There aren't many businesses that have upended an industry quite like Airbnb(NASDAQ: ABNB) has. The alternative accommodations platform, which was founded in 2008, quickly ascended to become a major player in the travel sector. It has become so successful that the company's name is often used as a verb.
But Airbnb hasn't been the best at taking care of its investors. As of this writing, shares were trading a gut-wrenching 46% off their all-time high, a milestone that was achieved in February 2021. Is it time to buy the dip on this growth stock?
Seeing a slowdown
Airbnb reported financial results for the second quarter (ended June 30), and based on the stock's immediate double-digit dip, the market wasn't pleased with the numbers, with the negative attention going to weak guidance. Executives forecast Q3 revenue to rise between 8% and 10% compared to the year-ago period. I'd guess that Wall Street was expecting faster growth.
"During Q3 2024, we expect a sequential moderation in the year-over-year growth of Nights and Experiences Booked relative to Q2 2024," Airbnb's latest shareholder letter reads.
Moreover, the business is seeing fewer bookings made further in advance globally, as well as "slowing demand from U.S. guests." This could signal softer consumer interest in travel throughout the rest of 2024.
But investors should still remember that Airbnb continues to expand at a healthy pace. Revenue increased 11% to more than $2.7 billion, coming in ahead of analyst estimates. This was driven by a 9% jump in nights and experiences booked.
Focus on the positive
It's so easy to get caught up in a single quarter's financial results. But investors need to keep their attention on the long term. Using this framework, there are some positive traits to know about Airbnb.
The company operates in a competitive industry, as consumers have many options when choosing where to stay and what sites to use to book their trips. But Airbnb has developed an economic moat over the years, supported by the presence of network effects.
There are more than 5 million hosts and 8 million active listings on the platform. And Airbnb says that there have been a total of 1.5 billion guest arrivals over time. By boosting supply and having more places to stay, the service provides much more choice for travelers. And the opposite is also true, as more travelers provide a bigger customer base for hosts to target.
Taken a step further, Airbnb has global network effects. It isn't confined to any single city or country. For example, someone in Denver looking to take a trip to France will benefit a host in Paris.
Airbnb is also profitable. In the past quarter, its net profit margin was a strong 20%. And the company consistently generates positive free cash flow, to the tune of $1 billion in Q3, which was up 16% year over year. This impressive profitability reduces financial risk for shareholders.
What about the valuation?
You'd think that if a stock is trading 46% off its all-time high and is down 14% in 2024, that it would trade at a bargain-basement valuation. In this instance, that might not be true.
Airbnb shares can be purchased for a forward price-to-earnings ratio of 28. This doesn't really present any margin of safety for prospective investors. And it represents a 24% premium to the overall S&P 500.
The current valuation isn't cheap by any means, but investors should still consider buying the dip, especially if you're bullish enough to believe that Airbnb has a durable and profitable growth runway ahead of it.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb. The Motley Fool has a disclosure policy.
