Stock Market Selloff: Is Airbnb a Buy?

With the S&P 500 down about 19% this year, it’s been a tough 2022 for stock investors. While it’s nice to see their holdings rise steadily, times like these can be opportune for long-term investors to buy shares in companies that still have good prospects.

airbnb‘s (ABNB -1.15%) the stock price has fared much worse than the broader market, falling by a staggering 44%. Of course, you need to put in a lot more work before committing your hard-earned money just because the stock fell sharply. Now would be a good time to review Airbnb’s fundamentals to see if the stock represents a good buying opportunity.

Image source: Getty Images.

Profitable, but with potholes ahead

Airbnb has become a leader in connecting hosts who want to rent their homes with guests who need a place to stay. And the company has grown revenue rapidly.

In the third quarter, sales increased 29% to $2.9 billion. Gross booking value (the dollar amount of bookings) increased 31% to $11.9 billion, primarily due to higher volume, but also increased average daily rate. Airbnb net income grew 46% to $1.2 billion.

Through the first nine months of the year, the company reversed losses from the prior year, reporting a profit of $1.6 billion compared with a loss of $406.5 million last year.

Things seem to be going in Airbnb’s direction, but with the Federal Reserve taking aggressive steps to curb inflation, many economists are predicting a recession, and the travel business could slow as people cut back on vacations. For example, consumers spent 3.5% less on travel in 2008, followed by another 9.8% drop in 2009.

Tough competition

The company continually seeks to attract and retain hosts, but Brian Nowak, Morgan Stanley analyst it has become more cautious about its ability to continue to increase supply. He believes that Airbnb’s ability to grow listings will become more difficult as it becomes a larger company and growth rates return to a more normalized level. That would limit Airbnb’s ability to expand.

Airbnb also faces intense competition for guests. Expedia (EXP -2.25%), with its various products, including Vrbo, with over two million listings, remains formidable. Although Airbnb does not publicly report the number, it is reported to be in the range of five to seven million. Still, Vrbo hosts get access to the entire Expedia network, a huge benefit.

There are also many online travel agencies, websites like tripadvisor (TRAVEL -0.88%)and traditional hotel chains such as marriot (SEA -1.04%). The experience in a hotel is certainly different from that of a rental house, but it is still another option that vacationers can choose.

Airbnb has done a good job growing hosts and guests. But it shares the market with others competing for this slice of the vacation market.

Valuation

The fall in the share price since the beginning of the year has led to a less expensive valuation. The price-earnings (P/E) ratio it has fallen from over 120 to 39. Still, this doesn’t mean Airbnb stock is a bargain.

Compared to the market in general, it is still expensive. The P/E of the S&P 500 is 21, which means that Airbnb shares are selling for almost twice that multiple. While Airbnb has been experiencing rapid revenue growth, with a potentially slowing economy and fierce competition, that may not last.

So even with Airbnb prices plummeting, investors should look elsewhere when hunting for bargains.