Airbnb (ABNB -0.09%) has transformed the lodging industry like few things before it, introducing short-term rentals as a concept and taking it mainstream.
These days, Airbnb is one of the biggest travel companies in the world by booking volume, and the company continues to deliver steady growth.
However, disruptive potential alone does not make a stock a buy. Let's take a look at the buy, sell, and hold arguments to determine how investors should approach the stock.
Image source: Airbnb.
1. Buy Airbnb stock
Airbnb is the clear leader in the short-term lodging segment with the majority of market share against competitors like Expedia's VRBO.
Over the long term, Airbnb seems likely to capture market share from traditional hotels as it offers a number of advantages. First, it gives hosts a way of earning money, which should help build a steady pipeline of new hosts in both strong economies and recessions.
Airbnb also has the ability to adapt to consumer demand much more quickly than a hotel operator. For instance, Airbnbs popped up during the pandemic in rural areas to meet new demand, and the platform also offers long-term stays in a way that hotels can't really match.
After issuing layoffs in 2020, Airbnb is now delivering strong profitability, and margins should continue to expand as the company leverages higher revenue on its asset-light business model. The company also has another valuable income stream earning interest income on the funds it holds between bookings and stays, which could reach $600 million this year.
Finally, the company has plans to push its boundaries beyond just a travel booking marketplace as CEO Brian Chesky has talked about moving the company beyond the travel core and leveraging artificial intelligence (AI) technologies to provide a travel concierge that can give personalized answers to Airbnb travelers.
2. Sell Airbnb stock
Despite the success of the business, there's no question that Airbnb faces a number of significant risks. Foremost of those may be the regulatory threat. Its model is controversial around much of the world, and Airbnb is seen as a scourge by some local communities that argue that the company raises home prices, changes the character of neighborhoods for the worse, and facilitates parties and unruly guests who disturb neighbors.
Additionally, competitors have adapted to the Airbnb threat as online travel agencies like Booking Holdings have added more alternative accommodations like apartments with kitchens, and hotels are also offering more amenities to compete with Airbnb.
Finally, the cultural zeitgeist may be shifting against the platform. Tweets ranting about the lack of pricing transparency -- which the company has since changed -- or the superior experience of hotels have gone viral, meaning Airbnb may have to improve its service in order to continue gaining market share as the stock still trades at a premium to its hotel and online booking peers.
3. Hold Airbnb stock
The travel industry is going through a transition as the initial boom from the pandemic reopening is fading. Airbnb has forecast 12% to 16% revenue growth in its current quarter, and it's unclear what to expect from the company as the pandemic reopening enters the next stage.
Additionally, the stock seems fairly valued at a price-to-earnings ratio of 41, which isn't cheap, but also reflects the company's growth potential. The uncertainty in the economy may also be a good reason to take the middle road and hold the stock.
What's the answer?
Despite the risks facing Airbnb, the stock deserves a buy rating due to its potential to disrupt a massive addressable market in the trillions of dollars. The company has demonstrated its competitive advantages through its strong profit margins and free cash flow and continues to deliver steady growth.
The potential to expand the business beyond the travel marketplace only makes the stock more alluring. Shares are priced at a premium, but that's worth paying as Airbnb's upside potential remains considerable.
