Airbnb Stock: Key Drivers Indicate Bright Future Despite Sell-Off

Key Points

• Airbnb stock is selling off by as much as 14% after reporting a solid quarterly report, disconnecting from fundamentals.
• The company's drivers currently point to strong financial momentum, and it has no intention of stopping. 
• Betting on a weaker dollar seems counterintuitive, but that's where management is wrong about its current guidance.

The stock market has been on a whipsaw in the past few trading days. As the so-called “Carry Trade” is now unwound in Japan after that country’s central bank hiked interest rates, the bottom for the S&P 500 is now further away than most had initially thought. Of course, when markets sell off, they don’t take any prisoners, and even stocks with strong fundamentals get dragged down.

One of these victims today is Airbnb Inc. NASDAQ: ABNB. This stock plummeted 14% after the market closed on Tuesday, even after reporting strong second-quarter 2024 earnings results. As bearish as this price action may seem, it presents the perfect example for investors to consider giving Airbnb a second look, especially as the American tourism industry is about to rally on a weaker dollar ahead.

Though taking a weak dollar view might seem unpatriotic, none other than Warren Buffett has taken it, as Berkshire Hathaway Inc. NYSE: BRK.A reported to have sold half of its stake in Apple Inc. NASDAQ: AAPL and also closed some of its position in Bank of America Co. NYSE: BAC. But this doesn’t have to mean bad news for everyone, namely for Airbnb stock in the following quarters.

All the Key Drivers Accelerating Airbnb Stock Higher

Each industry and company has its own set of key performance indicators (KPIs), which investors and analysts always consider when making their decisions and recommendations. Here are a few of these indicators, or drivers, that are pushing the envelope for Airbnb.

As in any other business, revenue leads the way. Airbnb reported 11% revenue growth over the past 12 months, but that’s not the only exciting thing inside the company’s press release.

Free cash flow (operating cash flow minus capital expenditures), the lifeblood of any business, jumped by 16% over the year to reach $1 billion, translating into a 41% net income margin. Given that Airbnb is still relatively young, this is surely a welcoming sign since free cash flow typically leads to shareholder benefits like buybacks and dividends.

But before investors dig deeper into the financial implications, here is what happened underneath the hood to enable these metrics to rise in the first place. Gross Booking Value (GBV) rose by 11% over the year, which basically means that the average daily rate in Airbnb locations went up, even ahead of rental inflation in most countries.

Despite these rising prices, users couldn’t put a price on the freedom and flexibility that Airbnb offers, so investors will see a 9% increase in net bookings over the year. This is not expected to stop, as there was a 25% annual increase in global downloads for the Airbnb app or users to be monetized down the line.

Investors and Wall Street See the Benefits of Sticking with Airbnb Stock

With the newfound profitability, seen in a full 12 months of positive free cash flow, Airbnb management started rewarding its shareholders. How? Up to $749 million was allocated toward share repurchases, the most tax-efficient way for investors to get a reward.

This is why Wall Street analysts feel comfortable forecasting up to 14.8% earnings per share (EPS) growth for Airbnb in the next 12 months. More than that, those at Benchmark see a price target as high as $190 a share for Airbnb stock, daring it to rally by 45.6% from where it trades today (plus or minus 12% as it sold off after hours).

Despite a global stock market sell-off currently taking place, Airbnb short sellers are still showing signs of bearish capitulation. Over the past month, Airbnb stock's short interest declined by 9.9% as short sellers opened the way for bullish investors to take their place.

So, knowing that there is so much bullish evidence supporting Airbnb stock's reaching new highs, why has the company shredded a few million in market capitalization after the quarterly results?

Misconceptions Create Opportunities for Airbnb Stock

The stock is selling off after a stellar quarter because management issued a slight warning about its future outlook. An expected decline in U.S. guests is causing a double-digit sell-off, but here’s why that threat might never be realized.

As the weaker dollar bet becomes increasingly popular on Wall Street, investors need to understand one thing. Foreign currencies will strengthen as a direct effect of the dollar becoming weaker, which means that investors might expect a lot of overseas tourists to come to places like Disney World, New York, California, and other American destinations.

With Airbnb’s global reach and popularity on the rise, this might actually turn out to be a potential earnings beat for the next quarter, erasing some—if not most—of the fears instilled by these negative U.S. demand comments.

This is why, unlike other business services sector stocks like Booking Holdings Inc. NASDAQ: BNKG, Airbnb stock trades at a price-to-sales (P/S) premium. A 7.2x valuation for Airbnb will be roughly 42% above Booking’s 5.1x. There is typically a good reason for stocks to trade at premiums over peers; now investors know why that is.