I believe right now is a great time to be buying shares of short-term rental platform Airbnb (ABNB +0.22%), even though economists are predicting a recession in 2023, which could affect the travel industry.
In this article I'll explain the merits of an Airbnb investment today, including something you might not be thinking about. And I'll also explain why the dark economic clouds on the horizon don't hold me back from investing.
NASDAQ: ABNB
Key Data Points
Why Airbnb is a great business for a portfolio
Through the first three quarters of 2022, Airbnb has spent over $1.1 billion on sales and marketing, up 33% from the comparable period of 2021. But keep in mind that according to chief financial officer David Stephenson, only about 10% of traffic from bookers is the result of advertising. Most traffic, therefore, is organic.
Airbnb knows that most people already know about its platform and don't need an ad, which is a competitive advantage, in my opinion. Therefore, it focuses much of its marketing budget on recruiting more hosts so that it can grow its supply. And by growing its supply, the company can ensure it has ample options for bookers no matter where or when they're traveling.
By simply providing a marketplace for short-term rental properties, Airbnb is a high-margin opportunity, with a gross margin over 80% and an operating margin over 20%, as the chart below shows.
ABNB gross profit margin, data by YCharts; TTM = trailing 12 months.
Airbnb had one-time expenses with going public, which is a big reason its profits dipped in the chart above. This event aside, it is getting more profitable with scale -- something many investors haven't noticed. It earned $1.2 billion in net income in the third quarter of 2022 on $2.9 billion in revenue -- a mind-blowing 42% profit margin and its highest quarterly profit ever.
To succinctly summarize the business, Airbnb is top-of-mind with travelers, it's spending to keep its supply growing, and its profits are getting better as its revenue goes up. These are all attractive qualities.
Moreover, the stock is trading at its most attractive levels ever, thanks to its 60% drop from its all-time high. This is true from multiple perspectives, as the chart below for sales, earnings, and free cash flow demonstrates.
ABNB PS ratio; data by YCharts.
Why I'm not waiting for a possible economic storm to pass
According to Bloomberg, 70% of economists say a U.S. economic recession is coming in 2023. And this possibility is why, according to The Fly, Wolfe Research analyst Deepak Mathivanan recently downgraded the stock of Airbnb rival Expedia, which owns Vrbo. After all, an economic slowdown would logically slow travel demand, which could impact Airbnb's business as well.
CEO Brian Chesky is far more optimistic about what adverse economic circumstances will do to Airbnb's business. As he pointed out in the company's recent conference call, the Great Recession incentivized people to start hosting on Airbnb, to earn extra income. The same could happen if a recession materializes in 2023.
Data from third-party analytics company AirDNA is similarly encouraging. AirDNA predicts that overall short-term rental demand will increase 5.5% in 2023 and that average daily rates (what it costs to book an Airbnb) will increase 2%. Both of these things would be huge for Airbnb in the coming year.
I bring up these disparate viewpoints on the state of the travel industry and the implications for Airbnb's business to highlight wisdom from investing guru Peter Lynch, who said: "Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested."
Airbnb could be in for a rough year in 2023 because of the economy. Then again, it might not be. I really can't predict the macroeconomic conditions, and Lynch would encourage me to not even try.
I can ascertain that Airbnb is a quality business trading at its most attractive price ever. And to me, that makes it worth holding in a diversified portfolio.
For those who are worried about what 2023 has in store, the best course of action may be to dollar-cost average -- buy small amounts of Airbnb stock at set intervals. If it drops because of challenges, you'll get a better price later. But if Airbnb overcomes its challenges and the stock goes up, you'll already be invested.
