Global travel company Airbnb (ABNB 1.03%) was growing rapidly before the pandemic temporarily halted nearly all travel. Thanks to its 4 million-plus hosts who open their homes to guests, the company offers plenty of variety for travelers. On Airbnb, you can book a stay in a treehouse, castle, farmhouse, beachfront home, or room in an apartment.
The wide selection is a hit with travelers because it increases the chances of finding someplace that fits their needs. Moreover, the endless selection gives Airbnb a moat around its business because that selection makes it difficult and costly for a competitor to match.
As economies around the world make every effort to reopen, Airbnb's variety will help it benefit from the pent-up demand that has developed among people wanting to travel again. And it's this pent-up demand that has me picking Airbnb as my top stock to buy in August.
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Ready for a rebound in travel
Airbnb revenue has already rebounded above 2019 levels, mainly due to the U.S. market for short-distance travel. Folks feel more comfortable getting in their cars and traveling someplace nearby. The U.S. is in the top tier of countries in vaccinating its population against COVID-19. And unsurprisingly, vaccinated individuals feel better about their protection against COVID-19.
The travel industry is just aching for a rebound. As of this writing, over 4.3 billion doses of COVID-19 vaccine have been administered worldwide. The increasing confidence for travel can also be seen in Airbnb's advanced reservations. In its most recent quarter, unearned fees, which are nights booked but not yet experienced, increased by 43.7% from the same time last year.
Just to be clear, this is only the beginning of the rebound in travel. Many international travel restrictions remain in place and are only beginning to slowly ease. It could be well toward the end of 2022 before travel is completely back to normal.
Zooming out from the near term, Airbnb is still a small part of the overall travel industry. According to Statista, the hotel and resort industry was worth $1.2 trillion in 2019. To put Airbnb's size into context, it earned $4.8 billion in revenue in 2019.
Moreover, its asset-light business model gives it the potential to generate profit margins above hotel operators. Over the last decade, Hyatt Hotels (H 0.14%) generated an operating profit margin of 5.7%. It can be expensive to maintain and staff hotel structures. Airbnb does not have that constraint. It merely brings host and traveler together and collects a generous fee for providing the platform and support.
The prospects for profitability got further enhanced by the cost-cutting measures Airbnb undertook during the pandemic. Forced to evaluate expenses more closely, the company reduced 25% of staff, suspended new buildings, and reduced capital expenditures.
Paying for quality
Interestingly, Airbnb's stock is only up 2.2% year to date despite the positive developments against COVID-19. Several effective vaccines have been approved, 4 billion doses have been administered, and more breakthroughs are in the pipeline. That has given governments the confidence to reopen economies and slowly remove travel restrictions.
The stock is trading at a forward price-to-sales ratio of 17.06, which is not cheap, to be sure. However, the company has a long runway of growth ahead of it. The potential for efficient growth for several years makes the high valuation tolerable.
