Airbnb (ABNB -1.68% ) is a global travel facilitator. Unsurprisingly, its business suffered a negative shock at the start of the pandemic. People around the world were much less interested in traveling to new destinations with a deadly virus circulating rapidly.
However, since COVID-19 vaccines started being administered, Airbnb’s activity has rebounded. This is arguably stronger than before the start of the pandemic, but the share price has yet to adjust accordingly.
Airbnb is ahead of the travel rebound
Airbnb reported third quarter revenue of $ 2.2 billion. This was 36% more than in the same quarter in 2019 before the epidemic. If incomes are this high while the pandemic is not yet over, they could increase further once the threat of contracting COVID-19 decreases.
People are drawn to Airbnb because of its great customer value proposition. At the heart of this value is the wide selection of ads that consumers can choose from. The choice is vast, not only in geography but also in the type of property. Whether you’re looking to reserve an entire house or just a small room, you’re likely to find plenty of choices on Airbnb.
This may partly explain why Airbnb is gaining ground in the huge market it serves. Before the pandemic disrupted travel, the annual revenue generated by hotels and resorts was estimated at $ 1.47 trillion in 2019. While the industry as a whole has not rebounded to levels of before the outbreak, Airbnb eclipsed its pre-pandemic sales level. This shows that travelers prefer the convenience of the selection offered by Airbnb.
Rapidly Rising Free Cash Flow Makes Airbnb a Good Business
When Airbnb’s business was devastated at the start of the pandemic, management did not remain in place. They improved the cost structure by reducing marketing, controlling variable expenses and eliminating fixed costs where they could. As a result, when Airbnb’s revenue rebounded above pre-pandemic levels, profits skyrocketed. Indeed, Airbnb reported net income of $ 834 million in the third quarter, up from $ 267 million in the same quarter in 2019.
In addition, robust earnings growth also increases free cash flow. In the third quarter, Airbnb’s 12-month free cash flow reached $ 1.6 billion. This is more than a ten-fold improvement from the $ 194 million recorded in the same period in 2019.
Given all of this great progress, it’s a bit confusing that Airbnb’s stock hasn’t grown much faster – it’s only grown 12% in 2021 so far. Perhaps high and persistent levels of COVID-19 infection are dampening enthusiasm for Airbnb shares. Nonetheless, the rapid increase in free cash flow, coupled with moderate stock price gains, allowed the stock to sell for a bargain.
Airbnb is trading at a price-to-free cash flow ratio of 62, close to its lows of the year. Investors looking for a good business selling cheaply have found one on Airbnb.
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