Certain types of businesses tend to perform well in an inflationary environment. These include companies that sell essential products that consumers need to buy under all circumstances. The energy sector generally outperforms during these periods because demand does not change too much and prices increase.
Ironically, they can also include luxury goods companies, which target affluent customers who don’t feel the pinch of inflation as much as others.
If other businesses do well in times of inflation, that’s a good indication that the business is well run and has enough brand power to charge the prices customers are willing to pay. Airbnb (ABNB -0.32%) falls into this category, and there’s a reason buying its stock might be a stroke of genius.
Achieve phenomenal results under pressure
Airbnb has shown an incredible recovery since suffering steep declines at the start of the pandemic. This has continued in the face of difficult macroeconomic conditions that are hurting dozens of large companies.
In the second quarter of 2022, Airbnb reported a 58% year-over-year increase in revenue and net income of $379 million. This is huge progress for a company that as recently as the last quarter posted a loss, and faced with last year’s difficult comps as well as difficult circumstances.
Many factors helped Airbnb achieve these results. Specifically, it operates a differentiated, agile and asset-light travel platform. This means it can quickly deliver accommodations that meet changing demand, unlike hoteliers who are stuck wherever they are, even when travelers are elsewhere.
This has been very clear over the past two years as travelers vacation locally and explore experiences close to home. But that hasn’t stopped as travel restrictions have started to ease. While booked suburban nights and experiences continue to do well, urban bookings are also starting to pick up. This indicates rigidity, and if Airbnb does it right, users will continue to enjoy its platform under all conditions.
Why Airbnb is in great shape right now
However, there is more than that. In short, this is called pricing power. Successful companies now do so because they were able to mitigate higher costs through higher prices. Airbnb’s average daily rate (ADR) was up 40% from a year ago to $164, and that’s also a slight increase from the first quarter of 2022. This was significant in quarter as urban destinations rebounded and urban destinations tended to have a lower ADR than non-urban destinations.
In this environment, people are willing to shell out more money because they look forward to traveling after a long time at home. Many people are opting for drive-on locations to avoid flying, which has been beset by delays, long lines and flight cancellations. This is a godsend for Airbnb, which can offer such accommodations in many areas.
Airbnb’s fastest growing category in terms of length of stay is stays of 28 days or longer, and with a higher ADR, these stays contribute to higher revenue both in number of days reserved and at a higher average rate per day.
The ADR should not continue to increase as quickly as in the second quarter. As urban destinations continue to recover, ADR should begin to moderate. But for investors, it’s an important thing to keep in mind as it relates to the strength of the business as a whole.
Should you buy Airbnb stock now?
Management made a bold decision when it took the company public at the end of 2020. This was because it was at the height of its revenue decline when the pandemic brought travel to a halt. However, it was also a time of gluttony in the markets, and investors devoured the initial public offering (IPO), making it the biggest IPO of the year in terms of funds raised.
As growth stocks deflated, as did shares of Airbnb. Its high valuation made it vulnerable to a sharp drop in prices, falling 30% this year. But now, at a much more reasonable level – and with solid activity despite current inflation – the stock looks like a buying opportunity for long-term investors.
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