Since going public in Dec. 2020, Airbnb (ABNB 1.20%) stock's performance hasn't been very inspiring. Shares are still down nearly 50% from the all-time high they set about 18 months ago. Many investors may be wondering: Is Airbnb's business headed in the wrong direction?
Reviewing Airbnb's business fundamentals and holding a long-term perspective can provide a great deal of clarity. Here are three reasons why taking advantage of Airbnb's low stock price is likely to produce stellar results for patient investors.
1. A global brand that keeps growing
Airbnb has become a household name by offering travelers the opportunity to choose from an unmatched variety of accommodations, experiences, and price points.
Image source: Getty Images.
In the process, Airbnb has also created a source of income for the platform's hosts, who share all or part of their properties with guests. The supply of properties on Airbnb's platform reached an all-time high in the second quarter, and in July, there were a whopping six million available properties listed for rent.
The number of nights and experiences booked in the second quarter jumped 25% year over year and 24% over the same quarter in 2019 (before the pandemic), reaching 103.7 million. Gross booking value (GBV) -- the total value of all transactions on Airbnb's platform -- was $17.0 billion, increasing 27% year over year. Airbnb's take rate -- revenue collected by the company as a percentage of GBV -- was 12.4%, producing revenue of $2.1 billion for the quarter, an increase of 58% over the year-ago quarter.
So while Airbnb's shares may be under pressure along with much of the market, its business is seeing incredible momentum.
2. A highly efficient business model
Airbnb is often referred to as a "travel" or "lodging" company, and that can be a bit misleading. Its business is structurally different from traditional hotels and resorts in that it doesn't own, lease, maintain, or operate the properties available on its platform. As a result, that significantly reduces the upfront and ongoing capital expenditures and operating expenses for the company.
Also, the incremental cost and time of adding a new listing or serving a new traveler for Airbnb are almost negligible. In other words, growth for Airbnb comes at a significantly cheaper cost and faster pace relative to traditional hotels that rely on hard assets. And as more travelers use Airbnb, more hosts want to join the platform, creating a natural network effect.
That favorable cost structure and highly-scalable model allowed Airbnb to generate prolific free cash flow of $795 million in the second quarter -- that's an incredible 38% free-cash-flow margin.
With its second-quarter report, Airbnb continues to demonstrate it can achieve growth and profitability at scale. That should give its current and future investors plenty of confidence.
3. Well prepared to handle macro headwinds
If the economy enters a recession, it is quite likely consumers will cut back on their travel budgets, and that would likely impact Airbnb's business. But people don't use Airbnb just for discretionary leisure travel. They also use it for essential travel such as for work.
It's also likely that, in a tough economic environment, Airbnb hosts may be more willing to lower their nightly rates relative to traditional hotels as property maintenance costs for hosts should be lower -- and some income is better than no income.
Finally, as a global company, recession in some parts of the world may not affect Airbnb's business in other parts of the world. That's not to say Airbnb is insulated from economic headwinds, but there are factors that protect its business.
At this point, Airbnb is projecting its third-quarter revenue to grow 24% to 29% year over year (up 69% to 75% over 2019). Also, as of June 30, the company had about $10 billion in cash and marketable securities.
Overall, Airbnb is financially healthy and positioned well to not only survive a potential recession but also come out stronger on the other side given its various advantages over traditional travel companies.
Great opportunity for long-term investors
There is no such thing as a perfect stock, though, and Airbnb has risks that investors should be aware of. First, the competition from well-established players such as Expedia's VRBO as well as smaller regional players is only going to heat up.
Second, some communities have banned or restricted Airbnb as they claim it causes a nuisance to local neighborhoods. Large investment companies have been buying and setting up Airbnb rentals in popular destinations, inflating housing prices. These developments are catching the attention of regulators, and future restrictions could be a hurdle for Airbnb's growth.
Having said that, Airbnb's global brand, scalable business model, and network effects outweigh those risks. And shares are trading close to their lowest price-to-sales valuation ever.
Data by YCharts.
Now is a great time for patient long-term investors to find a spot for Airbnb in their portfolio.
