We're barely more than a quarter of the way through the year, and the Nasdaq has already put up some impressive numbers.
The tech-centric index is up 15% through April 11. This is thanks to optimism that the economy could avoid a recession and due to the drumbeat of layoffs from big tech companies, showing that they're responding to investor demands for increased profitability.
However, tech investors aren't out of the woods yet. The Federal Reserve is expected to raise interest rates by another 25 basis points this year, and the upcoming earnings season could be a rough one. Most of the big tech companies reported a sharp deceleration in growth in the fourth quarter.
If you're looking to beat the market this year, there's one tech stock in the travel sector that is well-positioned to beat the headwinds the rest of the Nasdaq is feeling.
That's Airbnb (ABNB 0.75%), the home-sharing leader. Here's why it looks set up to breeze past the market this year.
Image source: Airbnb.
1. High interest rates are good for Airbnb
For most tech stocks, rising interest rates have been a negative. Higher interest rates make long-dated earnings worth less, so unprofitable, high-growth stocks like those in the software sector have been hit especially hard by the Fed's rate hikes.
Higher rates also encourage investors to move money out of stocks into bonds, as they can earn steady yield "risk-free" from treasuries, rather than dealing with the risk in stocks.
However, Airbnb doesn't operate like the typical tech company. As a travel marketplace, the company actually makes money from earning interest on the money it collects in between bookings and stays.
Last year, the company brought in $186 million in interest income. That number will almost certainly move higher in 2023 based on the Fed's forecast of the Fed funds rate finishing the year at 5% to 5.25%, up 25 basis points from where it is now. Growth in the underlying business will also support an increase in interest income.
Based on the $103 million the company earned in interest income in the fourth quarter, it wouldn't be surprising to see Airbnb bring in around $500 million in interest income in 2023, given the expected growth in the business and the Fed's interest rate. Last year, the company brought in $1.9 billion in total net income, so that kind of increase in interest income would account for a 16% increase in net income.
Analysts are calling for just a 19% increase in earnings per share, a sign that Airbnb will beat analyst estimates handily again this year.
2. Travel demand is strong
The travel industry isn't normally thought of as recession-proof, but 2023 might be the exception that proves the rule.
The home-sharing leader, peers like Booking Holdings and Expedia, and the airline industry have all pointed to strong demand trends early in the year. Airbnb said that it's seeing summer bookings come in in Europe even earlier than usual -- a sign that people are still eager to spend on travel.
After a long period during the pandemic of spending on items for the home, people seem to be eager to get back out and travel regardless of the economic conditions.
That could change, especially if there's a severe recession. But for now, Airbnb seems likely to escape the recessionary malaise that's plagued tech subsectors like enterprise software, e-commerce, and digital advertising.
3. The business can adapt to a recession
Because Airbnb is a travel business, it might not be accurate to say it's recession-proof. But it does have a unique way to withstand a recession that its travel-sector peers like online travel agencies and hotels don't.
Anybody can list a room or a home on the platform, making it a great way to earn supplementary income, or even be a primary source of income. There's already evidence that tough times have driven more people to host on the platform.
For example, the company said that in the third quarter, it saw a "disproportionate" 31% increase in single-room listings due to the cost-of-living crisis in Europe and other parts of the world.
Management believes that supply and demand growth are highly correlated and new hosts help bring on other hosts once they're successful. It's also worth remembering that Airbnb was founded during the 2008-2009 financial crisis, with the idea that the founders and others could make some extra cash by renting out their homes to strangers on a short-term basis.
That idea has proven enormously popular. Even if a recession hits, Airbnb should see steady growth in new supply, which should support the stock over the long term.
Year to date, the stock is up 33%. It should continue to outperform the Nasdaq thanks to strong travel demand, its ability to withstand a recession, and because it can benefit from high interest rates.
