Airbnb (ABNB 0.12%) hasn't quite panned out as early investors might have hoped. After its initial public offering in December 2020, the stock quickly soared 50% over the next two months. But it has mainly been a downward trajectory since that all-time high price in February 2021.
Even though shares are up roughly 50% in 2023, benefiting from the broader market's rally, they remain well off their peak (as of June 28), Should investors buy this beaten-down growth stock now? Here are three compelling reasons why it might be a good idea.
Airbnb enjoys powerful network effects
Warren Buffett, the CEO of Berkshire Hathaway who many consider to be the greatest investor ever, says that a top trait to look for before buying shares of a business is the presence of an economic moat. This is a key attribute that allows the company to keep rivals at bay. And it can help lead to strong financial results (more on this later).
Airbnb is different from a traditional real-estate operation because it doesn't actually own the properties it rents out. Instead, it just connects more than 4 million hosts with customers who booked 121 million nights and experiences in the first three months of 2023. In other words, Airbnb is simply a digital marketplace, collecting fees off the transactions that happen.
Network effects are arguably the strongest source of economic moat in the business world. In Airbnb's case, hosts want to post their dwellings on the site because of the platform's massive global reach, now in over 220 countries and regions. And travelers looking for a place to stay are naturally drawn to the service that has the greatest number of choices. It gets more powerful as it gets bigger, becoming more valuable to all the users.
If I woke up tomorrow and suddenly decided that I wanted to launch my own competitor to Airbnb, where would I even start? Without any property listings, I'd have no shot at getting a renter to use my site. And with no potential customers, there is zero chance that a landlord would offer up their home. It's a classic chicken-and-egg problem, one that Airbnb has clearly already solved.
Strong financial profile
At a certain scale, having network effects can lead to outstanding financial performance. Again, because Airbnb doesn't own properties itself, it can free up capital, essentially operating an asset-light model.
Despite its outstanding growth, the company is incredibly profitable. Last year, Airbnb generated $3.4 billion in free cash flow (FCF), increasing 49% year over year. This translated to a superb 40% margin (FCF as a percentage of revenue).
Some might argue that the company's huge stock-based compensation expense means that FCF doesn't paint an accurate picture. For what it's worth, Airbnb's net income margin of 23% in 2022 was a huge improvement from the net loss registered in 2021. It's very rare to find a business that combines rapid growth with sizable profits.
Moreover, Airbnb's balance sheet is in solid shape. As of March 31, it had over $8 billion of cash and cash equivalents versus just $2 billion of long-term debt.
Massive market opportunity
Airbnb's business posted phenomenal growth in 2022, with revenue up 40% and gross bookings up 35%. Although a bit of a deceleration, this momentum carried over into the first quarter of this year. Revenue and gross bookings jumped 20% and 19%, respectively.
But the management team did give weaker-than-expected guidance for the current year, primarily as a result of difficult year-ago comparisons when there was so much pent-up travel demand following the worst of the pandemic. Investors must also think about the uncertain macro environment and inflationary pressures as potential headwinds to consumer spending on travel.
Nonetheless, it's hard not to get excited about Airbnb's long-term opportunity. Executives believe the business operates in a gargantuan $3.4 trillion market. Capturing even a tiny share of this spend will boost Airbnb's prospects.
There's a lot to like about this business, so it's probably a good idea for investors to take advantage of the beaten-down stock and add it to their portfolios.