Airbnb (ABNB 2.79%) has transformed the travel industry. Just a decade ago, the home-sharing platform was a little-known fringe concept, but today the idea of renting a stranger’s home has become mainstream. For many travelers, staying at an Airbnb has replaced hotels, and millions of people are supplementing their income or even making a living by hosting on the platform.
As a stock, Airbnb has disappointed this year. Shares fell nearly 50%, just one of many high-growth tech stocks that have been hit hard by rising interest rates and fears of a recession. With the stock on sale, it’s worth considering the many reasons why Airbnb should be on your long-term shopping list.
A pool at an Airbnb in Milan, Italy. Image source: Airbnb.
1. Its margins are already huge
In the third quarter, Airbnb reported net income of $1.21 billion on revenue of $2.88 billion, giving it a profit margin of 42%. The third quarter is its seasonal peak, but even in the last four quarters its profit margin was 20% – and that should increase as the company expects margins to increase in the fourth quarter.
2. He has a monopoly
Airbnb has become synonymous with the home-sharing industry, and it’s both a noun and a verb for staying with a stranger. According to research and analytics firm M Science, it has a 74% market share in home sharing, and the company is likely to continue to lead the industry it pioneered with its network effects, high switching costs and its well-known brand. This monopoly power is one of the reasons why it can generate significant margins.
Airbnb invented the concept of home sharing. To dethrone it, a competitor would have to come up with something significantly different and better – and that seems unlikely.
3. It generates tons of cash
In addition to producing significant margins on a GAAP basis, Airbnb is also very profitable on a cash basis.
Over the past year, the company reported $3.3 billion in free cash flow on $8 billion in revenue, or a free cash flow margin of 41%. Few companies are more effective at generating cash.
4. The business model is a dream
Airbnb takes the user-created content model that has been so successful on the internet even further. Users (or hosts) do not create content; they create experiences, and they are directly incentivized to do so. While social networks like Facebook monetize user content through advertising, hosts on Airbnb sell those experiences directly, giving it a better fit with the product market and allowing it to earn commissions while on Airbnb. others do the hosting job.
5. It has almost no capital expenditure
Besides its exceptional business model, Airbnb also doesn’t need to spend a lot on capital expenditures (capex) for things like data centers and other infrastructure that may require large investments in certain technology companies. In the first three quarters of 2023, it spent just $16.6 million on investments. This shows that her business is highly scalable and should have no problem keeping up with demand.
6. It has a bonus income stream
Although most of the money Airbnb makes comes from commissions and fees on stays and experiences, it earns interest on the money he holds between the time a booking is made and the time it begins. The company calls this “funds held on behalf of clients” and, with rising interest rates, this additional income has become substantial.
In the third quarter, Airbnb earned $58.5 million in interest income, and that figure is expected to rise as interest rates rise.
7. It can adapt to a recession
the travel industry is generally very cyclical. Consumers spend more on vacations when they have the money, so a recession would clearly be a headwind for the industry.
But Airbnb has a greater ability to adapt to a recession than peers like hotel chains or online travel agencies because its inventory is flexible and it can offer a wide range of accommodations. Hosts also react quickly to changing economic demands.
For example, the number of single room listings jumped 31% in the last quarter as people around the world looked for ways to cope with skyrocketing inflation, providing more budget options for travelers.
8. It has a huge addressable market
Airbnb’s gross booking value, or the dollar value of its bookings, has reached $61.1 billion over the past four quarters, but the company estimated at the time of its initial public offering that its addressable market, made up of the categories it currently competes in, is worth $1.5 trillion.
The travel and accommodation industry is huge, and Airbnb only has a small market share, giving it a long path to growth.
Image source: Airbnb.
9. The management team is strong
When Airbnb laid off a quarter of its staff at the start of the pandemic, CEO Brian Chesky was praised for a letter he wrote to employees explaining why the layoffs were happening and what the next step was for those involved. . Management has also taken the unusual step of creating an “old talent directory” to help laid-off employees find new jobs, and the company has tasked its recruiting team with helping them as well.
More recently, Chesky responded to complaints about opaque pricing with a product update that tells travelers what they’ll pay up front, solving a major problem.
On Glassdoor, 83% would recommend working there to a friend, and the same percentage would approve of Chesky as CEO. The company was also ranked No. 1 for workplaces in 2016. Investors are in good hands with Chesky and the rest of the management team.
10. Stock is cheap
Airbnb now trades at a price-to-earnings ratio of 42, not much more expensive than slow-growing stalwarts like Procter & Gamble and Coca Cola. Investors seem to be betting that Airbnb’s recent growth is more a reflection of the rebound in the travel industry, rather than a unique strength of the company.
But the company has taken significant market share from peers like Reserve credits and hotel chains since the start of the pandemic, and this is expected to continue even if a recession hits.
Assessing the stock as a mature business seems like a mistake. Airbnb still has a promising long-term growth opportunity and the means to capitalize on it.
At the current price, the stock looks poised to reward investors over the next few years.
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