The Nasdaq Composite posted a sizable 33% loss in 2022, its worst annual performance since the depths of the Great Recession in 2008, when the widely followed index shed nearly 41% of its value. What's encouraging for investors is that the Nasdaq is up 12% so far this year. But it is still about 27% off its peak from November 2021.
Investors can look through the volatility to identify individual stocks they'd like to buy. Innovative travel company Airbnb (ABNB 0.83%) is up 35% in 2023, despite being down 20% since its initial public offering. Does the recent optimism make Airbnb stock a buy right now? Let's find out.
The bullish case for Airbnb
At this point in time, it's incredibly easy to come up with a compelling bull case for Airbnb. For starters, the business is on fire right now, posting 24% revenue growth in the fourth quarter (ended Dec. 31) to total $1.9 billion. Diluted earnings per share of $0.48 increased 500% year over year. And Airbnb generated positive free cash flow of $455 million during the three-month period. Shareholders should be very encouraged by the fact that Airbnb is in full-on growth mode and that it is firmly profitable.
In less than 15 years, Airbnb has become a clear leader in the travel and tourism industry, with a 2022 gross booking value of $63.2 billion. There are 6.6 million active listings on the site, with over 4 million hosts in nearly every country. The biggest hotel chain, by comparison, is Marriott, which has over 8,000 different properties with roughly 1.5 million rooms across the world. This rapid rise to dominance has made Airbnb what's known as a cognitive referent, a brand that is automatically associated with being a top travel service.
Another perhaps obvious favorable characteristic about Airbnb is its most powerful competitive advantage: network effects. At a high level, this is a platform and marketplace company, connecting travelers with hosts. The more hosts there are, the more valuable the service becomes to travelers because there are more options to choose from. And as more travelers visit Airbnb to book their next vacation, a greater number of hosts want to offer their homes on the site.
It's a positive feedback loop that gets stronger and more valuable over time, a situation that's hard for rivals to match.
The bearish case for Airbnb
Shareholders also need to consider the bear case for Airbnb to round out their knowledge of the business. While it does have a strong market position, Airbnb still faces stiff competition. There are hotel chains, like Marriott, Hilton, and Hyatt, that are particularly attractive for lucrative corporate travelers. Then there are more direct rivals, like Booking Holdings and Expedia. Tourists can also start their journeys by searching on Alphabet's Google, as opposed to going directly to Airbnb.
Another key concern centers on regulatory issues, which complicates matters for hosts. Every jurisdiction is different, with some areas not even allowing someone to rent out their home without getting the necessary licenses and permits. Moreover, ensuring the proper safety protocols are in place is a big challenge, both for renters and for the communities that an Airbnb is located in. While a transaction between a host and renter might seem simple, there are always going to be a lot of moving parts, and things can often go wrong. With Airbnb's gigantic scale and worldwide reach, the company needs to always be prepared for legal problems to arise.
The final bear argument for Airbnb focuses on its valuation. Although the stock is still down 20% since its December 2020 initial public offering, it is up a notable 35% in 2023 (as of this writing). And shares trade at a hefty price-to-earnings multiple of 41 right now. At a time when macroeconomic certainty is sky-high and the Federal Reserve is still hiking interest rates, this valuation might be too steep to justify paying in this type of environment.
It's up to investors
Juggling both the pros and the cons with Airbnb is a difficult endeavor. But in my opinion, the positive characteristics narrowly outweigh the negative ones. And this means that it's a good idea for investors to take a much closer look at adding the stock to their portfolios.
