A decade ago, travelers may not have ever considered the idea of home-sharing. In 2022, this concept is top of mind for many travelers.
There’s plenty to like about Airbnb, especially among long-term investors. For one, it’s a whole lot cheaper to scoop up shares now than a year ago. The company’s share price has plummeted by over 40% this year, making it attractive for those who buy into the Airbnb investment thesis.
If you can see past the fears of a potential recession, there are at least five reasons to consider adding shares of Airbnb to your buy list.
1. Solid Business Model
Airbnb has developed an extraordinary business model. It oversees the largest inventory of rooms globally without owning any.
The home-sharing platform makes money by collecting commissions from hosts. So, Airbnb collects revenue without needing to own any inventory, unlike major competitors, such as Hilton and Marriott.
Over the years, as Airbnb evolved, it has become a competitor for the largest travel agencies and hotel chains. Its business model has resulted in around 6 million active listings across over 100 cities in more than 220 countries. Hosts have earned more than $180 billion to date, creating a community that continues to grow.
2. Competitive Moat
Airbnb has a sustainable competitive advantage; it benefits from a network effect that creates a competitive moat. As the number of listings grows, so too does availability in each geography. As more guests sign up, so too do host numbers grow. This synergy has helped to supercharge the brand, creating a bigger marketplace.
During the pandemic, Airbnb could be flexible. Many consumers preferred their own accommodations versus hotels that were heavily populated. The desire to rent remote accommodations surged. The brand’s success and ability to adapt were seen in its earnings. For FY 2021, Airbnb reported revenue of $6 billion, a gain of 77% year over year.
The company’s most recent earnings report showcases further growth. In Q3 2022, “Nights and Experiences Booked” grew by 25% compared to the previous year, reaching $99.7 million. Revenue was $2.9 billion, and with a net income of $1.2 billion, it was Airbnb’s most profitable quarter ever.
3. Cash-Generating Machine
Aside from attractive margins, Airbnb is also cash rich. Over the past year, Airbnb has reported $3.3 billion in cash thanks to its free cash flow (FCF) margin of over 40%.
Not many companies are as efficient when it comes to generating cash. Most of Airbnb’s revenue comes from service fees charged to hosts and guests. And because the company spends so little on capital expenditures, money continues to roll in, allowing the company further expand.
4. Massive Addressable Market
Before Airbnb’s initial public offering IPO, the brand estimated an addressable market worth $1.5 trillion. This value represents consumers’ spending on hotels and resorts worldwide before the pandemic.
Closer to its IPO, Airbnb sought a significantly higher valuation than originally was targeted. The company reported it has only captured a small fraction of what it sees as a
$3.4 trillion total addressable market.
This figure includes $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.
5. Well-Priced Shares
Perhaps one of the most compelling reasons to grab shares of Airbnb’s stock is its current price relative to its fair value.
The consensus among 33 analysts is that Airbnb has an intrinsic value per share of $131.48, suggesting as much as 30% upside.
What About the Risks?
Airbnb has a strong brand and moat, but competitors are trying to encroach on its dominant market share position. With that said, it’s notoriously difficult to dislodge an entrenched player with a brand advantage, like Airbnb enjoys.
The company could face regulatory hurdles in large markets and undoubtedly risks poor publicity from stays that go wrong – for example when one owner was spying on guests, it deters others from renting on Airbnb. One bad apple can soil the bunch.
With all that said, Airbnb currently dominates the market with a 74% market share. At the company’s current stock price, analysts expect an above-average return and, while shares aren’t cheap, you’re buying future growth and opportunity which still seems to favor the upside.
