Down 28% over the last 12 months, shares of Airbnb (ABNB 0.76%) underperformed the Nasdaq Composite Index, which declined 14% in the same period. But despite a rough go during the pandemic, the company's streamlined business model and burgeoning profitability could position it for long-term success. 

Why has Airbnb stock historically underperformed?

Despite being one of the most disruptive hospitality companies in history, Airbnb struggled to create value for its shareholders since hitting the markets through an initial public offering (IPO) in December 2020. 

On the first day of trading, Airbnb opened at $146 per share, giving it a market cap of $86.5 billion. Naturally, this was great news for the company's early backers, who bought shares before it went public. But new shareholders were left holding the bag, especially as the pandemic turned the hospitality industry upside down in 2020 and 2021. 

Airbnb's stock performance worsened in 2022 when the Federal Reserve embarked on its fastest rate-hiking cycle in history. Tightening monetary policy tends to hurt the valuations of growth stocks by reducing the projected future value of their profits while making it more expensive for them to get the capital to expand. But the good news is that Airbnb turned all of its challenges into opportunities. 

A leaner and more profitable company 

While many technology companies were overexpanding during the pandemic, Airbnb used the crisis to streamline its business model. In 2020, the company laid off 25% of its workforce and embarked on cost-cutting measures targeting management compensation, marketing expenditures, and more. The results are impressive. 

$100 bills pinned to a dartboard

Image source: Getty Images.

In 2022, revenue jumped by a whopping 40% to $8.4 billion, while the company generated its first full-year net income under generally accepted accounting principles (GAAP), at $1.9 billion. Airbnb's free cash flow of $3.4 billion represents a more than 3,000% increase over 2019, before the pandemic.

The strong bottom-line numbers suggest Airbnb is finally transitioning from a speculative growth stock to a sustainably profitable blue-chip tech company -- although it is still a bit early to make that call.  

The company also might be surprisingly resilient against macroeconomic headwinds, such as inflation and a possible recession. As economic pressures mount, more families are incentivized to list their properties on Airbnb for supplemental income. The platform can also serve as a lower-cost alternative to traditional hotels.

How is the valuation?

With a forward price-to-earnings (P/E) multiple of 36, Airbnb shares are more expensive than the Nasdaq average of 20. But the premium looks justified when considering the company's healthy top-line growth and tremendous cash flow and profitability. 

While the economic outlook remains uncertain, with interest rates rising and a potential recession on the horizon, this innovative hospitality disrupter looks like a great way to bet on a future bull market.