Wall Street was thrilled with the latest operating update from Airbnb (ABNB 1.04%), which in mid-February showed strong sales growth, profit generation, and cash flow throughout 2022.
Yet some big questions remain about how well the home rental specialist can maintain its momentum as economic expansion rates slow. Airbnb is also facing pricing challenges that threaten to push vacation shoppers into competing services.
Let's take a look at the 2023 bullish and bearish outlooks for this growth stock, starting with some reasons to worry about the business.
The bear case
Airbnb is clearly riding a wave of increased travel demand, but the slowdown has already started. Revenue in Q4 rose 31% after accounting for currency exchange rate shifts compared to a 46% increase for the full year.
ABNB Revenue (TTM) data by YCharts
The platform is also depending more on price increases to drive growth, leaving it exposed to a sharp slump if consumers become more cautious around spending. In a nod to this challenge, Airbnb is rolling out discounting tools and more price transparency in its search results so that shoppers aren't shocked once service fees are included in the booking rate.
Ultimately, the main risk for this business is that it isn't as recession resistant as many shareholders believe. Its business and long-term stay bookings might not insulate it from a spending downturn. Airbnb could ultimately prove to be a highly consumer discretionary business like other travel booking peers such as Expedia. Yet Wall Street is valuing the business at a huge premium compared to these rivals.
The bullish case
Bulls will say that there's plenty to justify that premium valuation. Airbnb's asset-light operating model makes it extremely efficient, for example. Net income in 2022 was $1.9 billion, or 23% of sales. That profit margin is more than double Expedia's and also above Marriott's 10% rate.
Airbnb has more flexibility to grow its sales footprint than a more traditional travel-booking platform, too. Adding services for hosts and expanding into complementary travel experiences are two attractive options.
But its addressable market can also soar as the company makes progress in areas like rental apartments and creating millions of new hosts. "We have some big ideas for where to take Airbnb next," executives said in a recent shareholder letter. That potential is a key reason to like this innovative growth stock as a long-term investment.
Is Airbnb stock a buy?
The good news for prospective investors is that Airbnb's stock valuation has come down significantly even after the 2023 rally. You'd have to pay around 10 times annual sales for the stock today compared to over 20 in late 2021.
Sure, there are much cheaper stocks in the travel industry. And that elevated valuation exposes Airbnb to potentially sharp declines if economic growth sputters. Investors haven't seen the business endure a downturn as a public company, leaving big questions about how well its profits will hold up when people aren't nearly as excited about splurging on trips.
However, management's updated outlook calls for this elevated demand to continue at least into early 2023, meaning bears will likely have to continue waiting for a time when Airbnb faces a severe test to its growth strategy.
