Airbnb (ABNB 2.77%) stock is back in Wall Street's good graces. After underperforming the market in 2022, the booking platform's shares jumped over 30% higher in 2023 through late March.
A quick rally like that might convince many investors to look elsewhere to find an attractive growth stock. Many tech peers are down in 2023, after all. But there are a few good reasons to like Airbnb stock right now, and one major reason for caution. Let's take a closer look.
Momentum is strong
Airbnb's platform could have many years of strong growth ahead as more hosts move onto the platform and more people book rooms, homes, and apartments for short-term -- and sometimes long-term -- stays. But Airbnb's short-term momentum is solid, too.
Revenue in the most recent quarter jumped 24%, thanks to the combination of higher booking volumes and increased average daily rates. Airbnb didn't struggle to generate earnings from these gains, either. The $319 million it generated in Q4 was a record, with net profit landing at 17% of sales, compared to 4% a year earlier.
Management sees no hint of an impending slump ahead, either. "We see a strong back log for Q1," executives said in a recent shareholder letter, "with longer lead times for bookings."
The bigger growth prize
Investors are likely to see Airbnb significantly grow its reach over time. Besides targeting market-share growth in geographies like Latin America, management's growth initiatives include adding more services for hosts. It's also expanding into the apartment niche, partnering with Airbnb-friendly buildings that will allow renters to hosts guests.
The platform should continue tilting toward longer-term stays, too. Bookings that spanned at least a week were up 40% last quarter, and stays of 28 days or longer currently account for 21% of all sales. Finally, management is making a big push in 2023 to reduce prices, even as it adds much more supply to the platform.
Some of these initiatives could deliver stronger returns than others. But there's a good chance that Airbnb can lean on its solid market-share position to move into complementary growth areas. "We have some big ideas for where to take Airbnb next," executives said in mid-February.
The valuation challenge
Unfortunately, an investor will have to pay a premium for that growth potential. And Airbnb's valuation has only increased in 2023. The shares are currently priced at nearly 10 times annual sales, up from below seven times in early January.
The stock had been valued at much higher levels in earlier phases of the pandemic. But since then, the global growth outlook has darkened. Airbnb isn't as exposed to a recession as some of its more vacation-focused peers. In fact, the platform might attract more hosts at a time when people are looking to generate more income from unused real estate space.
Still, you're taking on a risk when buying a growth stock at such a premium, especially in uncertain economic times. Investors might decide that the risks are worth it, considering Airbnb's positive momentum and its strong cash and profit trends. The 2022 fiscal year was the company's first profitable one, and there will likely be many more ahead.
If you're more cautious, though, you might want to watch the stock for signs that it can continue boosting earnings even as global economies slow and vacation travel demand recedes.
