If there is supposed to be a looming recession for the global economy, Airbnb (ABNB 1.02%) did not get the memo. The online travel marketplace just posted fantastic financial results for the fourth quarter of 2022 as more and more travelers continue to join its platform as both customers and hosts.
There were concerns from Wall Street around how inflation, bad rental experiences, and an oversupply of hosts could affect its business, but Airbnb just proved that sometimes the investor narrative does not line up with reality.
Right now, the Airbnb bulls are winning against the bears, with the stock up 50% in 2023. But does that mean you should buy shares today?
No signs of a slowdown in the travel market
Bears on Airbnb have many theories about why the platform had reached its peak. These include guest frustration with bad hosts and sneakily high cleaning fees, an oversupply leading to lower average daily rates, and the fact the business benefited greatly from the COVID-19 pandemic "work from anywhere" transition.
So far, if these things are happening at all, they are proving to have a small effect on Airbnb's business. In Q4 of 2022, nights and experiences booked on Airbnb grew 20% year over year to 88.2 million, leading to gross booking value (GBV) -- or the total amount of dollars flowing through its platform -- growing 20% year over year to $13.5 billion. Since Airbnb takes a small slice of every payment through its network, GBV growth directly leads to revenue growth for the business and is a key performance indicator that investors should follow closely.
With that being said, revenue did grow in line with GBV in the fourth quarter, up 24% year over year to $1.9 billion. Unlike many of its Silicon Valley peers that recently went public, Airbnb sports a very high profit margin, generating a net income of $319 million last quarter and $1.9 billion for the full year. These figures are due to the company's discipline regarding employee hiring, with its total employees actually down 5% since 2019 even though revenue is up 75%. And this is with the company still experiencing headwinds in Asia with a slower recovery from the COVID-19 pandemic and by making an official exit from the local China market last year.
Accelerating product expansion
In 2022 Airbnb homed in on improving and expanding its core short-term lodging product. It added an easy host setup guide, strengthened its host insurance product, called AirCover, and launched what it is calling "Airbnb-friendly apartments." This is a partnership with apartment buildings that let their tenants rent out their units on Airbnb, which is a clever way to increase supply (and therefore the value proposition for travelers) on Airbnb.
In 2023, with pandemic restrictions in the rearview mirror, Airbnb said it will continue to work on perfecting its core service but also start launching some new products that it believes can drive "incremental growth for years to come," according to its shareholder letter.
There are scant details on what these products will be, but a few obvious ones make sense.
First, like most other travel companies, Airbnb could finally launch a loyalty program and Airbnb credit card to make more money off of its power users. Second, it could start partnering with airlines on ticket purchases since many guests are purchasing airline tickets and Airbnb reservations at the same time.
Whatever these product launches are, Airbnb is now firmly on the offensive, as opposed to a few years back when it was just trying to stay operational during the height of the COVID-19 pandemic.
But what about the valuation?
Airbnb's business is humming along just fine, but its earnings multiple is less than desired for value-focused investors. At its current market cap of $83.5 billion, shares trade at a price-to-earnings (P/E) ratio of 46, which is more than double the S&P 500's current average P/E of 21.
ABNB PE Ratio data by YCharts
I have no doubt that Airbnb can grow into this high earnings multiple over time, especially if some of these new product launches prove to be successful. The big question is: How many years will that take?
If you want to buy shares today, you need to be comfortable taking on the risk of near-term multiple compression, which could send Airbnb shares down 50% or more if its P/E falls back to the market average. However, if you are comfortable that the business can grow GBV at double digits for a decade and plan to hold your shares for that long, now could be a fine time to take a position in Airbnb stock.
