Airbnb (ABNB -0.14%) quickly went from an unprofitable growth stock to a profitable one. It posted a record net profit of $1.2 billion in the third quarter of 2022, demonstrating its resilience in this economy and its viability as a business.
Despite its strides toward growth and earnings, investors have driven Airbnb’s price down 52% over the past year. Here’s why I think this looks like a compelling opportunity.
Leading a Change in Travel
Airbnb has shaken up the travel industry, which until recently consisted of various hotels and scattered rentals, leading it into uncharted territory. The company has huge opportunities that are hard to imagine right now.
After representing its strongest growth in length of stay for many quarters, stays of 28 days or more now account for approximately 20% of nights booked. In addition to regular vacation rentals, Airbnb has carved out a travel niche that is a cross between vacation and life.
Remote work contributes to the development of this movement. For Airbnb, it’s partly a benefit of being in the right place at the right time, but its model supports general shifts in travel trends.
The adaptable model
Due to its platform nature, it does not hold inventory or other capital-intensive assets such as land or buildings. It looks good on its balance sheet, but it also gives the company more flexibility and adaptability.
Airbnb offers non-urban rentals that soared when far-flung travel was banned, and now urban travel is rebounding. City nights booked were up 27% year over year in the second quarter, and cross-border nights booked were up 58%. All of these factors together contribute to a dynamic and growth-oriented model.
Airbnb’s extensive network of hosts can expand if needed, and the rise of remote work is attracting hosts who view Airbnb as a way to generate income. This is also due to the economic downturn as it is an easy way for people to increase their income without a large investment.
Management noted that the company started during the 2008 recession, when people were looking for additional ways to increase their income. When traditional travel suffers, Airbnb can thrive.
Resilience and profitability
This model has withstood a devastating pandemic and is growing beyond. But Airbnb demonstrates that it’s more than a growth stock. It is now posting several quarters of profitability and generating strong free cash flow. Consider how net income and free cash flow have grown, not just in raw numbers, but as a percentage of revenue this year.
Airbnb’s net income as a percentage of revenue. Image source: Airbnb.
Airbnb free cash flow as a percentage of revenue. Image source: Airbnb.
Airbnb is a great example of a business that can be extremely profitable at scale. Many growing companies struggle with this, as expenses increase with scaling and growth eventually declines before profits catch up.
Chief Financial Officer Dave Stephenson explained that Airbnb has grown its brand to the point that 90% of traffic to Airbnb’s website comes directly or for free, and that it has “radically adjusted our marketing spend to be considerably lower. This adds up to better leverage on fixed costs and improved variable costs, and when combined with increased revenue, leads to strong profits.
A buying opportunity?
I admit that Airbnb stock does not look cheap, even at this price. The shares are trading at more than 8 times the sales of the last 12 months, which is quite expensive.
Other multiples make the stock price more palatable. Airbnb shares trade at a price-earnings ratio of 48, which is a 12-month ratio and includes a quarter of the past year’s losses. This assessment does not seem unreasonable given that it still projects double-digit sales growth and EBITDA increase, and Airbnb deserves some sort of bonus for its performance over the past two years.
All this means Airbnb stock looks like an opportunity at present.
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