Airbnb (ABNB 1.09%) is a worldwide facilitator of travel. Of course, this was not a great business at the pandemic's onset when the activity nearly came to a halt. But Airbnb is bouncing back and has the characteristics of an excellent company.
It participates in a massive, addressable market with an asset-light business model and is trading at a relatively inexpensive valuation. That said, its chosen business model can make it challenging to deliver quality and consistency to consumers. Let's look closer at three reasons to buy Airbnb stock and one reason to hesitate.
Image source: Getty Images.
1. Airbnb operates in a massive, addressable market
In 2019, before the outbreak, consumers spent an estimated $1.5 trillion on hotels and resorts worldwide, according to the researchers at Statista. That figure crashed to $610 billion in 2020 before bouncing back to $950 billion in 2021. Even if it does not grow further from here, $950 billion is a massive market opportunity.
It means that Airbnb could grow its revenue tenfold from its 2021 total of $6 billion and still capture less than 10% of the overall market. If Airbnb manages to capture 20% of the market, its revenue could be $190 billion. And that's without considering the likelihood that the industry rebounds above pre-pandemic levels over the next few years.
ABNB Revenue (Annual) data by YCharts.
2. Its business model is easier on the balance sheet
Airbnb has chosen not to own or operate any of the properties listed on its platform. Instead, it invests in the capabilities of its website and app to facilitate transactions between travelers and hosts. Airbnb then takes a percentage of those exchanges as revenue. The model puts less strain on the balance sheet because it does not require significant investments to buy or build hotels or resorts.
What's more, it allows Airbnb the potential to snowball along with consumer demand. Suppose there is a surge in customer interest for the types of properties available on Airbnb, typically different from traditional hotel rooms. In that case, its hosts will list more often, incentivized with more money. That's in contrast to legacy hotels, which cannot grow much more after booking every space available without spending large sums on expansionary construction.
3. Airbnb is trading at a relatively inexpensive valuation
Growth stocks have gotten hammered in 2022. The investor pessimism has not spared Airbnb, now selling at a price-to-free-cash-flow ratio of 28.5, near its lowest level ever. That's creating an opportunity for long-term investors to buy this excellent business cheaper than ever.
ABNB Price to Free Cash Flow data by YCharts.
A reason to hesitate: Difficulty with quality control
Of course, there is a disadvantage of the asset-light business model discussed earlier. That is, Airbnb cannot effectively deliver quality stays for travelers. Besides handling payments, Airbnb takes a hands-off approach, leaving hosts and guests to communicate directly to exchange information. Sometimes, properties may not be presented to travelers in good condition or the experience is not what was anticipated.
Booking a place to stay with Airbnb could be as varied as the number of its hosts. The uniqueness that attracts travelers to Airbnb could also be its Achilles' heel, potentially turning people off after a few poor experiences.
The reasons to buy Airbnb are more compelling than the reason to hesitate. In particular, the massive market opportunity means it can be hugely successful while capturing just 20% of the market.
