Airbnb (ABNB 3.89%) is a global travel facilitator. Of course, it wasn’t a big business at the start of the pandemic when activity almost came to a standstill. But Airbnb bounces back and has the characteristics of a great company.
It participates in a massive, addressable market with an asset-light business model and trades at a relatively inexpensive valuation. That said, the chosen business model can make it difficult to deliver quality and consistency to consumers. Let’s take a closer look at three reasons to buy Airbnb stock and one reason to hesitate.
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1. Airbnb operates in a massive, addressable market
In 2019, before the outbreak, consumers spent an estimated $1.5 trillion on hotels and resorts globally, according to Statista researchers. This figure crashed to $610 billion in 2020 before bouncing back to $950 billion in 2021. Even if it doesn’t increase further, $950 billion represents a huge market opportunity.
This means Airbnb could increase its revenue tenfold from its $6 billion total in 2021 and still capture less than 10% of the overall market. If Airbnb manages to capture 20% of the market, its revenues could reach $190 billion. And that’s without considering the likelihood of the industry bouncing back above pre-pandemic levels in the next few years.
ABNB revenues (annual) given by Y-Charts.
2. Its business model is easier on the balance sheet
Airbnb has chosen not to own or operate any of the properties listed on its platform. Instead, it invests in the capabilities of its website and app to facilitate transactions between travelers and hosts. Airbnb then takes a percentage of these exchanges as revenue. The model puts less pressure on the balance sheet because it does not require large investments to buy or build hotels or resorts.
Plus, it allows Airbnb to snowball with consumer demand. Suppose there is an increase in customer interest in the types of properties available on Airbnb, which are typically different from traditional hotel rooms. In this case, his hosts will list more often, incentivized with more money. This contrasts with legacy hotels, which can’t grow much more after booking every available space without spending big bucks on expansionary builds.
3. Airbnb is trading at a relatively cheap valuation
Growth stocks have been hammered in 2022. Investor pessimism has not spared Airbnb, which is now selling at a price-to-free cash flow ratio of 28.5, near its lowest level. This creates an opportunity for the long term investors to buy this excellent deal cheaper than ever.
ABNB Price vs. Free Cash Flow given by Y-Charts.
A reason to hesitate: Difficulty in quality control
Of course, the asset-based business model discussed earlier has a downside. In other words, Airbnb cannot effectively offer quality stays to travelers. In addition to handling payments, Airbnb takes a hands-off approach, letting hosts and guests communicate directly to exchange information. Sometimes properties may not be presented to travelers in good condition or the experience may not be what was intended.
Booking accommodation with Airbnb can be as varied as the number of its guests. The uniqueness that draws travelers to Airbnb could also be its Achilles heel, potentially turning people off after a few bad experiences.
The reasons to buy Airbnb are more compelling that the reason to hesitate. In particular, the huge market opportunity means it can be hugely successful while only capturing 20% โโof the market.
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