Value investors looking for shares to buy don’t typically pay attention to high-flying growth names. But sometimes a sharp decline in a company’s share price can create an opportunity.
After a disappointing earnings report, the Airbnb (NASDAQ:ABNB) share price is 31% lower than it was a year ago. That implies a price-to-earnings (P/E) ratio of around 17, but things aren’t as straightforward as they seem.
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Profitability
Airbnb’s revenues for the second quarter of 2024 came in 11% higher than the previous year. This was largely due to higher booking volumes flowing through its platforms.
Unfortunately, management warned that demand in the US is showing signs of slowing. As a result, revenues for the third quarter are likely to be lower than expected.
Worse yet, the company’s costs grew faster than its sales. As a result, earnings per share came in 15% lower than the previous year, despite a reduction in the outstanding share count.
The market didn’t take the news particularly well and it’s easy to see why. When a company like Airbnb is supposed to be in growth mode, news that things might be slowing down is a concern.
Interest and interest rates
I don’t see slow growth over the next three months as a big reason for concern. Various companies have reported weak consumer spending in the US, so I don’t think it should be much of a surprise.
To my mind, the much bigger issue is the company’s profits declining. One reason for this is that earnings fell despite a significant boost to the interest the firm receives on the cash it holds.
Airbnb has $21.6bn in cash, including $10.3bn held on behalf of customers to be paid to hosts. And the interest it receives on this grew from $191m a year ago to $226m in the last three months.
That’s around 40% of the company’s net income – earnings per share would have been even lower without this. The trouble is, I think most of this is at risk if there’s an interest rate cut in the US.
P/E complications
There’s a lot to like about Airbnb as a business. As an asset-light organisation (it doesn’t own the properties it lets) it has huge margins and its size gives it a major advantage over the competition.
The current share price implies a P/E multiple of around 17 based on the company’s earnings over the last 12 months. That looks incredibly cheap, but there are a couple of catches.
One is concern over the durability of the interest income Airbnb is currently receiving. But another is the fact the business benefitted from a one-off tax boost during the third quarter of 2023.
This meant earnings came in higher than they would normally, making the P/E artificially low. That means investors need to investigate what the normalised earning power of Airbnb is.
Is the stock a bargain?
Based on analyst estimates for the next 12 months (which might well change) Airbnb shares are trading at a P/E ratio of around 23. But this is expected to fall to 14 by the end of 2027.
That’s not bargain basement territory, but I don’t think it’s outrageous for a quality company. I therefore wouldn’t be against using the weak short-term outlook as an opportunity to do more research and consider buying.
