Airbnb (NASDAQ: ABNB) has faced plenty of skepticism since going public in 2020. Critics have repeatedly predicted the company’s demise, claiming its business would crumble from events like a recession, regulations on short-term rentals, or competition from hotels.
Yet Airbnb has consistently proven the naysayers wrong. Despite numerous challenges, the company continues reporting stellar growth and profits quarter after quarter. Its impressive track record shows Airbnb has a durable business model that can perform well even in difficult environments.
Airbnb’s Strong Q3 Results Defy Expectations
In Q3 2023, Airbnb once again exceeded expectations. The company generated revenue of $3.4 billion, up 18% year-over-year. It also produced $1.3 billion in free cash flow (FCF), an impressive 39% FCF margin.
These stellar results demonstrate Airbnb’s resilience amidst economic uncertainty. Many analysts predicted consumers would cut back on travel spending due to high inflation and recession fears. But Airbnb bucked that trend, showing travel remains a high priority for consumers even during difficult times.
The company achieved this growth while significantly expanding margins. In Q3 2021, Airbnb’s FCF margin was 26%. So in one year, it improved margins by a remarkable 13 percentage points.
Generating More Cash Than Google
Airbnb’s 39% FCF margin is even higher than Google parent Alphabet, which is legendary for its cash generation abilities. In Q3 2023, Alphabet reported a FCF margin of just 28%.
This demonstrates Airbnb’s potential to become a cash cow. It also gives the company tremendous financial flexibility.
Airbnb can use its excess cash in several productive ways. It can repay debt, fund growth initiatives, acquire companies, initiate a dividend, or repurchase its own shares.
Management Repurchasing Undervalued Shares
In fact, management is already putting some of that cash to work by repurchasing Airbnb shares. The company announced a $2 billion share repurchase program last year.
In just the last four quarters, Airbnb reduced its share count by 2.5%. Buybacks at this pace could have a significant impact over time if maintained.
Why is Airbnb so eager to buy back its own stock? Because management believes shares are undervalued, creating an attractive use of capital.
Repurchases make a lot of sense given Airbnb’s cheap valuation relative to its growth prospects.
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Valuation Still Lags Growth Potential
One metric that illustrates Airbnb’s bargain valuation is the price-to-free cash flow (P/FCF) ratio. This compares a company’s market capitalization to how much pre-tax cash it generates.
Currently, Airbnb trades at a P/FCF ratio around 21. That’s well below high-growth peers like Shopify (P/FCF of 265) and MercadoLibre (P/FCF of 60).
It’s also inexpensive relative to Airbnb’s projected growth. The company expects to grow revenue over 20% annually for the foreseeable future. For a stock poised to generate 20%+ sales growth, a P/FCF ratio below 25 seems very modest.
In other words, Airbnb offers tremendous growth at a discounted price. That’s a recipe for market-beating returns for long-term investors.
One-Time Event Creates Buying Opportunity
Part of the reason Airbnb’s P/E ratio looks high right now is a one-time tax benefit in Q3 2022. The company was able to utilize some deferred tax assets, creating an abnormally high net income figure that skews the P/E ratio.
Excluding this non-recurring item, Airbnb’s P/E ratio would be much more reasonable at around 40. That’s cheap for a company capable of sustaining over 20% revenue growth annually.
So this temporary distortion has created a nice buying opportunity. Savvy investors should take advantage while Airbnb’s valuation disconnect remains.
Impressive Track Record in Tough Environments
While Airbnb has its skeptics, its performance shows real resilience. Despite a once-in-a-lifetime pandemic, regulations, rising rates, and recession fears, it continues posting incredible growth.
And with travelers prioritizing experiences over material goods, Airbnb’s platform stands to gain wallet share in the years ahead. Its global scale and brand reputation provide strong competitive advantages as well.
For investors, Airbnb offers a rare combination of growth, margins, and reasonable valuation. That’s why Airbnb remains a compelling investment today, despite the doubters.