Growth stocks have fallen on hard times. The coronavirus pandemic is causing supply-chain disruptions worldwide and, combined with robust consumer demand, is leading to widespread inflation. To combat rising costs for households, the Federal Reserve is increasing interest rates; when that happens, it lowers the present value of future cash flow, which hurts growth stocks.
Unsurprisingly, many growth stocks are selling off. That said, Airbnb (ABNB 0.90%) is bucking the trend -- up about 2% so far this year even as the S&P 500 is off 7%. Let's look closer at why it's outperforming.
Airbnb is emerging out of the pandemic a stronger business
It all starts with Airbnb's excellent prospects. The business was hurt by the pandemic's onset, with revenue falling 30% for 2020. Management did not sit idle during that time. The company adjusted its cost structure, lowering fixed and variable expenses and making the business more resilient. As a result, profits exploded when revenue rebounded by 77.4% in 2021.
Airbnb reported two consecutive quarters of net profits on the bottom line, and net income in its most lucrative summer travel season was nearly four times the total in the same quarter in 2019. It's clear to investors that the company has emerged stronger from the pandemic. Airbnb has yet to achieve a full year of profitability on the bottom line, but investors are starting to get a peek at its potential, and it is getting them excited.
What's more, worldwide hotel and resort spending is still nowhere near where it was before the outbreak. Consumers spent $1.5 trillion in the category in 2019 and only $950 billion in 2021. Forgive me for saying only $950 billion, but it highlights that spending on travel was still one-third lower than in 2019 in 2021. The fact that Airbnb's revenue is far ahead of 2019 levels -- despite the industry remaining significantly below average -- is a testament to its preferential status among consumers.
An inexpensive valuation
Another reason why Airbnb is holding up so well despite the broad selling in growth stocks is its already inexpensive valuation. Airbnb's price-to-free-cash-flow and price-to-sales ratios are down considerably even though the absolute stock price is holding up. That usually happens when a company improves its operating performance, but the stock price does not increase much in response. Therefore, investors are getting more bang for their buck, so to speak, which is precisely what's going on with Airbnb. Sales, profits, and free cash flow are rising. Meanwhile, the stock has remained relatively flat over the past year.
Is it a good time to buy Airbnb stock?
Airbnb is in an excellent position to benefit from the recovery in worldwide travel. The rebound may spread over the next couple of years rather than instantaneously bounce back in 2022. Nevertheless, Airbnb should capture a meaningful share of the increase in spending. Changes that management made to the cost structure mean the company will be more profitable, too. Of course, it helps that the stock is inexpensive. It points to this being as good a time as any to add shares of Airbnb to your portfolio.