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I ultimately decided not to buy Airbnb (NASDAQ:ABNB) shares a year ago, when they traded at a price-to-earnings (P/E) multiple of 17. But at a P/E ratio of 30… I’ve just become interested.
That sounds like it makes no sense, but bear with me. Despite the share price being up 5% in the last 12 months, I think the stock is actually much better value today than it was a year ago.
What’s been going on?
A year ago, Airbnb’s earnings per share were being boosted by a one-off tax gain from the third quarter of 2023. As a result, they were much higher than they might normally be.
Adjusting for excess cash and stock-based compensation, the stock traded at a free cash flow multiple of around 24. In other words, it was more expensive than its P/E ratio implied.
Fast forward to today and I think the situation is different. The price is up around 5%, but the underlying business has been growing.
As a result, the multiple is largely unchanged from where it was a year ago. And with interest rates set to fall, I think the stock is well worth a look.
Q2 earnings
Airbnb’s share price fell 10% this week after the firm’s Q2 update. An 11% increase in bookings meant sales came in 13% higher than the previous year and earnings per share were up 16%.
Those numbers are – in my view – pretty encouraging. The company’s revenue growth has been uninspiring over the last four quarters, but 13% growth shows acceleration.
The reason the stock fell, however, is Airbnb announced a $200m investment in new initiatives. That includes a revamped Experiences division and this is set to weigh on margins in Q3.
The company sees it as an investment, but the stock market is viewing it differently. And it’s easy to see why investors might be sceptical at the moment.
Experiences
Airbnb has tried an Experiences division before – and it wasn’t much of a success. Offerings on the platform were often of uneven quality, limited in number, and poorly advertised.
It’s therefore entirely understandable that investors might be wary about the company trying again on a bigger scale. Especially if it means significant capital expenditures up front.
One of the main attractions of Airbnb is its asset-light model, which results in strong cash generation. So a large cash commitment is something shareholders are likely to take note of.
The big question is whether hosts who previously offered experiences will return to the platform. But CEO Brian Chesky stated on the earnings call that interest has already been strong.
This time it’s different?
Investors being quizzical about Airbnb having another go at a previously unsuccessful venture is entirely justified. But I think the stock falling 10% is an opportunity that’s worth considering.
In light of the weak guidance, it’s easy to overlook the fact that the company’s revenue growth is accelerating. In my view, this makes it worth considering at today’s prices.
A year ago, I thought a P/E ratio of 17 made the stock look cheaper than it was. Today, I think a P/E ratio of 30 distorts the value equation in the opposite direction.
