Airbnb stock could soon be a strong buy (NASDAQ:ABNB)

Take a quick look back

Lastly, I covered Airbnb.NASDAQ:ABNB) November 2023 (time flies!). The article gave the stock a Hold rating and a price target of close to $100. Here is my rating history:

The first two buy ratings worked well, recording quick gains of 26% and 32%, and the sell rating was timely, but the hold in the middle of the graph missed out on more gains.

At that time I wrote:

Frankly, we know that consumers can’t keep up this frenzied pace forever. Something will have to give. This was evident in the lukewarm tone of management after Q3.

Given the economic climate, it would take a significant discount to re-enter a long position.

He said he would buy stocks when the price goes up. Close to $100 Weekly during the summer, and that’s still my goal, but combining a desired price with dollar-cost averaging is a strategy I use to slowly buy stocks as the price gets closer to the target.

Why did Airbnb’s stock price fall?

Expectations that consumer spending would decline have been high for some time, but that may finally be the case.

Here’s an excerpt from the second quarter earnings call:

However, booking lead times are shortening globally, and there are signs that demand from U.S. customers is slowing.

In other words, people are not planning their vacations in advance, which is a sign of weak consumer sentiment.

The stock price plummeted when the news broke.

Why is US demand falling?

The Federal Reserve’s aggressive campaign to curb inflation with “higher for longer” rates is working. The consumer price index fell to 2.9% in July, the first time it has fallen below 3% since the campaign began.

In particular, “eating at home” costs rose 1.1%, while “eating away from home” costs rose 4.1%. Overall energy costs also rose less than the top CPI. This tells us two things. First, inflation for basic goods is declining. Second, many people are still spending money on luxuries like restaurant meals, which is encouraging for Airbnb.

Help is on its way.

The Federal Reserve Chairman signaled on Friday that a rate cut is imminent, which would boost economic growth. But it takes time. Still, it’s a good sign for long-term investors in stocks like Airbnb.

Airbnb is a profitable company.

Despite the slowdown, Airbnb’s Q2 results were still impressive. I like the company’s business model: cash flow-hungry, capital-poor, lean, and profitable.

Management leaned out of necessity during COVID-19 as revenue plummeted. But it was a blessing in disguise for the company’s long-term trajectory. They found that the company was more agile with less bureaucracy, allowing them to do more with fewer employees. Airbnb still has fewer employees than it did before the pandemic, but revenue has more than tripled.

As shown below, sales have increased by 97% and operating cash flow has increased by 140% over the past three years.

Free cash flow margins are over 40%, which allows the company to fund growth, maintain a strong balance sheet, and buy back large amounts of stock.

As of Q2, Airbnb had $11.3 billion in cash and investments and less than $2 billion in long-term debt. Another $6 billion in share repurchase authorizations were announced, representing 8% of the current market cap.

As you can see below, since the program began in mid-2022, the number of diluted shares has decreased by 5%.

It’s not without risk

Wall Street reacted negatively to earnings due to slowing sales growth and a lukewarm outlook.

The long-term sales growth trend post-COVID raises concerns about:

But with employment and wages strong, the Fed may step in to help.

Airbnb has faced a backlash against short-term rentals in major cities. Some have banned them outright, while others have restricted them by issuing a certain number of permits or creating cumbersome procedures. Many homeowners associations also do not allow short-term rentals.

This will be a constant headache for Airbnb. That’s why I now own Booking Holdings (BKNG) instead of Airbnb. They have similar business models, but Booking has less regulatory risk. Still, Airbnb can be bought at a reasonable price, and we’re getting close.

Is it a good idea to buy Airbnb now?

Airbnb’s expected price-to-earnings (P/E) ratio is still higher than Booking’s, despite its current P/E being lower.

Expected P/E is more important.

However, I prefer to evaluate both companies by cash flow, and on this metric the stocks are remarkably similar.

All things being equal, I would prefer Booking Holdings because it is less risky, but Airbnb probably has a bigger advantage.

The ideal entry point I think is still around $100 per share. But that doesn’t mean you should just sit there and wait until then. As the price gets closer to your target, you start adjusting your size. This way, even if the stock doesn’t reach your target price, you won’t miss out completely and you’ll mitigate your short-term risk.

Also, selling cash-backed puts is an attractive option. The November $110 puts will sell for about $500 per lot. If the stock price does not fall below $110, you can keep $500 free. Then, your purchase price will be $105. Of course, this is riskier. If the stock price crashes, you will incur a significant paper loss.

“The stock market is a device for transferring money from the impatient to the patient.”

Warren Buffett

I’m not in a rush to buy Airbnb, but I’m watching closely to see if there’s another downturn.