During the 2023 first quarter, ended March 31, Airbnb (ABNB 0.75%) posted revenue and diluted earnings per share of $1.8 billion and $0.18, respectively, beating Wall Street analyst expectations. However, this didn't please investors, as the stock dropped more than 10% immediately following the news because of disappointing guidance for the current quarter. Management said comparisons to last year would be difficult.
Zooming out, we see that this travel company's shares are down 40% from their all-time high, even though they've been on an impressive run in 2023. In my opinion, this means that Airbnb looks like a beaten-down growth stock that investors should buy now. Here's why.
Airbnb benefits from strong travel demand
Looking past the fact that the business disappointed analyst estimates for guidance, Airbnb is seeing strong demand for its travel platform. Gross booking value increased 19% to more than $20 billion in the quarter. Nights and experiences booked also jumped 19% year over year.
It's great for shareholders to see that Airbnb is riding the wave of strong travel demand following the pandemic-related restrictions to strong financial results. And this momentum carried over into the last three-month period. But there are many financial experts predicting that a recession will happen in the near future. If that's the case, then spending on discretionary products and services, a category that travel definitely falls into, will be curtailed as consumers try to stretch their budgets and try to focus on the essentials. This is a near-term risk to keep in mind.
Disruptive category creator
Like Uber did to the taxi industry, Airbnb has completely upended the market for short- and long-term lodging. And the company hasn't even been around for a full 15 years yet.
But those on the management team aren't resting on their laurels. They believe Airbnb is underpenetrated in many markets, even though it's in more than 220 countries and regions today. What's more, by introducing new features, like improved pricing and transparent checkout, Airbnb is constantly finding ways to improve. The leadership team measures the company's total addressable market to be $3.4 trillion.
Airbnb can be considered a category-creating company, launching an entirely new industry that has now spawned copycats trying to all get a piece of the action. Having massive scale, a first-mover advantage, and network effects really matter, though, and it's hard to see a smaller rival like Vrbo holding a candle to Airbnb's dominance in the alternative-accommodations market.
Impressive financial profile
At a high level, Airbnb is a marketplace or a platform that simply connects guests with hosts. It is not a traditional hotel chain, like Marriott or Hilton. The key difference is that Airbnb doesn't own any properties itself, so it operates an asset-light model.
This has its advantages. Airbnb has proved to be extremely lucrative from a profitability perspective. In 2022, free cash flow totaled $3.4 billion, translating to a superb 40% margin as a percentage of revenue. Moreover, every additional stay that's booked on the platform should carry high margins, as the underlying tech and data infrastructure are mostly built out.
The investment community clearly appreciates this situation as well. As of June 15, Airbnb's market capitalization of $81 billion is about 53% higher than Marriott's.
Analyzing the valuation
Investors have generally been down on growth tech stocks ever since the Federal Reserve started to aggressively raise interest rates. And with it still being well off its peak, Airbnb stock's current price-to-earnings ratio of 42 is significantly below its historical average.
But it's still worth mentioning that investors need to keep an eye on macroeconomic conditions and their impact on the travel industry as an important risk factor. Still, Airbnb looks like it could be a smart choice for your portfolio given its growth potential.
