A little more than two years after it laid off a quarter of its workforce, Airbnb (ABNB 2.77%) has become one of the more profitable companies on the stock market.
In its second quarter, the company posted a net profit margin of 18%, but its performance was even stronger on an arguably more important metric. Based on its free cash flow, the company kept 38% of the $2.1 billion it made in revenue as cash profits. That's real cash it can redistribute to shareholders, invest in other projects, or keep on the balance sheet.
That 38% margin is also far better than that of most publicly traded companies and highlights what makes the company's business model so powerful.
The secret to Airbnb's success
Through the first half of this year, Airbnb brought in $2 billion in operating cash flow. About half of that is unearned fees, or money it collects from guests before they've completed their bookings. Airbnb collects interest on that cash, which becomes a powerful source of income in a high interest-rate environment. There is some seasonality in unearned fees so investors should expect unearned fees to be weaker in the second half of the year as the third quarter marks the peak of the travel season in North America.
However, the more important part of the free cash flow equation is capital expenditures (capex), which are subtracted from operating cash flow to determine free cash flow. Capital expenditures usually refer to spending on property and equipment, which could be for maintenance or new projects.
Airbnb spends almost nothing on capex. Through the first half of the year, the company spent just $11 million, even less than it spent in the first half of 2021, which was just $15 million. That number, more than any other, shows what makes the business so special.
By comparison, top competitors like Booking Holdings and Marriott spend more than 10 times that on capex, even though their recent revenue is only roughly double that of Airbnb's. As a fast-growing company, Airbnb might be expected to spend more on capex than its peers, but that's clearly not the case.
That number shows that Airbnb can run its business and grow rapidly, with 58% revenue growth in Q2 and almost no additional investment in infrastructure. In other words, its technology has reached a scale where it requires little capital spending. Airbnb's hosts do much of the work of making the business run, and Airbnb can sit back and collect commissions and fees on bookings. It's a wonderful business model, and Airbnb's monopoly of the home-sharing market, with an estimated 74% market share, only makes it better.
Airbnb can run its business with so little capital investment because the company's balance sheet is made up almost entirely of cash. Of the $19 billion in assets on the balance sheet, $17.4 billion is in some form of cash or receivables, including funds received from customers, marketable securities, and unrestricted cash. It owns just $118 million in property and equipment.
Its business is successful not because of physical assets, but because of its leading brand, its scale, and the network effects of home-sharing, which gives Airbnb a wide economic moat.
What it means for investors
With little required capital investment to grow the business, Airbnb's profit margins should continue to expand. While the company still has recurring expenses for things like payment processing, data centers, employee salaries, marketing, and product development, both the income statement and its massive free cash flow margins show the company's outstanding ability to turn revenue into profits.
Airbnb stock is down roughly 50% from its peak late last year even though the business is booming during the travel recovery and growing into a huge addressable market worth more than $1 trillion. Wall Street seems to be underestimating the company's profit potential and the competitive advantages of its business model. Investors should take advantage of the sell-off and buy this money-printing machine now.
