Few companies have disrupted the tourism industry like Airbnb (ABNB). Last year, the vacation home rental company generated almost $6 billion in revenue from 300 million bookings, representing a 73% year-on-year increase. So, it’s no wonder that in early 2021, the company’s stock hit an all-time high of nearly $220.
However, Airbnb was also one of the hardest hit platforms by COVID. At the pandemic’s peak, new bookings were down by as much as 85% — and although activity is increasing, Airbnb’s stock is beaten down. Plummeting by 50% this past year, investors are wondering whether this is the end of Airbnb or just the beginning. Here’s why it’s got the hallmarks of a good long-term bet.
Earnings Beat On Top and Bottom Lines
On November 1, 2022, Airbnb released its third-quarter results. The vacation marketplace beat estimates on the top and bottom lines, yet share prices dropped. Although revenue rose 29%, hitting $2.9 billion, the stock fell 6% after-hours.
Investors weren’t impressed with Airbnb’s fourth-quarter guidance. The company anticipates an increase between 17% and 23%, which aligns with expectations. While this may not cause alarm for some, others are concerned about Airbnb’s decelerating growth. Some think the stock is still pricey, while others have a different view based on the stock’s long-term potential.
Demand For Airbnb Still High
It has been a challenging couple of years for many businesses, especially for those in the travel and hospitality industries. Travel significantly declined for obvious reasons during the recent pandemic. COVID-related challenges were followed by rising interest rates, record inflation, and other economic headwinds, which are still ongoing.
Despite that, variables surrounding the pandemic also caused a spike in growth. Companies like Airbnb saw a boom in business in response to COVID vaccines and re-openings. Even today, persistent demand is evident for Airbnb stays with long-term stays showing record increases, suggesting remote work is here to stay.
Why Airbnb Is Unique
Competitors of Airbnb, such as Expedia and Booking Holdings, have yet to release their third-quarter earnings — but similar results are anticipated. These earnings will showcase the challenges faced by those within the tourism industry as a whole. However, Airbnb is not quite like its competitors, making it tough to compare this business with its publicly traded peers.
Since 2008, Airbnb has been shaking up the world of travel, so its long-term growth rate is hard to estimate. Based on Airbnb’s history and plans for the future, many believe there is still a potential growth story ahead. As Airbnb penetrates an addressable market of $1 trillion or more, shares could soar in the coming years.
What’s Next for Airbnb?
Airbnb changed how people travel. The company offers more rooms, with six million listings worldwide, than the five largest hotel chains combined — not to mention its wide array of styles, price points, and locations.
While it’s tough to predict where Airbnb will be in the next five or ten years, some trends provide insight. As mentioned, the rise of remote work is fueling long-term stays. In Q1 2022, nearly a quarter of nights booked were for 28 days or longer.
This trend continues, remaining the fastest-growing category by trip length. Again, the edge that Airbnb has over hotels is that guests have access to full kitchens and workspaces in large cities, small towns, and everything in between.
Profitability is also a good indicator of where Airbnb is heading. Despite the pandemic affecting business, Airbnb has reported a profit in the last four quarters. The most recent quarter was Airbnb’s most profitable, reporting a net income of $1.2 billion, up 46% year-over-year. Free cash flow increased to $960 million, up more than 80%.
Guest demand remains strong, and the company is seeing strong growth in the number of hosts, making it well-positioned for the road ahead. As the company scales, profitability should follow.
Then there’s Airbnb’s history of innovation and adaptability. The company’s business model continues to pivot, announcing changes to ensure the best experience for guests and hosts. Some of the latest changes include Airbnb categories, AirCover (its travel protection service), and split stays.
Airbnb Is a Long-Term Play
There are many things to like about Airbnb, especially its consistent growth and strong moat. Shares are now attractively discounted for buy-and-hold investors. However, they’re still not overly cheap. Airbnb’s valuation remains high — but most believe it’s warranted. So, if you’re thinking short-term, there may be better investments than Airbnb.
Even though shares may drop further, the current price level offers an attractive entry point following Airbnb’s latest post-earnings decline. The best strategy here is to buy a few shares and add to your holdings over the coming months. Dollar-cost averaging is an excellent way to help curb the risks associated with the current market volatility and ongoing headwinds.
The bottom line is Airbnb is a buy based on its solid financials and growth potential. If you’re in it for the long-term, expect fruitful returns.