Airbnb (ABNB 0.32%)the home-sharing disruptor, caused a stock market sensation when it went public in 2020.
Like most growth stocks, Airbnb surged through 2021, but stumbled in 2022 even as the company posted strong earnings growth. Since the start of the year, the stock is down 42%, with investors seeming to bet that the recovery of the travel market will soon fade as fears of a global recession grow.
However, even in a weakened macroeconomic climate, Airbnb looks like a smart stock to own. Here are three reasons.
Image source: Aribnb.
1. It can gain market share in a recession
Airbnb’s home-sharing marketplace business model offers a number of competitive advantages, but arguably the biggest is its flexibility.
At the start of the pandemic, Airbnb outperformed its online hotel and travel agency counterparts as travel demand shifted to rural areas and long-term stays as people sought to escape densely populated cities to overcome the blockages.
Unlike a hotel chain, Airbnb’s inventory can quickly scale to meet changing demand. It happened in 2020, and it seems to be happening again as much of the world faces a cost of living crisis. Airbnb said in the third quarter, single-family listings jumped 31% as people around the world turned to Airbnb for additional income.
This shows how the home-sharing platform can adapt to changes in demand based on price, location and other factors, and the influx of single room listings should provide supply. additional low-cost options for budget-conscious travelers during a possible recession.
2. Profitability should continue to increase
Airbnb’s business model is highly scalable. By providing a technology platform for users to host travelers in their homes, the company monetizes the market while hosts do the hard work of providing accommodations.
Some of the business expenses need to increase with booking volume, but the core business needs to gain momentum and increase profit margins as revenue grows. This happened in 2022 as profit margins surged, reaching 20% ββin the last four quarters, and the company also guided the increase in margins in the fourth quarter.
The company also spends almost nothing on capital expenditure, which shows the advantages of its platform business model. In the first three quarters of the year, it spent just $16.6 million on capital expenditures but generated nearly $3 billion in operating cash flow, giving it a free cash flow of $2.95 billion.
From a revenue base of $6.5 billion, that gives the company a free cash flow margin of over 40% in the first three quarters of the year. The fourth quarter is its weakest season in terms of cash generation, but this figure nonetheless shows the company’s ability to convert revenue into cash.
3. Stock is cheap
Like the rest of the tech sector, Airbnb stock has fallen sharply this year, but the home-sharing leader is different from most of its peers in tech and growth stocks.
Unlike most of these stocks, Airbnb’s business has been negatively impacted by the pandemic, and the company has thrived this year upon reopening. So it’s odd that the stock has fallen so much this year, and it seems to reflect broader market sentiment more than Airbnb’s fundamentals.
After surging in earnings this year, the stock now trades at a price-earnings ratio of just 40, which seems like a good price for a fast-growing company with a huge addressable market ahead of it that it believes to be over of 1 trillion dollars. .
After a strong year in 2022, Airbnb’s growth rate is expected to slow in 2023, but the company appears well positioned to gain market share in 2023 and expand profit margins. Investors would be wise to take advantage of the stock’s discount and buy this wide-moat travel disruptor.
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