Is Buying Airbnb Stock Below $135 a Smart Idea?

Airbnb (NASDAQ: ABNB) has become so popular that the company's name is often used as a verb when people are looking to travel and book their accommodations. Shares have recently been a disappointment, though, as they are down 2% year to date, as of this writing. Meanwhile, the major market indexes have soared in 2024.

With this top travel stock trading at $133 per share, nearly 40% below its all-time high, is buying Airbnb at this level a smart idea?

Moat and profits

As a two-sided platform with tremendous scale, Airbnb connects millions of hosts and travelers across the globe. The 123 million nights and experiences booked in Q3 serve as clear evidence of the network effects the company enjoys, and this is key to the company's economic moat.

This moat is so important because it makes success extremely difficult for new entrants. Someone launching a new competitor to Airbnb would have to bring hosts and travelers onto the platform, but without a large enough base of either user group, this is a tall order.

For existing rivals to Airbnb, it's hard to match the depth of offerings. Airbnb currently has 5 million hosts and 8 million active listings in 220 countries. It's the default choice for many hosts and travelers, which creates a positive feedback loop.

Airbnb is also consistently profitable. Through the first nine months of this year, Airbnb reported $2.1 billion in operating income, good for a 25% margin. And it generated $1.1 billion in free cash flow (FCF) in Q3, capital that management has used to repurchase outstanding shares.

Airbnb's risks

Airbnb registered impressive growth during the post-pandemic travel boom. In 2021 and 2022, it posted 77% and 40% revenue growth, respectively. Consumer demand for travel was clearly strong.

However, those monster gains are now a thing of the past. After recording an 18% sales increase last year, Airbnb saw the top line expand by just 12% through the first nine months of 2024. The company's performance is stabilizing, so investors expecting the high double-digit growth of years past should temper their expectations.

As is often the case with disruptive and innovative businesses that upend entire industries, which is precisely what Airbnb did to the travel sector, there's always uncertainty around the regulatory landscape that investors need to be mindful of. In this instance, Airbnb's presence in some markets has led some local residents and businesses to push for new rules around short-term rentals.

The fact that Airbnb operates in so many markets, coupled with the fact that no single city represents more than 2% of overall revenue, adds diversification to the business that protects it from downside. However, it may only take a few major cities or countries to adopt laws that limit short-term rentals to kick off a domino effect.

Shares are trading 39% off their peak from Feb. 2021. Don't let that fool you, though. The stock still sells at a forward price-to-earnings (P/E) ratio of 33. This is expensive given FCF is only projected to increase at a 6% annualized pace between 2024 and 2026.

Weigh the two sides

There are valid bull and bear arguments when it comes to Airbnb stock. The bulls will call out the company's powerful network effects, as well as its ability to generate lots of cash. On the other hand, bears will point to slower growth, regulatory risk, and an expensive valuation.

I side with the bears, so I'm keeping the stock on my watch list for now, waiting for a more compelling valuation before making a decision.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb. The Motley Fool has a disclosure policy.