Airbnb (NASDAQ: ABNB) is one of the biggest disruptors of the mobile age. The company has fundamentally changed the hotel and lodging industry and essentially invented a new category of short-term accommodation.
Although Airbnb has become a formidable player in the accommodation industry, the stock has not always been a winner, as it faces a number of risks from regulators, increasing competition from traditional online travel agencies such as Booking stocksand the volatility inherent in a cyclical industry such as travel.
This vulnerability was evident in the second-quarter earnings report, when the stock plunged 17% in after-hours trading, hitting its lowest level in over a year. Let’s analyze the earnings report before discussing why the sell-off represents a good buying opportunity for investors.
The recovery of travel traffic is slowing
Airbnb’s momentum from the recent travel boom appears to be waning. Rivals like Booking have already reported a slowdown. The home-sharing leader reported revenue growth of 11 percent to $2.75 billion, but that was the lowest growth in at least two years, even if it slightly beat estimates.
The bottom line was more modest growth. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 9% to $894 million, while net income declined due to higher income taxes from the reversal of a valuation allowance, an increase in stock-based compensation and sales and marketing expenses weighing on profits. On a generally accepted accounting principles (GAAP) basis, earnings per share fell to $0.86 from $0.98, below estimates of $0.91.
Management also said booking lead times were getting shorter, a sign that budgets could be tighter and travelers are becoming more selective about their trips. Finally, the company also pointed to slowing demand in the U.S., which also seemed to weigh on the stock.
For the third quarter, management expected revenue growth of 8 to 10 percent to $3.67 billion to $3.73 billion, below estimates of $3.84 billion. The company also forecast flat EBITDA growth due to continued investments in marketing.
Airbnb shares go on sale
If the sell-off continues after the market closes, Airbnb stock will be cheaper than ever. The market cap will have fallen to $70 billion, but the company just reported free cash flow of $4.3 billion. Based on free cash flow, the stock will then trade at a multiple of just 16. EBITDA was $3.9 billion, which equates to an EBITDA multiple of just 18, which again seems like a good price for a company with Airbnb’s growth potential.
Airbnb also continues to buy back shares, which becomes easier as the stock price falls and serves as a natural tailwind for per-share growth.
The future looks bright
Airbnb still has a huge market to conquer and the company sees great opportunities in bringing penetration rates in countries like Japan, Spain and Italy up to the level of its most mature markets like the US, UK, France, Canada and Australia.
CEO Brian Chesky wants to expand Airbnb’s business into new areas such as extended stays, guest services and host services. He said the company will launch new products around these businesses in 2025. In the conference call, he said:
The new Airbnb… is about much more than just short-term rentals. It’s about long-term stays. It’s going to have our guest services, host services, and lots of new offerings. And you’ll see that in the next year.
In other words, the market accessible to Airbnb is likely to grow significantly in the coming years.
Why Airbnb is a buy
While the share price drop is understandable, Airbnb’s competitive strength remains intact and the growth opportunities are still huge. With the stock trading at a free cash flow multiple of just 16, the price looks great too. Investors can expect long-term growth in the travel industry, especially as its popularity continues to grow.
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Jeremy Bowman holds positions in Airbnb. The Motley Fool holds positions in and recommends Airbnb and Booking Holdings. The Motley Fool has a disclosure policy.
This disruptive tech stock just went on sale. Here’s why I’m buying more of it. was originally published by The Motley Fool
