly $2.8 billion is related to a one-time income tax benefit just realized in Q3 2023. This is related to the non-cash valuation allowance on some of Airbnb's deferred tax assets, which can be used to offset liability to Uncle Sam and other governments.
This tax benefit line item won't be recurring in 2024, so don't put too much emphasis on Airbnb's current price-to-earnings ratio of just 15 based on GAAP net income. The stock isn't quite the value it appears.
Is Airbnb stock really cheap?
Taxes and non-recurring items like this can be a limitation of using GAAP net income to assess a stock's valuation. Thus, it's appropriate here to exclude this tax benefit to get a more accurate picture of the company's real value. Let's go with trailing-12-month free cash flow ($4.25 billion) and trailing-12-month EBITDA (earnings before interest, taxes, depreciation, and amortization, $2.89 billion) instead.
Additionally, the price-to-earnings ratio doesn't account for the massive cash and short-term investments Airbnb has on balance, nearly $11 billion at the end of September, offset by debt of just $1.99 billion. Accounting for those items, Airbnb currently has an enterprise value (EV) -- or the market cap plus debt minus cash -- of $72 billion. Thus, as of this writing, Airbnb stock trades for 17 times EV to free cash flow and 25 times EV to EBITDA.
There are many ways to value a business, making fair value assessments highly subjective. But when adjusting for one-time tax benefits, it's clear in this instance that Airbnb's basic valuation metric needs an asterisk. Nevertheless, given the ongoing growth opportunities for Airbnb in the global travel industry and its highly profitable operation,
I think Airbnb still looks fairly valued for its long-term potential. It just may not be as cheap as it appears at first glance as we head into 2024.
