Airbnb Is a Great Company That Had a Rough Week. Its Stock Is a Buy.
Shares of the lodging company fell more than 10% this week after the company reduced its financial guidance, but its fundamentals and market position remain strong.
Plenty of medals were won at this year’s Paris Olympics. Airbnb arguably deserved one, too. The company created temporary housing supply for 400,000 spectators in private homes throughout the City of Light, showcasing the power of its platform.
Wall Street isn’t giving Airbnb any medals these days.
Investors have soured on the lodging platform as growth has slowed, as evidenced by the company’s disappointing third-quarter financial guidance. The shares fell more than 10% on the week, to $115. The stock is trading for just over half of the peak it reached in early 2021, after the company’s spectacular initial public offering. Most Wall Street analysts have Neutral or Sell ratings on the shares.
The selloff offers a good entry point for investors in a company that dominates the short-term rental market worldwide, with eight million active listings, more than $80 billion of annual gross bookings, and $11 billion of annual sales.
“The setup is good,” says Richard Clarke, a Bernstein analyst. “Airbnb should continue to gain share from hotels and become ever more global. There is huge optionality with the business.” He has an Outperform rating and a price target of $174 for the stock, a 51% increase from its current value.
Airbnb CEO Brian Chesky has acknowledged that Airbnb has done little outside its core business and says that the company plans to change that. Clarke sees opportunities in travel experiences, like tours and cooking classes, which the company plans to roll out in 2025; sponsored listings allowing hosts to pay for better placement; the introduction of a loyalty program; and a property-management business.
Plus, plenty of open space remains in the world for the San Francisco-based company, as most of its business is in five countries: the U.S., France, the U.K., Australia, and Canada.
Airbnb stock isn’t a bargain, but it is cheaper now than at any time since its IPO. Shares are trading for about 26 times projected 2024 earnings of $4.23 a share, and 23 times estimated 2025 profits of $4.60 a share. These are conservatively calculated earnings estimates that include the expense of the company’s sizable stock compensation.
As an intermediary between hosts and guests, Airbnb doesn’t require much capital. It generates significant free cash flow and the industry’s best margins. The company has ramped up its stock repurchases with $1.5 billion so far this year, and doesn’t pay a dividend.
The stock trades in line with the valuations of hotel leaders Hilton Worldwide Holdings and Marriott International, and at a premium to online travel providers Booking Holdings and Expedia.
Airbnb has a formidable balance sheet with nearly $10 billion of net cash and short-term investments, almost 15% of its current market value of $73 billion. Net cash could double over the next three years depending on the level of buyback activity.
While Airbnb’s second-quarter earnings topped expectations, third-quarter guidance was a disappointment. Airbnb sees 8% to 10% revenue growth, about four percentage points below expectations, and no year-over-year growth in pretax cash flow, against estimates of about a 10% gain. It cited higher marketing spending and “slowing in demand from U.S. guests.”
Analyst Brad Erickson of RBC Capital Markets wrote that “kicking up marketing spend at a moment when demand is softening tends to be the ultimate backbreaker for an Internet stock in our experience.”
Chesky wouldn’t provide any guidance beyond the current quarter, in keeping with company practice. “You get a fear factor,” Clarke says. “Investors over-extrapolate short-term trends.”
“We feel that our growth strategy will more than offset any transitory macro trends,” says Ellie Mertz, Airbnb’s chief financial officer. A key reason for Airbnb’s high profit margins is strong consumer brand recognition, she says. About 90% of the traffic to the website comes directly, meaning Airbnb pays relatively little to drive consumers to its platform.
To stay ahead of rivals, Airbnb has improved the traveler experience. The company has culled 200,000 listings and added a guest favorite icon on rentals that have garnered high scores from travelers. That’s all part of its efforts to improve reliability, which Chesky admitted is the main reason travelers choose hotels over Airbnb.
Like other founder CEOs such as Mark Zuckerberg of Meta Platforms and Elon Musk of Tesla, Chesky, 42, is an asset who brings a passion to the business.
Airbnb has dealt with other setbacks, including a new law last year in New York City, one of the company’s largest markets, that crimped short-term rentals and led to a sharp drop in business.
Consumer-friendly California began requiring that Airbnb disclose some fees related to short-term rentals in response to complaints that the company wasn’t transparent about them.
Chesky said on the earnings call that there is a place for hotels and Airbnbs. If you’re staying for a night or in some business situations, he said, “a hotel is better.” But if you’re with a group, traveling for more than three nights, or in a nonurban area, “Airbnb is better.”
Hotels still outdraw Airbnb by a ratio of nine to one. That’s a big opportunity, and a reason to stick with the well-managed industry leader after its recent setback.