IMPORTANT NOTES
- Airbnb stock faces several challenges, yet the company has expanded despite them.
- In a downturn, the market leader in home-sharing should outperform its peers.
Bears appear to be winning the war for Airbnb shares, which plummeted nearly 50% last month. - You might consider something other than Airbnb (ABNB 1.91%) as a cheap stock.
After all, the market leader in home-sharing is often regarded as a growth stock. The company was started during the Great Recession, and in just over a decade, it has become one of the most important in the travel business.
Airbnb might not appear particularly cheap on a price-to-earnings (P/E) basis, trading at a P/E of 38, astute investors understand that free cash flow often provides a more accurate view of a company’s profitability because cash is ultimately what counts.
Airbnb profits from a favorable cash conversion cycle since it collects money from guests before paying it out to hosts and recording it as revenue. The company generated $3.3 billion in free cash flow over the last four quarters, and its enterprise value, which is its market cap less cash and debt, is just $55 billion, giving it an enterprise-value-to-free-cash-flow (EV/FCF) ratio of just 16.7, much below the S& P 500’s P/E of 21. Even after deducting the company’s $676 million in share-based pay, the EV/FCF ratio is only 20, making the stock appear to be a steal considering its growth potential.
So, Why is Airbnb stock so cheap? Let’s look at some of the market’s concerns about the store.
The risks associated with Airbnb
Despite its rapid rise, Airbnb’s shares dropped over 50% last year. While rising interest rates and a shift in market sentiment against growth stocks may explain some of the drops, investors appear pessimistic about the company’s prospects in 2023.
The market assumes that a recession will undermine the travel sector’s rebound and halt Airbnb’s expansion. Airbnb wasn’t the only travel stock to fall last year; Expedia plummeted even worse, while Booking Holdings fell 16%, marginally outperforming the S& P 500.
Analysts predict that Airbnb’s sales will increase by only 12% in 2023, with earnings per share rising by only 7%.
Increased regulation is another threat to the company. Airbnb is still contentious in many parts of the world, with detractors claiming that the company takes away housing from locals who need it. In contrast, advocates claim that it allows locals to supplement their income and puts money back into the local economy. For example, a new regulation requiring hosts to register in New York City is projected to result in the removal of up to 10,000 Airbnb postings. There is still a public relations struggle building over Airbnb, and the company will need to win it to be successful in the long run.
There is also a widespread belief that Airbnb’s brand and value proposition have worsened. Travelers have complained about rising rates and hefty cleaning fees on the platform. On Twitter, for example, this tweet received over 100 million likes.
Finally, there’s the notion that Airbnb is beginning to saturate the home-sharing industry. Wall Street analysts have identified slowing supply growth as a headwind, and Airbnb’s brand is well-known globally. With a considerable rise in room supply, the company may be able to outgrow the industry.
Why is Airbnb’s stock still a good buy?
All of these are valid arguments against Airbnb. None of them, though, are very novel. The corporation and the home-sharing concept have long been a contention in local communities, with many already imposing limitations on short-term rentals. Nonetheless, Airbnb has grown as a result of this.
Similarly, complaints regarding extra expenses such as cleaning have dogged the site. Airbnb recently announced a remedy to this problem, allowing visitors to see the total amount upfront rather than being stung with additional costs after clicking. This helps mitigate some of the criticism.
Furthermore, Airbnb will not replace hotels. In many aspects, it is more of an alternative to hotels than a direct equivalent. Hotels are a better alternative if you’re staying alone or as a couple for a night or two and wish to be in a downtown area or near an airport. On the other hand, an Airbnb is better suited for excursions with a family or group of friends or for staying in locations or districts with no hotels.
Finally, Airbnb is better positioned than its contemporaries to outperform during a recession since its inventory can swiftly react to economic conditions. For example, the business reported that single-room listings increased by 31% in the third quarter as people worldwide sought extra income to deal with the cost-of-living crisis. After all, the company was founded during the last recession, and the notion is tempting as a means to earn extra money while also saving money when traveling.
Airbnb will continue to face criticism as a disruptor, but there needs to be more danger to derail its long-term growth. At its current price, the stock is oversold. Despite the platform’s detractors, it’s worthwhile to purchase.
