Growth stocks have been getting crushed in 2022 as investor interest has shifted toward stable, slow-growing stalwarts. That means plenty of high-quality growth stocks have been left by the wayside despite continued execution.
Airbnb (ABNB 1.03%) is one company that was left for dead. It has fallen more than 47% from its all-time highs, but is this a bargain buy or a value trap? Two Motley Fool contributors break down what could go right and wrong for Airbnb and determine whether the risk is worth the potential reward for buying shares at these discounted prices.
The bull case: The result of continuous innovation
Jamie Louko: Airbnb is known for its deep bench of over 6 million active listings, ranging from traditional apartments to unique tree houses. The company has developed its brand on the unmatched uniqueness of its offering, which has worked wonders: More than 102 million nights and experiences were booked on the platform in the first quarter alone.
This success has been outpacing larger competitors, flexing Airbnb's brand strength. Expedia Group, for example, grew its gross booking value (GBV) by 58% year over year in Q1, but Airbnb's GBV soared 67% over the same period. Airbnb's net loss was also substantially lower, clocking in at $19 million compared to Expedia's $122 million loss in Q1.
As my Motley Fool colleague will explain below, the main concern with Airbnb is its inconsistent quality. For many customers, the stays they book are hit or miss, but Airbnb is working hard to change that experience. The company recently announced AirCover, top-to-bottom coverage for vacationers. It protects against host cancellations and listing inaccuracies, and will refund consumers if a listing is not up to snuff. This should significantly eliminate the variability in quality and ensure vacationers get what they paid for.
With almost $2.9 billion in trailing 12-month free cash flow, Airbnb has the cash to keep improving its platform and reputation. It also has arguably one of the strongest brands in the hospitality space, and it is quickly gaining market share because of it. And the company is quickly reducing the lowlights of its platform, which could make it even more successful. While the company isn't perfect, I think Airbnb could be a major winner over the long term.
The bear case: Airbnb stays are like a box of chocolates
Parkev Tatevosian: My bear case against Airbnb centers on the inconsistent quality of the of stays booked on the platform. The company does not own or operate the listings on the site. Instead, the listings are populated by hosts worldwide who are attracted to the platform by the opportunity to make money by renting out a space. The problem is that guests could get a vastly different experience depending on the host.
For instance, I once booked a home for my family in Palm Springs, California. The host advertised the property as having a working jacuzzi, one of the selling points. After arriving, we soon noticed the area to walk to the hot tub was under lock and key. Our attempts to reach the host were unsuccessful, and Airbnb customer support was not able to help. Ultimately, we left the host a poor review and were less than enthusiastic about booking our next trip through Airbnb.
These scenarios are inevitable with such a broad base of hosts all over the planet. That's in contrast with hotels and resorts where travelers have grown accustomed to a consistent level of service, depending on the price point (i.e., people who want a luxury experience reserve a five-star hotel, and people on a budget can opt for lesser accommodations).
Of course, part of the appeal of Airbnb is the unique experience it offers. That has propelled revenue from $2.5 billion to $6 billion from 2017 to 2021. But "unique" could mean a worse-than-expected experience or a better-than-expected one. It's unclear whether consumers will tolerate the variability in the long run.
The verdict
Airbnb has had its troubles in the past, but it is working hard to solve the problems that consumers have had. The company will have to reinvest in its business to diminish the flaws of its platform, but it is generating the cash to do just that. This could further its success, which is why investors should be optimistic about the stock.
That said, it will be critical that Airbnb actually delivers the goods. If the company invests heavily into solving this quality concerns, but nothing comes from it, that could be concerning.
At 25 times free cash flow, the shares are reasonably priced. If the company can continue building a more uniform consumer experience, investors should consider grabbing a few shares for the long haul today.
