Airbnb (ABNB -0.37%) has quickly matured from an unprofitable growth stock into a profitable one. It posted a record $1.2 billion in net income in the third quarter of 2022, demonstrating its resilience in this economy and viability as a business.
Despite its progress toward growth and profits, investors have sent Airbnb's price down 52% over the past year. Here's why I think this looks like a compelling opportunity.
Leading a change in travel
Airbnb upended the travel industry, which until recently consisted of various hotels and scattered rentals, leading it into unexplored territory. The company has enormous opportunities that are hard to envision right now.
After accounting for its greatest growth in terms of length of visit for many quarters, stays of 28 days or more now account for a reliable 20% of nights booked. In addition to regular vacation rentals, Airbnb has carved out a travel niche that's a cross between vacationing and living.
Remote work is contributing to the rise of this movement. For Airbnb, It's partially a benefit of being in the right place at the right time, but its model supports general changes in travel trends.
The adaptable model
Due to its nature as a platform, it doesn't hold inventory or other capital-heavy assets like land or buildings. That looks good on its balance sheet, but it also gives the company more flexibility and adaptability.
Airbnb provides non-urban rentals that soared when far travel was off-limits, and now urban travel is bouncing back. Urban nights booked increased 27% over last year in the second quarter, and cross-border nights booked increased 58%. All of these factors together contribute to a dynamic, growth-oriented model.
Airbnb's massive host network can expand as necessary, and the rise of remote work is attracting hosts who view Airbnb as a means of generating income. That's also being driven by the economic downturn, since it's a simple way for people to increase their income without a large investment.
Management noted that the company began during the recession in 2008 when people were looking for extra ways to boost their income. When traditional travel suffers, Airbnb can thrive.
Resilience and profitability
This model has held through a devastating pandemic and is growing beyond that. But Airbnb is demonstrating that it's more than a growth stock. It has now posted several quarters of profitability and is generating strong free cash flow. Consider how both net income and free cash flow have increased, not only in raw numbers, but as a percentage of revenue this year.
Airbnb net income as a percentage of revenue. Image source: Airbnb.
Airbnb free cash flow as a percentage of revenue. Image source: Airbnb.
Airbnb is an excellent example of a company that can be extremely profitable at scale. Many growth companies struggle with this, as expenses mount with scaling, and growth eventually tapers off before profits catch up.
CFO Dave Stephenson explained that Airbnb has built up its brand to the point that 90% of Airbnb's website traffic comes directly or unpaid, and it has "radically adjusted our marketing expenditures to be substantially lower." That's in addition to better leverage in fixed costs and improvements in variable costs, and when combined with increased revenue, it's leading to strong profits.
A buying opportunity?
I'll admit that Airbnb stock doesn't look cheap, even at this price. Shares trade at more than 8 times trailing-12-month sales, which is fairly expensive.
Other multiples make the stock price look more palatable. Airbnb's stock is trading at a price-to-earnings ratio of 48, which is a trailing-12-month ratio and includes one quarter of losses over the past year. That valuation doesn't look unreasonable considering it's still projecting double-digit sales growth and EBITDA to increase, and Airbnb deserves some kind of premium for its performance over the past two years.
All this means Airbnb stock looks like an opportunity right now.
