First-quarter earnings are arguably the most important reports for any stock to release, as they set the tone for the rest of the year and give investors insight into their current—and potential—holdings. After reporting its own set of first-quarter 2024 results, shares of Airbnb Inc. (NASDAQ: ABNB) fell by 8.5% on what could be the wrong conclusions coming from the market.
After digesting what happened within the company’s financials, investors could renew their hopes to see Airbnb stock return to its former glory and even make potentially new all-time high prices. Markets and analysts give investors enough evidence to believe in Airbnb’s bullish potential, but that’s not all.
Compared to peers like Booking Holdings Inc. (NASDAQ: BKNG) and Trip.com Group Limited Inc. (NASDAQ: TCOM), Airbnb holds the most market attention for good fundamental reason. Investors could soon realize that the price reaction is more part of a broader economic worry within the consumer discretionary sector.
Understanding Investor Worries
After expanding month after month since 2020, the ISM services PMI index has fallen into a contraction, according to its latest reading for April 2024. Because discretionary spending and services stocks like Airbnb fall into this category, investors may have gotten slightly spooked.
Nothing wrong with taking profits – if there are any -though investors should consider if they can stomach the realization of how many percentage points of upside they potentially left on the table.
The services sector isn’t the only one contracting; manufacturing businesses have also been contracting for over 15 months. Because of this, the Federal Reserve (the Fed) may consider cutting interest rates sooner rather than later, even with stubbornly high inflation rates.
Rate cuts could push consumer discretionary spending toward Airbnb, as it is directly tied to domestic and international travel budgets. At the same time, even if the Fed doesn’t cut rates, rent inflation is reported to be one of the main drivers of the sticky U.S. inflation rates experienced today.
Because consumers – in their right minds – won’t lock in leases at record high rates, nor are they looking to finance a new home at 7.5% mortgages and an average home price that is now 32% higher than pre-pandemic prices, Airbnb also becomes a solution for those looking to weather the housing inflation storm.
Airbnb’s Fundamentals Show
The company’s key performance indicators (KPIs), such as gross booking value and nights and experiences booked, rose by attractive rates over the year.
According to management’s shareholder letter, gross bookings jumped by 12% to reach $22.9 billion, with nights and experiences booked advancing by 9.2% during the same period.
Because of these drivers, Airbnb’s revenues rose by 18% over the year, far from the potential fears coming from investors today. Net income broke a first-quarter record of $264 million, or a 12% jump over the year. But here’s where investors can get all the benefits.
Airbnb’s free cash flow (operating cash flows minus capital expenditures) reached $1.9 billion, or a margin of 41%. Using this significant free cash flow, management bought back as much as $750 million worth of stock in the past quarter.
Share buybacks typically mean management – the true insiders – think the stock may be undervalued or has a high probability of heading higher shortly, and that’s something that markets and Wall Street analysts agree on.
Wall Street’s Take: Airbnb’s a Winner
Airbnb analysts could be conservative in their expectations of 16.8% EPS growth in the next 12 months since the company’s reported app downloads rose by 60% over the year, and the past quarter saw EPS growth of 127% alone.
Because of this wide runway ahead for the stock, markets felt comfortable bidding it up in all the important ways. Starting with price action, Airbnb stock trades at 93% of its 52-week high, suggesting bullish momentum ahead.
On a forward P/E basis, or how markets place a value today on tomorrow’s earnings, Airbnb leads the way. A multiple of 30.2x puts Airbnb at 73% above Booking’s 17.4x valuation. Airbnb is also above Trip.com’s 14.8x multiple, or a premium of roughly 104%.
Stocks trade at premium valuations for good reason, and investors can point to the company’s financials when questioned. Analysts at the Mizuho Financial Group also saw good reasons to boost Airbnb’s price targets higher, this time to $200 a share, or 26.5% higher than today’s prices.
Over the past month, despite contracting services data and an inflation-choked housing market, short interest for Airbnb stock declined by 7.4%, meaning bears won’t even act on harmful data, knowing the company’s fundamentals may rise above the current trends.
