The travel industry is a mixed bag right now. Total US travel expenses are down just a little from 2019. A recession hasn’t materialized (yet), and air travel is strong. For example, Las Vegas recorded its third-highest passenger count ever this summer.
Consumers continue to spend and Airbnb (NASDAQ:ABNB) The third quarter report was spectacular, even though its forecast warned of a drop in demand.
In my last Airbnb article in July, I downgraded the stock from Buy to Sell after rising 40%, as shown below.
It has fallen 13% since then, while the S&P 500 is flat. The share price is more attractive now, so I’m upgrading to Hold and watching closely for a great entry point.
Let’s start with the positive.
How was Airbnb’s Q3 revenue?
Airbnb’s business model is fantastic. the star of the company free cash flow separates it from the pack. That’s why Airbnb and Bookings Holdings (BKNG) are the only travel stocks I will touch in this economy.
I always look at free cash flow before net income. The ultimate measure of any business’s financial success is the money it puts in the owners’ pockets. Two businesses can have the same GAAP net income, but if one has to spend tons of capital on plant, equipment, etc., it’s less attractive.
The Airbnb platform requires very little capital expenditure (CapEx) – less than 1% of
Management focused on a poor business model when COVID-19 crushed travel and never looked back. Airbnb brings in more revenue per employee than its peers, as shown below.
Airbnb reported $1.3 billion in FCF in the third quarter, coming in at $4.2 billion over TTMs with a ridiculous margin of 44%.
As shown below, TTM free cash flow per share jumped above $6 and Airbnb reported nearly $11 billion in cash and investments.
Cash and investments on hand are above $16 per share, and the company has repurchased $3 billion worth of stock since the repurchase program began last year. The total number of diluted shares decreased by 2.5%. With little need for CapEx, shareholders should expect share buybacks to continue in earnest.
Sounds great, but here’s why I’m not buying yet.
Is Airbnb a stock buyback?
Consumers are the engine of our economy, but many of them are running out of gas. The Federal Reserve’s fight against inflation has yet to produce a recession, largely thanks to government spending, but high interest rates and prices are taking their toll. Remember when stimulus checks were issued and Americans were paying off a lot of debt? Well, we’ve loaded those credit cards to record levels, as described below.
No wonder consumer sentiment is lower now than it was during the Covid crash and almost as bad as the Great Recession. The rise in interest rates also takes some time to fully take effect. For example, many people own cars with less than 3% interest and mortgages under 4%. This makes buying a new car or house unattractive, which slows down the economy. It also means their spending power will drop when they need a new vehicle or home, further reducing economic activity. This is just a simple example of the many countries facing the economy.
Let’s face it. We know consumers can’t keep up this frenetic pace forever. Something will give. This was evident in lukewarm management tone after Q3.
Is Airbnb stock overvalued?
Airbnb often attracts the “overrated” label. It is, and it isn’t in my opinion. Its price-free cash flow and EV-to-EBITDA valuations are not outlandish compared to many companies (for example, Microsoft (MSFT) has a price to free cash flow ratio above 40); however, they are significantly higher than Holdings Reservations.
Given the economic situation, I need a significant discount to reverse the dive into a long position.
I said I would buy shares once the stock got close to $100 for action in the summer, and that remains my target. However, combining a desired price with dollar cost averaging is a strategy I use to buy stocks slowly as the price closes in on the target.
selling in-the-money put options is another great way to get in at an attractive price; however, please note that this is a higher risk. For example, the stock never went below $100, but I was lucky enough to enter at a cost average of $108 and sold a $100 put option for $10.65 per share before exiting the stock entirely after the $140 eclipse per share.
Airbnb stock looks a lot more attractive than it did just a few weeks ago, but the discount still isn’t substantial enough for my money. Stay tuned.