Airbnb (ABNB 2.40%) has reshaped the travel and hospitality space, and the business is back to posting substantial sales growth now that pandemic-related pressures have eased. However, the stock has seen some volatile swings since its initial public offering late in 2020, and the company's share price is now down about 21% from market close on the day of its public debut.
Is now the right time to invest in the rental specialist? Here's a look at risk factors and company strengths that could determine how the stock performs over the long term.
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Airbnb could be a huge long-term winner
Keith Noonan: While Airbnb's share price has fallen roughly 32% year to date, that performance has much more to do with macroeconomic pressures and the market's overall appetite for growth stocks than the state of the business. The travel specialist grew sales 58% year over year last quarter and 73% compared to Q2 2019, and the company looks well-positioned for profitable expansion over the long term.
Airbnb posted an 81% gross margin last quarter, and the business notched record free cash flow (FCF) and net income for the period. The business has now generated $2.9 billion in FCF over the trailing 12-month period, and performance along key metrics should be even stronger in Q3 -- which is typically the company's strongest quarter thanks to the summer travel season.
Through the challenges of the pandemic and subsequent recovery momentum in the travel industry, Airbnb has shown that its business is highly adaptable, and the company is still just scratching the surface of its long-term growth potential.
High levels of inflation, rising interest rates, and other factors shaping bearish trends in the market have pushed the company's valuation down to roughly $73 billion, and the stock now trades at roughly 8.8 times this year's expected sales and 39 times this year's expected adjusted earnings. While that growth-dependent valuation could expose Airbnb's stock to outsized volatility if the broader market continues to struggle in the near term, the long-term outlook remains very promising.
Airbnb has a business that its users love, the company has shown that it can scale profitably, and I think that there's a very good chance that investors who take a buy-and-hold approach with the stock will enjoy market-crushing returns.
A bear case against Airbnb
Parkev Tatevosian: Airbnb is an excellent travel company with an asset-light business model. It does not own or operate any of the properties listed on the platform. While that may be a selling point to investors, it is not such an attractive feature for travelers. Since Airbnb does not operate the properties, it cannot ensure quality or consistency. That is left to individual hosts who serve guests more closely.
Admittedly, this feature has not stopped Airbnb from growing revenue from $2.5 billion in 2017 to $6 billion in 2021; it might, however, hinder its ability to expand to $20 or $40 billion in sales. To achieve broader adoption, Airbnb must convince travelers to trust they will get a good experience when choosing the platform.
Many folks take a vacation only once or twice a year, so they may not be willing to take a chance on Airbnb. Rivals in the hotel and resort industry have developed a reputation for delivering a consistent product, which could be perceived as a lack of variation.
Nevertheless, a vacation is different enough for folks' everyday lives that variation may not be what they are looking for when choosing a rental provider. If the business model does prove a barrier to growth, it would arguably be unfixable.
It's not as though Airbnb can quickly buy all the properties listed on the platform. Admittedly, the risk of the business model falling might be a small-probability event. However, the magnitude of the outcome makes it a bear case worth considering.
Is it time to buy this growth stock?
Airbnb is an innovative, well-run business, but the stock isn't without its risks. The company has a growth-dependent valuation, and continuing to increase sales at a rapid clip could be much more difficult if the company can't continue attracting new users to its platform in significant numbers.
On the other hand, Airbnb has a strong position within its industry, and the stock could deliver impressive returns if the business continues to scale in a cost-effective fashion.
For those worried about the sustainability of sales expansion in the company's niche or those aiming to avoid growth-dependent companies, Airbnb probably isn't a great fit. But for investors who are willing to take on some risk and volatility, the stock offers huge return potential at current prices.
