Wall Street and Main Street are abuzz with talk of artificial intelligence (AI). Companies are rapidly integrating AI tools, such as Microsoft‘s Copilot and Salesforce‘s Einstein AI. Both are used to automate tasks, utilize data to offer insights, and enhance efficiency.
AI is a terrific industry to invest in, with dozens of stocks from which to choose, but it isn’t the only one to consider. So today, I’ll look at a company outside of AI that could provide terrific returns. I’ll highlight why Airbnb‘s (ABNB 1.17%) business model, financial position, and valuation make it a desirable investment.
Is Airbnb a good stock to own?
There are three primary reasons that Airbnb is a great stock to own:
- Demographic tailwinds
- An efficient business model
- Major stock buybacks
As seen in the chart, vacation rental users are forecast to increase 25% to more than 1 billion globally during the next five years.
Data source: Statista.
Younger demographics tend to favor short-term rentals more than older folks. This tendency favors Airbnb as the younger generations grow and eventually become the majority of vacationers.
COVID-19’s devastating effect on the vacation industry forced Airbnb to switch to a lean business model, and the company hasn’t looked back. Revenue in Q3 increased 10% to $3.7 billion; however, the most impressive metrics are Airbnb’s margins.
Net income reached $1.4 billion for a 37% margin, while free cash flow clocked in at $1.1 billion for a 29% margin. During the past 12 months, 38% of revenue translated to free cash flow. This means that nearly $0.40 went right into the company’s pocket for every $1 of revenue.
The terrific free cash flow generation brings several positives. First, it helps Airbnb fund operations and growth initiatives, like advertising, developing a more personalized app, and promoting hosting. Second, Airbnb has a terrific balance sheet. The company reported $18 billion in current assets against $11 billion in current liabilities last quarter. Long-term debt is just $2 billion, while cash and investments total $11 billion.
Finally, Airbnb returns billions to shareholders in the form of stock buybacks. Buybacks reduce the number of shares outstanding, which increases shareholders’ ownership interest and boosts earnings per share, which typically leads to a higher stock price. Shares outstanding are trending downward, while stock buybacks are increasing, hitting $1.1 billion last quarter:
ABNB Average Diluted Shares Outstanding (Quarterly) data by YCharts
Looking to the future
Because of the prolific free cash flow production, the price-to-free cash flow ratio is my preferred metric for valuing Airbnb. It trades for a similar valuation as its main rival, Booking Holdings (NASDAQ: BKNG), slightly below its recent average and 33% off its peak.
ABNB Price to Free Cash Flow data by YCharts
The stock trades for a fair price that should increase over time due to strong growth tailwinds and significant stock repurchases. In addition, Chief Executive Officer Brian Chesky said on the last earnings call that Airbnb will release new businesses each year, generating $1 billion in revenue annually. This could propel the stock to new heights over the next five years.
Bradley Guichard has positions in Airbnb and Booking Holdings. The Motley Fool has positions in and recommends Airbnb, Booking Holdings, Microsoft, and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
