Airbnb (ABNB -3.66%) and other top travel stocks reported strong increases in revenue this year as the industry continues to recover from travel restrictions during the pandemic. But there are lingering concerns about whether the economic softness starting to creep up in auto and retail sales will spill over to the travel sector in the near term.

Wall Street's pessimism has sent Airbnb's stock price down 30% year to date, yet the company is on pace to grow revenue by 38% this year, according to analyst estimates. Does this discrepancy suggest now might be a good time to buy Airbnb stock?

Airbnb has an incredibly powerful brand, and the stock's steep drop in the face of robust revenue growth indicates the answer is "yes."

Travelers seek out Airbnb

Airbnb's strong rate of growth coming out of the pandemic points to a bright future. It has an addressable market of $150 billion, according to Bernstein analyst Richard J. Clarke, who recently called Airbnb "one of the best [growth] stories out there." It's what that growth says about the underlying brand that could make the stock a wealth-building investment.

The company has a unique inventory of listings provided by millions of hosts on the platform. It doesn't have to spend billions on maintaining buildings or other properties. Instead, management pours its capital on new features and marketing, which expands the company's competitive moat -- brand awareness.

Airbnb spent 18% of its revenue on sales and marketing last quarter and is earning a great return on that expenditure, as revenue grew 58% year over year.   

ABNB Sales and Marketing Expense (% of Quarterly Revenues) Chart

Data by YCharts.

Airbnb has mostly operated around breakeven on profitability going back to 2017. But it's starting to generate a growing stream of free cash flow, which is the actual amount of cash generated by the business. Airbnb generated $2 billion in free cash flow over the last year, excluding stock-based compensation expenses. That is a high free cash flow margin of 26% on $7.4 billion of revenue.  

The business could squeeze more cash out of operations by continuing to rely on word-of-mouth marketing, which already drives most of the traffic to Airbnb's platform. This should allow management to lower marketing expenses as a percentage of revenue over time.

During the pandemic, management did an experiment where the company turned off all marketing to see what would happen. The result was that traffic still operated at more than 90% of its previous level. 

As CEO Brian Chesky explained at a recent investor conference, "The lesson is that the more unique your product is, the more people love it, the more word of mouth you have [...] the less you have to spend on marketing." 

Indeed, Airbnb's ability to grow without spending much on marketing is underestimated by the market right now.

Lower stock price = higher prospective returns

Airbnb is already turning into a cash-producing machine. It completely flipped its year-ago loss in free cash flow into a positive number, which shows the company's ability to scale into a highly profitable business over time. This is getting overlooked by investors as the stock falls.   

Metric  TTM Q2 2022 TTM Q2 2021
Revenue  $7.4 billion $4.4 billion
Free cash flow $2 billion ($1.9 billion)

Data source: Airbnb. TTM = Trailing 12 months. Free cash flow excludes stock-based compensation expense.

Analysts expect Airbnb to grow revenue to over $15 billion by 2026. That would put its free cash flow at $3.7 billion, assuming it converts a quarter of its revenue into free cash flow -- the same margin as this year. Using its current market cap of $70 billion (stock price times total shares outstanding), Airbnb will be trading at a price-to-free-cash-flow ratio of 19 times estimated free cash flow in four years.

Generally, buying shares of a fast-growing business at 10x what it will likely generate in free cash flow within five years is considered a bargain. Airbnb is not that cheap, but it is offering a fair entry price for potentially decades of compounding returns.

Investors can consider starting a small position here. It can be hard to put money to work in a bear market, but Airbnb's growth will likely reward investors who stick with it for the long term.