Short-term rental platform Airbnb (ABNB -2.27%) was founded in 2007 -- less than 20 years ago -- and has quickly grown into a big business. In 2022, the company's revenue of $8.4 billion was up 40% year over year. Airbnb believes its market opportunity could be around $3.4 trillion, which would seemingly give the company an enormous runway for future growth.
But a single statement from management in its latest report gives reason to question how much upside Airbnb's core platform realistically has. Let's take a closer look.
Airbnb's surprise announcement
In addition to reporting massive profits, Airbnb's management laid out three areas of focus for 2023 in its financial report for the fourth quarter of 2022. First, it wants to make hosting easy and popular -- this has long been an area of focus. Second, it wants to keep improving the overall experience, which again is nothing new.
But third, management wants to "expand beyond the core," which is novel. This could wind up being an extremely important statement for Airbnb shareholders. By looking for business opportunities outside of its core, management could be signaling that growth inside its core business is becoming more limited.
Let's first remember what Airbnb's core is. In its filings with the Securities and Exchange Commission (SEC), management says that it only has one job (performance obligation), which is to "facilitate a stay." In other words, anything that has to do with getting a guest through a host's door should be considered part of the core.
Indeed, it's fair to wonder how much upside Airbnb's business has servicing this core. Yes, the opportunity is theoretically in the trillions of dollars. However, remember that Airbnb only takes a cut of a transaction as its revenue. The total value of the transaction is known as booking value. And Airbnb already facilitated over $63 billion in booking value in 2022. In other words, it's already captured much more of the opportunity than its revenue of $8.4 billion would suggest.
Furthermore, consider that Airbnb won't capture the entire trillion-dollar opportunity -- there's competition. Therefore, Airbnb's realistic ceiling keeps dropping closer to Earth. And this could be part of the reason its growth rate is slowing.
For the first quarter of 2023, Airbnb expects to generate revenue of $1.75 billion to $1.82 billion, or a gain of 16% to 21% year over year. That's slower than its 40% growth in 2022. And it's dramatically slower than the 70% year-over-year growth it recorded in the first quarter of 2022.
ABNB Revenue (Quarterly YoY Growth) data by YCharts
Slowing growth in the core competency may be what's motivating Airbnb's management to look elsewhere for upside.
In the conference call to discuss Q4 results, co-founder and CEO Brian Chesky said: "We have some pretty big ideas for where to take Airbnb next. And this year, we're going to build the foundation for future products and services that will provide incremental growth for years to come."
Airbnb's management seemed to hint that these products and services will be targeted toward travelers rather than hosts. But it didn't divulge any details about what these incremental revenue opportunities might be.
Why it matters
Airbnb is not a value stock by any means. The stock currently trades at about 47 times its trailing earnings whereas the average for the S&P 500 is around 19. The implication is that Airbnb's profits could almost triple from where they are today before it would be considered a cheap stock in absolute terms.
S&P 500 P/E Ratio data by YCharts
In other words, for Airbnb stock to be more reasonably valued, either the stock price needs to come down or profits need to go up.
Speaking broadly, Airbnb's profits can go up in two ways: revenue can increase or the profit margin can improve. However, Airbnb's net profit margin was about 23% in 2022 -- this is already among the highest on this stock market. Expecting meaningful margin expansion from here seems unrealistic.
Therefore, to grow its profits and justify its stock price, Airbnb will primarily rely upon revenue growth. On one hand, management explicitly says that growth will come from increased activity on its platform. As Chesky said, "Our core business has a huge amount of growth ahead of us."
That said, Airbnb will be looking for incremental growth opportunities outside of the core this year, potentially motivated by its slowing revenue growth. And because of its valuation, growth is something the company needs. That's why this is an area for shareholders to focus on in coming quarters.
