Airbnb (ABNB -3.18%) was one of the hottest initial public offerings (IPOs) of the 2020 bull market. Launching at a market capitalization north of $100 billion, the short-term rental and travel platform instantly became one of the largest companies in the world when it went public in December of that year.
But in 2022, the market value of Airbnb turned southward, with shares down around 50% last year. Nobody wants to own growth stocks like Airbnb in a bear market, even if the underlying business is improving. But short-term pessimism from Wall Street can provide fantastic buying opportunities for those looking to grow their wealth.
Here's why investors should consider Airbnb for their portfolios in 2023.
Long-term opportunity to expand the rental market
The COVID-19 pandemic disrupted many businesses, but perhaps none more than Airbnb. With nobody traveling, the platform that allows people to rent out any type of lodging to travelers saw a huge drop in demand. But through cost-cutting measures, multiple capital raises, and some innovative product releases, Airbnb was able to make it through the lockdowns intact.
Now, the business is booming. People are traveling again, and with the rise of remote work, many are doing so through Airbnb. In fact, in Q3 of this year 20% of gross nights booked on the platform were for stays of 28 days or longer, and 45% were for stays of seven days or longer. This expansion to longer rentals has helped Airbnb grow its financials, with revenue up 29% year over year last quarter to $2.9 billion, which was on top of 67% growth from the quarter a year earlier.
There's still a huge opportunity for Airbnb to grow if it can expand the travel rental market, just as it's done for the past 10-plus years. Analysts estimate that the vacation rental market will grow by 5% a year and hit $107 billion in spending by 2027. Airbnb, as it expands the market for travelers worldwide, should be a key driver of this industry growth.
Growth of experiences and adjacent opportunities
Outside its core platform, Airbnb is working to expand its product offerings for customers through its experiences business. Experiences are events and activities that hosts can offer to travelers, such as cooking classes, tours, and sporting activities. During the pandemic, this category expanded to online experiences as well, which Airbnb said was its fastest-growing product ever. Experiences will probably never be as big as vacation rentals, but it is a large market opportunity and should help drive revenue growth for Airbnb.
Management has also held back on releasing products like an official Airbnb credit card or a rewards program for customers. These are products almost every travel company offers and can be an easy way for Airbnb to lock in its core customers and grow sales in the coming years.
These won't be game-changers for the business, but there's still a lot of low-hanging fruit for Airbnb to go after as the platform matures. For example, the company just announced a partnership with various apartment buildings across the United States to easily let tenants rent out their places part-time on Airbnb, further expanding its rental supply for customers.
Combine the growth of the hosting, experiences, and add-on features, and I think Airbnb is poised to grow its revenue at a double-digit rate for the foreseeable future.
The stock is still not cheap today
Even though Airbnb is down nearly 50% in 2022, the stock is not cheap at today's prices. With a market capitalization of $54 billion and $1.6 billion in trailing net income, Airbnb has a price-to-earnings ratio (P/E) of 34, which is expensive compared to the S&P 500's average of 20. What this means is that investors are expecting the company to grow its earnings faster than the market average.
ABNB Net Income (TTM) data by YCharts
I think there's a good chance Airbnb will grow its earnings at an above-average rate over the next few years, given the opportunity ahead of it in short-term rentals, experiences, and the overall travel industry. I wouldn't call it a can't-miss buying opportunity, but there is a good chance Airbnb does well for shareholders over the next five years if you buy the stock right now.
