Airbnb stock bulls went all-in ahead of earnings

Earnings season has begun and markets are more attuned to the potential moves of money coming into the economy in this new cycle. One of the most anticipated changes is the Fed’s proposed interest rate cut this year. With this in mind, it is more important than ever to ensure that your portfolio is not exposed to anything that could seriously impact your performance.

While some investors may start looking for cheap stocks in the coming months, you should look for market momentum and favoritism. When it comes to real estate stocks, there are two paths: the operations/services area, or the more traditional construction stocks, or even REITs (real estate investment trusts). Today there are reasons to believe that returns could be found in the former.

More on why this is the case in a minute. For now, all you should worry about is that investors have grabbed the bull by the horns when it comes to this Airbnb NASDAQ:ABNB action. They are doing this in a predictive effort to ensure they are positioned in this stock ahead of any potential rally once the company announces its earnings release this month. However, in doing so, traders and investors have been negligent in leaving much evidence for the rest of the market to follow.

Here’s a rundown

Airbnb shares are now hitting 52-week high prices and have outperformed the broader S&P 500 index by as much as 12.8% over the past twelve months. This gives the stock the kind of momentum you should be looking for in this ever-changing economy and confirms that the bulls have taken over the stock.

When compared to other real estate operations stocks, such as Zillow Group NASDAQ:Z and also the CBRE Group NYSE:CBRE, no one comes close to Airbnb in its business model, brand penetration and above all its scale. With a market capitalization of $96.9 billion, the markets convey the message that “size matters” because it reflects not only current quality but also future growth.

Even though both Zillow and CBRE are trading above 90% of their 52-week high prices, one factor is creating a huge mispricing opportunity that investors like you can take advantage of today. You see, analysts may be asleep at the wheel in assigning the correct earnings per share growth rates to these names.

Zillow stock analysts expect an impressive 55.1% increase in EPS for the next twelve months, which is more than double the average rate of 20.1% expected for the rest of the industry. These same analysts, however, believe the stock is fairly valued at their $55.5 price target, offering only 1.0% upside from today’s price.

For CBRE, history rhymes a bit. With expected 21.4% EPS growth for 2024, analysts believe this company will perform in line with the industry average, while still assigning a 6.6% upside to their stock price target of $92.3. This is where Airbnb gets interesting.

Down 4.3% from today, in their share price target of $141.3, analysts aren’t too keen on the prospect of 8.6% EPS growth this year. You should always take the analyst consensus with a grain of salt because they are directly fighting the market as it stands today.

You see, Airbnb has not only outperformed the S&P 500 index but the broader index as well Vanguard Real Estate ETF NYSEARCA: VNQ by over 40.0% in the last twelve months. Despite what analysts say, here’s what the markets think of this stellar performance.

Difference maker

The market has not only caused Airbnb’s size (market capitalization) to be far greater than that of the industry, but is also leaving an important signal of future optimism in their operation.

While the rest of the field trades on average at a price-to-book ratio of 3.7x, investors – and traders alike – are perfectly fine with overpaying for the stock they think will be a winner.

At a valuation of 10.6x P/B, Airbnb shares command a 185.0% premium to its peers. CBRE is discounted 16.0% to the industry average with its P/B ratio of 3.1x, and Zillow falls further with a P/B of 3.0x, representing a discount to the industry through 21st, 0%.

Remember the saying, “It has to be cheap for a reason?” Well, even Airbnb must be expensive for a reason; here are some. According to the latest quarters’ results, Airbnb grew its revenue by 18.0% over the year, with net income increasing by 266.0% over the same period.

It wasn’t long ago that Airbnb struggled to make net profits, much less free cash flow (operating cash flow minus capital expenditures). Today, free cash flow stands at $4.2 billion over the trailing twelve months, at a margin of 44.0%. This impressive feat is a testament to the company’s operational efficiency and growing level of business.

Do yourself a favor, add this stock to your watchlist and keep an eye on it; might really shock you this week.

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