Picking market-beating stocks in a volatile economic environment is no easy feat, especially as some economists are calling for a deep recession next year. In an uncertain environment, though, it's always smart to look for stocks with sustainable competitive advantages, attractive valuations, and the means to outperform in an economic downturn.

One overlooked stock with those qualities that comes to mind is Airbnb (ABNB 0.49%), and it's my highest-conviction stock to buy going into 2023.

An Airbnb host walking down an outdoor staircase.

Image source: Airbnb.

A compelling case

If you're familiar with Airbnb's business model, the competitive advantages are easy to understand. The company has Google-like mindshare in the home-sharing industry. Its name is both a noun and verb used to describe the accommodations offered on the platform, and it has a monopoly in the home-sharing market with a 74% market share, according to M Science.

As the leading home-sharing marketplace and the company that invented the concept, Airbnb benefits from significant network effects, switching costs, and brand recognition.

The company has also disrupted the travel sector, rapidly taking market share from traditional hotel operators and online travel agencies like Booking Holdings and Expedia.

Since 2019, before the pandemic, Airbnb's trailing twelve-month revenue has jumped 67%, while peers like Expedia, Marriott, and Hilton have all seen revenue shrink in that timeframe. Booking Holdings, on the other hand, has managed just 6% revenue growth.

In addition to the competitive advantages above, Airbnb's business model also gives it a degree of flexibility that none of its competitors can match. During the pandemic, when people around the world were looking to escape cities, Airbnb stays sprung up in rural locales to meet that demand. Hotels can't open new locations overnight like that.

As much of the world is facing a cost-of-living crisis right now, Airbnb's business is adapting -- the company said last month that single-room-listings jumped 31% over the last year as more people become hosts as a convenient way to make ends meet. Once again, hotels don't have the ability to meet changing demands like this, adding cheap new inventory as the world heads into a possible recession. The best hotels can do is lower rates for existing rooms.

Impressive fundamentals

Not only does Airbnb's business model pass the Warren Buffett test, but the financials indicate a spectacular business as well. Revenue jumped 29%, or 36% in constant currency, in the third quarter to $2.9 billion. And over the last four quarters, it has a GAAP net profit margin of 20%, which is likely to expand thanks to its scalable business model. The company also has tremendous growth potential. It's penetrating a massive industry worth more than $1 trillion, and it's been disciplined about spending since it laid off a quarter of its staff at the beginning of the pandemic, which should encourage investors as well.

Because the company owns none of the properties on its platform, it spends almost nothing on capital expenditures. Through the first nine months of the year, Airbnb spent just $16.6 million on cap ex while generating nearly $3 billion in operating cash flow. Over the last four quarters, the business generated $3.3 billion in free cash flow for a margin of 41%. 

In other words, Airbnb is very efficient at turning its bookings into profits.

2023 could be better than expected

While most economists are predicting a recession in 2023, with some calling for one in the first half of the year, the travel sector could skate by relatively unscathed. Demand for travel has thus far been mostly resistant to the current macro headwinds, and travelers still seem to be making up for lost time during the pandemic.

Most airlines have pushed back against expectations of a recession, and United Airlines CEO Scott Kirby said earlier this month he's seen no signs of a recession in his company's data. TSA data also shows air travel continuing to recover with passenger throughput up 11% so far in December from last year -- though throughput is still down 6% from 2019 levels, perhaps indicating more room for a recovery. Air travel is typically sensitive to the overall economy, so it's odd to see the industry hold fast even as sectors like tech, retail, and advertising are all clearly struggling.

Even if a recession does hit the travel sector, Airbnb's flexibility makes it better positioned than its competitors. The company can offer a wider range of prices than its peers, including single-room listings, which even Expedia's VRBO doesn't have. Since Airbnb offers anyone the potential to supplement their income, it could also see an influx of new hosts during a recession.

Finally, higher interest rates benefit the company since it collects interest on the funds it holds for hosts between the time of booking and the actual stay. In the third quarter, it earned $58 million in interest income, and it could make significantly more than that next year as the Fed funds rate is expected to approach 5%.

A scene on the coast of Portugal

Image source: Getty Images.

An attractive valuation

For a company with a disruptive business model that's rapidly gaining market share, Airbnb stock looks surprisingly cheap.

Shares trade at a price-to-earnings ratio of 38 based on trailing GAAP earnings, which is about double that of the S&P 500. On an enterprise value to FCF basis, the stock trades at a ratio of just 15.

Wall Street expects Airbnb's growth to slow next year, and it's likely to moderate as the travel recovery tailwinds fade, but analysts still seem to be low-balling their estimates. The consensus calls for just 12.5% revenue growth to $9.4 billion as earnings per share rise only 7% to $2.75. Beating those estimates shouldn't be hard.

Since Airbnb's IPO two years ago, analysts have consistently underestimated its performance and seem likely to do so again next year. The stock is now trading just above its all-time low, showing how much pessimism is priced into the shares. It won't take much for Airbnb to bounce higher from here.

If the home-sharing leader can buck expectations and continue to gain market share in its massive industry, the stock should crush the market.