Airbnb (ABNB 0.10%) stock shot higher after the company announced results for the fourth quarter and all of 2022. Both revenue and earnings handily exceeded analyst estimates. Investors have taken a keen interest in the stock since its 2020 initial public offering (IPO) as the company helps to transform the vacation rental industry.
A question worth asking now is how much the company can potentially grow from here. Could its market capitalization reach $1 trillion, and if so, can that happen by 2035? Let's take a closer look at what that would take.
The path to $1 trillion
Airbnb's market stands at $77 billion as of this writing. To reach $1 trillion by 2035, its market capitalization would have to grow at a compound annual growth rate of 24%.
According to Morningstar/Ibbotson & Associates, S&P 500 earnings grew at 10.5% on average between 1926 and 2021. Hence, the internet and direct marketing retail stock will have to more than double the S&P 500's performance for the next 12 years.
It also faces some challenges on that path. Lodging is a competitive industry, and Airbnb is not even a first mover in the short-term vacation rental space. Expedia's VRBO pioneered the concept.
Additionally, events outside Airbnb's control could derail growth. This actually occurred in 2020 when the pandemic led to a near standstill in the industry, forcing the company to adapt. But Airbnb showed it could adapt as it shifted its focus to its core mission, namely home rentals, and slashed spending on marketing and executive salaries. Also, because it did not launch its IPO until late in 2020, it avoided most of the stock price volatility that took place that year.
Moreover, smart investors know it has developed some unique competitive advantages. It utilizes artificial intelligence (AI) to properly price properties and better understand the needs and wants of individual customers. In recent months, it has also created a new rental market by helping apartment dwellers find tenants to fulfill leases they no longer need.
With over 6.6 million active listings on its site, it can also continue to build on network effects and name recognition.
What the financials say
Indeed, events like the pandemic will weigh heavily on the financials. However, if one does not include 2020, the company has logged impressive growth. Revenue increased by 32% in 2019. And after a 30% revenue drop in 2020, revenue came back from pandemic lows in 2021, rising 77%.
That was followed by a 40% increase to $8.4 billion in 2022. During that time, costs and expenses grew by just 19%. Consequently, Airbnb also turned profitable for the full year with a net income of almost $1.9 billion. That compared to a loss of $352 million in 2021.
For the first quarter of 2023, the company forecast almost $1.9 billion in revenue, an increase of about 21% at the midpoint. Analysts also predict just 12% revenue growth in 2023, indicating that growth is slowing. That could cause investors to question whether they want to buy Airbnb stock at a 50 P/E ratio.
That answer could be yes if the analysts' prediction of 90% annual earnings growth over the next five years comes to pass. But such a forecast amounts to a "way too early prediction" as nearly anything can happen over that time.
Airbnb in 2035
In the end, Airbnb holds considerable potential to become a $1 trillion stock by 2035. In 2022, revenue grew at approximately twice the rate of costs and expenses. Hence, even if revenue growth slows to the forecast 12% rate going forward, earnings growth could exceed 24% per year if revenue growth significantly outpaces cost and expense increases.
Nonetheless, the path is far from certain. Lodging remains a competitive industry, and peers could potentially cut into growth. Moreover, the pandemic served as a reminder of how unexpected disruptions can affect the company. But as long as conditions do not change too dramatically, investors should experience considerable growth over the next 12 years.
