The new year provided a rough start to the stock market, increasing volatility and punishing growth stocks. The downturn opened up an opportunity for me to buy one stock I have had on my watch list for several months.
Airbnb (ABNB 3.35%) is a worldwide facilitator of travel. As a result, it was devastated at the pandemic onset when fewer folks wanted to travel. However, it is recovering quite nicely. Despite the positive developments, the stock is down 17% in the last year. The falling price and the fact that the omicron variant is not causing significant changes in consumer mobility is what gave me the incentive to finally open a position. Here's what attracted me to Airbnb stock in the first place.
Preparation meets opportunity
One of my favorite aspects about Airbnb is the asset-light business model. Airbnb does not own or operate any physical properties that folks can book on its platform. Instead, Airbnb brings travelers together with hosts and takes a percentage from each transaction on its site. That allows Airbnb to expand and contract more quickly in response to market demand.
For instance, if there is a boom in customer demand for travel, Airbnb will benefit as hosts will be encouraged to list more properties more often, and it will become enticing for new hosts to join. Compare that to a traditional hotel or resort operator, which must anticipate a jump in demand early enough to build expensive hotels or resorts to take advantage. That can also be a risky proposition, spending millions or even billions on expansions in anticipation of demand, which may not turn out as planned.
Speaking of market demand, the hotel and resort industry is massive. According to Statista, the industry generated $1.47 trillion in revenue in 2019 before the outbreak. And there is plenty of room between where Airbnb is now, with $11.9 billion in bookings in its most recent quarter, and the size of the overall industry.
Airbnb has an excellent opportunity to take a meaningful share of that market, partly because of the business model discussed above. Airbnb does not require massive capital investments to take a more significant market share.
Of course, none of its success would be possible without an excellent customer value proposition. The broad selection available to travelers on Airbnb is an attractive feature. Rarely are the needs of travelers closely matched by what traditional hotels provide. A single traveler may not need an entire hotel room, and might prefer more modest accommodations at lower prices.
In travel accommodations, like clothing, the right fit is critical. Few people enjoy paying for space they don't need because there is no better option. Airbnb can be one of those better options.
The timing was right
Notably, during the significant decrease in demand at the pandemic onset, Airbnb optimized its cost structure and reduced expenses. As a result, in its most recently reported quarter (ended Sept. 30, 2021), it reported a net income of $834 million, its highest ever in a quarter, and 213% higher than in 2019.
Moreover, even though people are more comfortable leaving their homes again, travel has not rebounded to pre-pandemic levels. Airbnb's revenue was 36% ahead of 2019. However, the overall market only recovered two-thirds of pre-pandemic revenue in 2021. Still, eventually, the travel industry will recover, and Airbnb could ride that wave higher.
Finally, the sell-off provided an opportunity to buy Airbnb's stock inexpensively. In January, investors had the chance to buy Airbnb at the lowest price-to-free-cash-flow ratio in its young history as a public company. Needless to say, I did not pass on that opportunity.