Airbnb (ABNB 0.91%) has a growing business but a shrinking stock price. The vacation rental specialist has seen its shares drop over 30% in the year ended in mid-January even though its last few operating updates have featured strong growth, cash flow, and profits.
Is Wall Street right to push the stock price down on fears of a recession ahead, or will investors who hold it over the next several years be happy that they did? Let's take a look at where Airbnb might be headed by 2026.
Latest results
Airbnb is cruising into 2023 with solid momentum. Sales in the most recent quarter (which ran through late September) were up 29% to $2.9 billion. The company was solidly profitable, too, as it benefited from high demand for vacations and rising nightly prices. "Our Q3 results demonstrate that Airbnb continues to drive growth and profitability at scale," executives said in an early November shareholder letter.
The main worry is that the good times are about to end. As a consumer discretionary stock located in the travel and vacation niche, Airbnb is highly vulnerable to a recession. If one develops in 2023, then the business might see major sales and earnings pressures for several quarters.
Growth initiatives
Wall Street is wrong to look at Airbnb as a pure vacation stock, though. It is a more diverse business, with hosts located in both metropolitan areas and rural areas. Longer stays are increasingly common on its platform, meaning that people are using Airbnb for remote work and short-term living experiences rather than just weekend getaways.
And don't forget that the company got its start during the Great Recession in 2008 when many people were looking for ways to turn unused rooms and entire homes into income. All these factors suggest the company can perform well even through a downturn.
The stock is worth watching
Still, the short-term outlook is unusually cloudy thanks to the combination of rising interest rates and slowing consumer spending. Investors who are worried about short-term volatility might want to choose a stock in a recession-resistant category like consumer staples.
If you don't mind holding through a period of elevated risk, though, the stock looks attractive. The price-to-sales (P/S) ratio has declined by about 50% in the past year to 8.6. Sure, that's still high compared to purely vacation-booking platforms like Expedia. But Airbnb is poised to generate far higher profits, with the operating margin today sitting at over 20% of sales.
ABNB PS Ratio data by YCharts.
In any case, Airbnb is likely to be setting sales and earnings records in a few years, and investors by that time will have much more clarity about economic growth trends. Waiting for that clarity will remove some risk, but the biggest returns will be available for investors who are willing to buy during a time of elevated pessimism like the current period.
Airbnb shares have room to fall more in 2023 if the economy turns sharply lower. But the wider outlook is bright for the industry and for the business. That's why its worth keeping Airbnb on your watchlist as a potential long-term addition to your portfolio.
