Down 46%, Is It Time to Buy a Discount on This Growth Stock?

There aren’t many businesses that have disrupted an industry like this Airbnb (ABNB 0.89%) has. The alternative accommodation platform, which was founded in 2008, has quickly risen to become a major player in the tourism sector. It became so successful that the company name is often used as a verb.

But Airbnb hasn’t been the best at taking care of its investors. At the time of writing, the stock is trading 46% off its all-time high, a milestone that was reached in February 2021. Time to buy the dip on this. growth stock?

Seeing a slowdown

Airbnb reported financial results for its second quarter (ended June 30), and based on the immediate double-digit drop in shares, the market was not happy with the numbers, with negative attention being paid poor guidance. Executives expect Q3 revenue to rise between 8% and 10% compared to the year-ago period. I guess Wall Street was expecting faster growth.

“In Q3 2024, we expect sequential moderation in year-over-year growth in Nights and Experiences booked compared to Q2 2024,” Airbnb’s latest shareholder letter said.

Furthermore, the company is seeing fewer advance bookings globally as well as “slowing demand from US guests”. This could signal weaker consumer interest in travel for the rest of 2024.

But investors should still remember that Airbnb continues to expand at a healthy pace. Revenue rose 11% to more than $2.7 billion, beating analysts’ estimates. This was driven by a 9% increase in nights and experiences booked.

Focus on the positive

It’s so easy to get caught up in a single quarter’s financial results. But investors need to keep their focus on the long term. Using this framework, there are some positive traits to know about Airbnb.

The company operates in a competitive industry because consumers have many choices when choosing where to stay and which sites to use to book their travel. But Airbnb has developed an economic moat over the years, supported by its presence network effects.

There are over 5 million hosts and 8 million active listings on the platform. And Airbnb says there have been a total of 1.5 billion guest arrivals over time. By increasing the offer and having more places to stay, the service offers many more options for travelers. And the opposite is also true, as more travelers provide a larger customer base for hosts to target.

Taken a step further, Airbnb has worldwide network effects. It is not limited to any city or country. For example, someone in Denver who wants to take a trip to France will benefit from a host in Paris.

Airbnb is also profitable. In the last quarter, the net profit margin was 20%. And the company is consistently generating positive free cash flow of $1 billion in Q3, which was up 16% year-over-year. This impressive profitability reduces financial risk for shareholders.

What about the assessment?

You would think that if a stock is trading 46% off its all-time high and is down 14% in 2024, it would be trading at a core valuation. In this case, it might not be true.

Airbnb shares can be purchased for a the forward price-earnings ratio of 28. This really presents no margin of safety for potential investors. And it represents a 24% premium over the total S&P 500.

The current valuation is far from cheap, but investors should still consider buying the dip, especially if you’re bullish enough to believe that Airbnb has a sustainable and profitable growth path ahead of it.