Picking stocks that beat the market in a volatile economic environment is no small feat, especially since some economists are expecting a deep recession next year. In an uncertain environment, however, it is always smart to look for stocks with sustainable competitive advantages, attractive valuations and ways to outperform in an economic downturn.
An overlooked stock with these qualities that comes to mind is Airbnb (ABNB 5.96%)and it’s my most compelling stock to buy through 2023.
Image source: Airbnb.
A compelling case
If you know Airbnb’s business model, the competitive advantages are easy to understand. The company has a similar spirit to Google in the home sharing business. Its name is both a noun and a verb used to describe the accommodations offered on the platform, and it holds the monopoly of the colocation market with 74% of the market share, according to M Science.
As the market leader in home sharing and the company that invented the concept, Airbnb benefits from significant network effects, switching costs and brand recognition.
The company has also disrupted the travel industry, quickly take market share traditional hotel operators and online travel agencies like Reserve credits and Expedia.
Since 2019, before the pandemic, Airbnb’s year-over-year revenue has jumped 67%, while peers like Expedia, Marriottand hilton all saw their income decline during this period. Booking Holdings, on the other hand, only managed 6% revenue growth.
In addition to the above competitive advantages, Airbnb’s business model also gives it a degree of flexibility that none of its competitors can match. During the pandemic, as people around the world sought to flee cities, Airbnb sprung up in rural areas to meet this demand. Hotels cannot open new locations overnight like this.
With much of the world currently facing a cost of living crisis, Airbnb’s business is adapting. make ends meet. Once again, hotels lack the capacity to meet changing demands like this, adding cheap new inventory as the world heads into a possible recession. The best hotels can do is lower the rates for existing rooms.
Impressive basics
Not only does Airbnb’s business model pass the Warren Buffett Essay, but the financials also show spectacular activity. Revenue jumped 29%, or 36% in constant currency, in the third quarter to $2.9 billion. And over the last four quarters, it has GAAP net profit margin of 20%, likely to increase thanks to its scalable business model. The company also has enormous growth potential. It’s stepping into a massive industry worth over $1 trillion, and it’s been disciplined on spending since laying off a quarter of its staff at the start of the pandemic, which should also encourage investors.
Because the company does not own any of the properties on its platform, it spends next to nothing on capital expenditures. In the first nine months of the year, Airbnb spent just $16.6 million in cap ex while generating nearly $3 billion in operating cash flow. Over the past four quarters, the company has generated $3.3 billion in free cash flow for a 41% margin.
In other words, Airbnb is very good at turning bookings into profits.
2023 could be better than expected
While most economists are predicting a recession in 2023, with some calling for the first half of the year, the travel industry could emerge relatively unscathed. So far, travel demand has mostly been resilient to the current macro headwinds, and travelers still seem to be making up for lost time during the pandemic.
Most airlines pushed back on expectations of a recession, and United Airlines CEO Scott Kirby said earlier this month that he saw no signs of a recession in his company’s data. TSA data also shows air travel continues to recover with passenger throughput up 11% so far in December from a year ago β although throughput is still down 6% compared to 2019 levels, possibly indicating more room for recovery. Air travel is generally sensitive to the overall economy, so it’s strange to see the industry holding its own even though sectors like technology, retail and advertising are all clearly struggling.
Even if a recession hits the travel industry, Airbnb’s flexibility positions it better than its competitors. The company can offer a wider price range than its peers, including individual room listings, which even Expedia’s VRBO doesn’t have. Since Airbnb offers everyone the opportunity to supplement their income, it could also see an influx of new hosts during a recession.
Finally, higher interest rates benefit the business because it earns interest on the funds it holds for guests between the time of booking and the actual stay. In the third quarter, it earned $58 million in interest income, and it could make a lot more next year as the fed funds rate is expected to approach 5%.
Image source: Getty Images.
An attractive valuation
For a company with a disruptive business model that is rapidly gaining market share, Airbnb stock looks surprisingly cheap.
The shares trade at a price-to-earnings ratio of 38 on a GAAP earnings basis, roughly double that of the S&P500. On an enterprise value to FCF basis, the stock trades at a ratio of just 15.
Wall Street expects Airbnb’s growth to slow next year, and it should moderate as the tailwinds to the travel recovery fade, but analysts still appear to be underestimating their estimates. Consensus calls for revenue growth of just 12.5% ββto $9.4 billion, with earnings per share rising just 7% to $2.75. Beating those estimates shouldn’t be difficult.
Since Airbnb’s IPO two years ago, analysts have consistently underestimated its performance and look set to do it again next year. The stock is now trading just above its all-time low, showing just how much pessimism is priced into stocks. It won’t take much for Airbnb to bounce higher from here.
If the home-sharing leader can defy expectations and continue to gain market share in its massive industry, the stock should crush the market.
Comments are closed.