Airbnb (NASDAQ:ABNB) recently released its Q1 results, showcasing incredible free cash flow strength. The accommodation booking giant continues to grow rapidly, sustaining the post-COVID revenge travel trajectory. Importantly, the company once again demonstrated the high-margin nature of its business by converting the entirety of its operating cash flow into free cash flow. Therefore, I view the post-earnings dip as a buying opportunity. Accordingly, I’ve added to my position and remain bullish on ABNB stock.
Strong Traveler Activity, Product Innovation Drive Strong Growth
Airbnb set foot into FY2024 by delivering strong growth. Revenues grew by 18% compared to last year to $2.14 billion, driven by the robust growth in Nights and Experiences Booked (up 9.5% year-over-year), a modest increase in average day rate (ADR), and the timing of Easter. Revenue growth was also driven by strong traveler activity and product innovation within the Airbnb Platform.
Regarding the first driver, the post-pandemic revenge travel trajectory that began in 2022 and persisted in 2023 has remained robust during the first months of 2024. According to data from The European Travel Commission, foreign arrivals and overnights in Europe rose by 7.2% and 6.5% in Q1, respectively.
According to Collinson, Asia also recorded strong tourism volumes, with India being a major contributor and China seeing the first signs of recovery. The travel industry is undoubtedly booming, and as a Greek citizen residing on a Greek island lately, I am experiencing this firsthand.
In the meantime, innovation within the Airbnb platform keeps travelers engaged, resulting in incremental bookings while promoting exclusivity. Specifically, last week, Airbnb introduced Icons—a new category of unique accommodation experiences hosted by the most popular names in entertainment, art, sports, and more.
From staying at Disney and Pixar’s famed Up House to spending a night at the Ferrari Museum, it’s evident that Airbnb is disrupting the industry with these one-of-a-kind opportunities that boost traffic to its platform.
Unbelievable Free Cash Flow Levels Persist
Besides strong revenue growth, Airbnb once again posted unbelievable free cash flow levels in Q1. I was never really skeptical about whether Airbnb could maintain its sky-high margins. I’ve always expected that its asset-light and capital-light business model could support exceptional profit margins. However, seeing how rich Airbnb’s margins have become after achieving the needed scale is quite literally awe-inspiring.
Of the $2.14 billion in revenues posted in Q1, $1.92 billion was operating cash flow, the entirety of which translated into free cash flow. Yes, it’s this high. Airbnb’s free cash flow margin reached 89%, up from 87% last year, and is the highest in the company’s history. I have made deep dives into the financials of more companies than I can remember, yet I have never seen such high free cash flow margins.
One could bring up the fact that the company’s rich stock-based compensation (SBC) is inflating its free cash flow figures. However, SBC is set to soften notably, moving forward. It grew to $295 million in Q1 from $240 million last year. Yet, beyond 2024, the company anticipates that SBC expenses will grow mostly in line with headcount growth, meaning that long-term revenue and earnings growth should easily overshadow it. Besides, its stock buybacks already offset SBC levels.
Airbnb’s Valuation Remains Reasonable
Following Airbnb’s post-earnings sell-off, I feel that the stock’s valuation is quite reasonable. As I noted in my introductory comments, this is precisely why I added to my position. At a market cap of just over $90 billion post-plunge, Airbnb doesn’t seem particularly cheap at first glance. Still, when you consider its long-term free cash flow generation prospects, its investment case actually does look rather compelling, in my view.
Based on Airbnb’s first-quarter results, second-quarter guidance, overall momentum, and the assumption that the company will be able to convert plenty of its revenues into free cash flow, this metric could easily reach $5 billion this year (currently $4.165 billion in the past 12 months). This means that Airbnb is now trading at about 18x my estimated free cash flow for the year – a rather attractive multiple, in my view, considering the double-digit revenue growth that persists.
Is ABNB Stock a Buy, According to Analysts?
Regarding Wall Street’s view on Airbnb, the stock continues to gather mixed feelings. The stock features a Hold consensus rating based on seven Buys, 18 Holds, and five Sells assigned in the past three months. At $150.11, the average Airbnb stock forecast implies 1.6% upside potential.
If you’re not sure which analyst you should follow if you want to trade ABNB stock, the most profitable analyst covering the stock (on a one-year timeframe) is Ronald Josey from Citi (NYSE:C). He boasts an average return of 18.93% per rating and a 77% success rate. Click on the image below to learn more.
The Takeaway
Airbnb’s Q1 performance clearly underscores its advantageous position in the ongoing travel industry boom. With double-digit revenue growth powered by traveler activity and innovative offerings, coupled with unparalleled free cash flow levels, Airbnb’s investment case appears compelling. In fact, the stock’s post-earnings dip seems to signal a buying opportunity, which I have already taken advantage of to add to my position.
