Airbnb’s stock price slump could be a gift for smart investors

Since its IPO in December 2020, Airbnb (ABNB -1.38%) stock performance was not very inspiring. Shares are still down nearly 50% from the all-time high they hit about 18 months ago. Many investors may be wondering: is Airbnb’s business going in the wrong direction?

Reviewing Airbnb’s business fundamentals and taking a long-term perspective can bring a lot of clarity. Here are three reasons why taking advantage of Airbnb’s low share price is likely to yield exceptional results for patient investors.

1. A global brand that keeps growing

Airbnb has become a household name by offering travelers the ability to choose from an unparalleled variety of accommodations, experiences, and price points.

Image source: Getty Images.

In the process, Airbnb has also created a source of income for the platform’s hosts, who share all or part of their property with travelers. The supply of properties on Airbnb’s platform hit an all-time high in the second quarter, and in July there were six million properties available for rent.

The number of nights and experiences booked in the second quarter jumped 25% year over year and 24% compared to the same quarter in 2019 (before the pandemic), reaching 103.7 million. Gross booking value (GBV) – the total value of all transactions on the Airbnb platform – was $17.0 billion, up 27% year over year. Airbnb’s levy rate – revenue collected by the company as a percentage of GBV – was 12.4%, generating revenue of $2.1 billion for the quarter, a 58% increase from in the quarter of the previous year.

So while Airbnb’s stock may be under pressure with much of the market, its business is seeing incredible momentum.

2. A highly efficient business model

Airbnb is often referred to as a “travel” or “lodging” company, and that can be a bit misleading. Its business is structurally different from traditional hotels and resorts in that it does not own, rent, maintain or operate the properties available on its platform. As a result, it significantly reduces the initial and ongoing capital expenditures and operating expenses of the business.

Plus, the extra cost and time it takes to add a new listing or serve a new guest for Airbnb is almost negligible. In other words, Airbnb is growing at a significantly lower cost and at a faster pace compared to traditional hotels that rely on sustainable assets. And as more travelers use Airbnb, more hosts want to join the platform, creating a natural network effect.

This favorable cost structure and highly scalable model has allowed Airbnb to generate prolific revenues free movement of capital of $795 million in the second quarter – that’s an incredible 38% free cash flow margin.

With its second quarter report, Airbnb continues to demonstrate that it can achieve growth and profitability at scale. This should give a lot of confidence to its current and future investors.

3. Well prepared to handle macro headwinds

If the economy enters a recession, it is highly likely that consumers will reduce their travel budget, which will likely impact Airbnb’s business. But people don’t just use Airbnb for discretionary leisure travel. They also use it for essential trips like work.

It’s also likely that, in a tough economic environment, Airbnb hosts are more likely to lower their nightly rates compared to traditional hotels, as property maintenance costs for hosts are expected to be lower – and some income is worth better than no income.

Finally, as a global company, the recession in some parts of the world may not affect Airbnb’s business in other parts of the world. That’s not to say Airbnb is immune to economic headwinds, but there are factors that protect its business.

At this point, Airbnb expects third-quarter revenue to grow 24% to 29% year over year (up 69% to 75% from 2019). Additionally, as of June 30, the company had approximately $10 billion in cash and marketable securities.

Overall, Airbnb is financially sound and well positioned not only to survive a possible recession, but also to emerge stronger on the other side given its various advantages over traditional travel agencies.

Great opportunity for long-term investors

However, there is no such thing as a perfect stock and Airbnb comes with risks that investors should be aware of. First, competition from well-established players such as Expedia‘s VRBO as well as smaller regional players will only heat up.

Second, some communities have banned or restricted Airbnb because they claim it causes a nuisance to local neighborhoods. Large investment firms have bought up and set up Airbnb rentals in popular destinations, inflating home prices. These developments are attracting the attention of regulators and future restrictions could be an obstacle to Airbnb’s growth.

That said, Airbnb’s global brand, scalable business model, and network effects outweigh these risks. And the shares are trading near their lowest price to sales on record.

Table of PS ABNB ratios

Data by Y-Charts.

Now is the perfect time for patient long-term investors to find a place for Airbnb in their portfolio.

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