It's been quite a ride for Airbnb (ABNB -2.37%) since it went public in 2020 with the shares soaring past $200 twice before crashing back down each time. The shares have clearly been hit by shifting levels of concern over the pandemic. Yet the stock is still up about 12% in the past year, and the company commands a sizable market cap of $105 billion.
Investors might have some pause to buy the stock right now since it still sells at 63 times free cash flow. Yet, the company has a leading position in the travel industry, a history of robust growth, and results are rebounding strongly with revenue up 67% year over year in the third quarter.
Plus, it's got a large and expanding addressable market and is already showing signs of building a tremendously powerful brand. So even at these high levels, Airbnb could still turn a small investment into a big one. Let's dive deeper.
Image source: Getty Images.
Breaking down the numbers
If you invested $10,000 in Airbnb stock, it would need to climb 100 times in value to reach $1 million. That's too much to ask for the next 10 years, but it's not unreasonable to expect Airbnb to deliver this amount if you could hold its shares over the next 30 years. That would represent an annualized return of about 16.5%. Not many companies can grow at this rate for that long, but if Airbnb can cement itself as the top brand in travel, it could be one of the few great businesses that make early investors into millionaires.
It's certainly addressing a large market -- an estimated $3.4 trillion globally each year. Short-term stays, like business trips and weekend getaways, make up about $1.8 trillion of the market with long-term stays and other experiences representing the balance. Long-term stays are a huge growth opportunity, given the increasing interest in remote work. This is why management expects the demand for long-term stays to accelerate coming out of the pandemic.
Airbnb still has just a fraction of that addressable market, giving it plenty of room for growth. Over the past year, the company's gross booking value came to $41 billion, or just a little over 1% of the total market. Moreover, the market is going to expand. Over the past decade, excluding the blip from the pandemic, travel spending has increased about 3% to 5% annually. If it continues to grow around 4% annually over the next 30 years, that would put Airbnb's addressable market at around $10 trillion.
Airbnb would need to capture more than a third of that opportunity to grow its gross booking value 100 times, and therefore also see a proportionate increase in revenue and profits, which is what ultimately makes a stock go up.
Keys to future growth
While it's nearly impossible to forecast exactly what a business will look like way out in the future, here are a few things that should build confidence in Airbnb's growth trajectory.
For one thing, it has a strong brand. Even if you have never used Airbnb, you likely know a friend or family member who has. After all, there were nearly 80 million nights and experiences booked on Airbnb in the third quarter. A strong brand will be key to capturing a sizable chunk of its addressable market.
Another good sign: management has been shifting its marketing strategy to be more brand-centric and less dependent on search engines. During the first quarter of 2021, over 90% of Airbnb's traffic came from customers seeking Airbnb directly as opposed to finding it through a marketing channel. That's a sign of growing brand awareness.
Competition is always a risk since new entrants might emerge down the road, forcing Airbnb to lower service fees to maintain demand and revenue growth. But Airbnb is already widely recognized, which is a competitive advantage. Its name has nearly become a synonym for a place to stay -- similar to how "Google" replaced "search."
I believe Airbnb's record of growth from its humble beginnings in the co-founders' San Francisco apartment in 2007, the size of the travel opportunity, and its growing brand power point to a long-term winner. I recently bought shares and plan to add further as the business grows, so count me as a believer in this stock's millionaire-making potential.
