Stock Market Sell-Off: Is Airbnb a Buy? | The Motley Fool

With the S&P 500 down by about 19% this year, it’s been a rough 2022 for stock investors. While it’s nice to see your holdings consistently rise, times like these may prove opportune for long-term investors to pick up shares in companies that still have good prospects.

Airbnb‘s (ABNB -1.15%) share price has done much worse than the overall market, dropping by an eye-popping 44%. Of course, you need to do much more work before committing your hard-earned money just because the stock fell sharply. Now would be a good time to check out Airbnb’s fundamentals to see if the stock represents a good buying opportunity.

Profitable, but potholes ahead

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

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

For the first nine months of the year, the company reversed year-ago losses, reporting a profit of $1.6 billion compared to a $406.5 million loss last year.

Things seem like they’re going in Airbnb’s direction, but with the Federal Reserve taking aggressive action to slow inflation, many economists predict a recession — and the travel business could slow as people cut down on vacations. For instance, consumers spent 3.5% less on travel in 2008 followed by another 9.8% drop in 2009.

Stiff competition

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

Airbnb also faces intense competition for guests. Expedia (EXPE -2.25%), with its various products, including Vrbo, with over two million listings, remains formidable. Although Airbnb doesn’t publicly report the number, it is reportedly in the five- to seven-million range. Still, Vrbo hosts get access to Expedia’s entire network, a major benefit.

There are also many online travel agencies, websites like Tripadvisor (TRIP -0.88%), and traditional hotel chains like Marriott (MAR -1.04%). The experience at a hotel is certainly different than a home renta, but it remains another options 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 stock’s price drop since the start of the year has led to a less expensive valuation. The price-to-earnings ratio (P/E) has fallen from well over 120 to 39. Still, this doesn’t mean Airbnb’s shares offer a bargain.

Compared to the overall market, it remains expensive. The S&P 500’s P/E is 21, meaning Airbnb’s shares sell for nearly double the multiple. While Airbnb has been experiencing rapid revenue growth, with a potentially slowing economy and major competition, that may not last.

Hence, even with Airbnb’s sharp price decline, investors should look elsewhere when bargain hunting.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb and Tripadvisor. The Motley Fool recommends Marriott International and recommends the following options: long January 2023 $115 calls on Marriott International. The Motley Fool has a disclosure policy.