After nearly everything went wrong for tech stocks in 2022, the sector has come roaring back in 2023.
Through February 9, the Nasdaq is up 12.6%, meaning it’s on the edge of a new bull market, according to one definition, as cooling inflation and slowing interest rate hikes from the Fed have lifted growth stocks. Generally, stocks are considered to be in a bull market when an index is up more than 20% from a recent bottom over a sustained period, and the Nasdaq is up 15% from its closing low on December 28.
If you’re looking for a stock that is poised to ride the next bull market, one outstanding choice is Airbnb (ABNB -5.85%), and buying it before it releases its fourth-quarter earnings report on February 14 looks like a no-brainer move right now.
A great stock at a good price
Airbnb has rebounded quickly from its bottom in December. It’s up 40% since then, and the stock still looks well-priced for its growth potential.
The travel industry is enjoying extended tailwinds from the economic reopening, and Expedia just affirmed that those good tidings have continued into the first quarter. The company said in its earnings report that gross bookings grew 20% from 2019 levels in January, a bullish sign for the travel industry as a whole.
Airbnb itself guided for revenue growth of 17% to 23% for the fourth quarter, or 23% to 29% in constant-currency terms, with revenue reaching between $1.8 billion and $1.88 billion. It called for its adjusted EBITDA margin to be 22% or higher, implying a minimum of $396 million.
The company continues to make product improvements as well. For instance, it just revamped its website to make its prices transparent, showing full prices at the beginning of a search rather than at the end. And the company continues to enjoy a number of structural advantages in the travel industry, including its well-known brand and monopoly-like market share in home sharing. Because most of its users come directly to its site to search for a place to stay, the company also spends significantly less on marketing as a percentage of gross bookings than do peers like Booking Holdings and Expedia.
Even after its 40% rebound, the stock is trading at a low valuation. It’s currently valued at 48 times GAAP earnings, but on an enterprise value/free cash flow (EV/FCF) basis, which takes into account its cash balance and free cash flow, it’s much stronger: Airbnb currently trades at an EV/FCF of 20. The discrepancy between EV/FCF and P/E is due to the company’s business model, which allows Airbnb to collect cash up front when a booking is made and disburse it when the guest’s stay begins.
A higher-interest-rate environment also gives Airbnb an advantage because it collects interest on the funds it holds between collecting them and disbursing them. In the third quarter, it generated interest income of $58.4 million, and that number is likely to rise higher in the fourth quarter because interest rates have risen.
What to expect from earnings
Analysts have low expectations for Airbnb going into 2023, calling for revenue growth of just 12% and even slower growth in earnings per share at 8%.
However, Wall Street has underestimated the company’s growth since its 2020 IPO. As the chart below shows, analysts have steadily raised their revenue and EBITDA estimates.
What’s also notable about the increases in estimates is that Wall Street underestimated Airbnb both during the pandemic, when the travel industry was getting crushed, and during the reopening, when travelers returned to cities and other online travel agencies bounced back. Airbnb is clearly able to thrive in different kinds of market environments.
A recession could eventually derail the recovery in the travel sector, but the momentum from 2022 and Expedia’s recent comment about January growth bode well for Airbnb.
As investors prepare for the next bull market, Airbnb stock could take off if the business tops estimates in its fourth-quarter earnings report on Tuesday.