The COVID-19 pandemic took the world by storm in 2020 and forever changed the way we interact with one another. Companies like Zoom helped shift traditional corporate dynamics of in-person meetings, while Peloton underscored the need for in-home exercise equipment.
Although some facets of the travel industry such as cruise lines and hotels have struggled during the pandemic, the online lodging marketplace Airbnb (ABNB 0.85%) has thrived. Despite generating record revenue and profit in third-quarter 2021, the stock is only up 8% over the last 12 months compared to the S&P 500 return of 27%. As the stock hovers near all-time lows, now may be a unique opportunity for investors to buy the dip.
Out with the old, in with the new
In a pre-pandemic world, it was not uncommon for people to go on vacation for a couple of weeks and spend the remainder of their time working at an office. This dynamic has changed significantly over the last two years, as people now have far greater freedom around when and where they travel. The pandemic has completely revolutionized how consumers are thinking about travel. As people think beyond a traditional weekend trip, and remote work becomes more of a constant among corporate enterprises, the rising popularity of long-term stays is creating a new theme for the travel industry.
According to Airbnb's Q3 2021 earnings report, long-term stays of 28 days or more remain its fastest-growing category by trip length and accounted for 20% of gross nights booked in Q3 2021, up from 14% in pre-pandemic Q3 2019. Additionally, 45% of gross nights booked were from stays of at least seven nights in Q3 2021.
Management is keeping a close eye on these new travel trends as it could be an opportunity to significantly grow its total addressable market. Even though hotels can offer consumers similar amenities to a home, the addition of things such as a washer, dryer, or small kitchen will command a much higher price point than a rental on Airbnb. The company's latest financial results may signal that a rebound in travel is well underway and that these new dynamics of longer-form rentals are here to stay.
Improving financial profile
Airbnb's management has proven that it can operate in a nimble fashion during times of economic uncertainty. Looking at the most recent quarter, investors can see the strong network effects of Airbnb's platform and its ability to generate organic growth.
For the quarter ended Sept. 30, 2021, Airbnb reported record revenue of $1.3 billion, an increase of 70% year over year. Meanwhile, sales and marketing expenses as a percentage of revenue were 13% in Q3 2021 (down from 24% in the second quarter) and product development costs accounted for 15% of revenue, down from 26% in the prior quarter. As revenue growth outpaces operating expenses, the company is able to expand its margins and generate higher profits as evidenced by its record net income of $834 million in Q3 2021.
This magnitude of growth is impressive considering the ongoing effects of the COVID-19 pandemic. As vaccination rates continue to improve, it is reasonable to believe that Airbnb may have even more runway to grow.
Keep an eye on valuation
Generating record revenue and profits is certainly an amazing feat in any economic environment. What may be even more encouraging to investors is the rate at which Airbnb is catching up to pre-pandemic levels. In 2019 Airbnb generated $38 billion in gross booking value. For the nine months ended Sept. 30, 2021, Airbnb generated $36 billion in gross booking value, representing 94% of its pre-pandemic results. By comparison, competing travel platforms Booking.com and Expedia have generated 60% and 51% of pre-pandemic bookings through the first three quarters of 2021.
Despite its revenue growth and optimized capital efficiency, Airbnb is trading near all-time lows. As of the time of this writing, it is trading for roughly 21 times its trailing-12-month sales. Given that the company has effectively reached pre-pandemic demand through the first nine months of 2021, Airbnb is proving that its platform is appealing to a growing number of consumers compared to its competition, namely traditional travel and booking platforms.
Likely more tailwinds to come
Airbnb is quickly evolving into a travel industry leader. The company's unique value proposition satisfies the needs of both hosts and consumers, as both wish to solve the same problem: Longer stays at an affordable price.
Although its financial results are stunning, investors should consider that the world is still operating in the middle of a pandemic. For this reason, it is possible that travel will experience further, more pronounced increases in the future which could serve as a lucrative tailwind for Airbnb. As the company hovers around all-time lows, now may present an opportunity for investors to buy the dip.