In just over a decade, Airbnb (ABNB -1.52%) has grown from a startup in its founders' apartment in San Francisco, California, into one of the leading travel companies in the world. While Airbnb's stock has done well over that time, it took a significant hit in 2022 along with many other tech stocks over concerns about growth and profits. Those two metrics are now higher than pre-pandemic levels, but the stock still trades well off its previous all-time highs set in 2021.
The lack of a full stock price recovery could partially be the result of concern over Airbnb's success, which has attracted competitors to the home rental market. Over the last year, the company posted a deceleration in revenue growth, and management expects further slowing on the top line in the second quarter. The slowing growth also reflects vulnerability to macroeconomic headwinds and continued pandemic-related disruptions in China.
Is Airbnb stock still a buy, or should shareholders consider other growth stocks? Let's first review the advantages Airbnb has over the competition before considering the risks.
What's going right for Airbnb
First-quarter revenue growth of 20% over the year-ago quarter is still well above average for most businesses. It's well off the year-ago quarter's 70% growth rate, when Airbnb was in the middle of a strong recovery, but some deceleration should be expected coming off those high rates.
The stock might be trading even higher if not for management's guidance for revenue growth to slow to between 12% and 16% year over year in the second quarter. But that hasn't prevented the stock from surging 60% year to date, nearly doubling the return of the Nasdaq Composite.
Still, investors should consider buying the stock for other reasons. Businesses that routinely generate high margins and returns on invested capital are known to deliver superior returns to investors over many years, and Airbnb is performing exceptionally well on this front.
The company reported a net profit of $2 billion over the last four quarters. This represents a high profit margin of 23% -- much higher than the 15% average margin of the most luxurious hotels.
Data by YCharts
Airbnb has a major technological advantage. Its primary expenditures are new features and functionality for its platform, which requires much less capital than maintaining buildings and expensive hotel properties.
For example, Airbnb held just $121 million of property and equipment on its balance sheet in 2022 but generated $8.4 billion in revenue from gross bookings made over its platform. By comparison, Marriott International has $1.5 billion of property and equipment, which produced only $4 billion of gross fee revenue last year.
Airbnb's business is more capital efficient, which is why it generates industry-leading margins. These higher margins are an important advantage, because as Airbnb gets larger, it will have more resources to invest in new features and services, which, in turn, will drive more demand.
Potential pitfalls for Airbnb
Airbnb has a powerful brand and a lucrative business model, but investors should be aware of the risks. When you are generating superior profits, others will want a piece of the action.
One advantage that Marriott has with its Homes & Villas rental service is a well-recognized brand and loyalty program that numbered over 177 million members last year. Big hotel companies can leverage these assets to gain market share.
In addition to hotel brands, there are many other alternatives in the rental world that could cause Airbnb to experience lower growth in the future. This is one reason why its recent revenue deceleration is somewhat concerning.
The verdict on Airbnb right now
Considering the potential pitfalls, Airbnb's forward price-to-earnings (P/E) ratio of 37 might look expensive. Investors looking to start a new position in the stock might want to wait for a better price, or at least wait to see if Airbnb can stabilize its current revenue growth rate.
If you're already holding this top travel stock, I wouldn't sell. But be aware of the risks in Airbnb's market and monitor management's outlook in each earnings report. If the company continues to see revenue slow, it might be time to look for alternatives.
However, it's also possible Airbnb could hold its growth steady in the mid-teens range, if not accelerate heading into 2024. Parts of Asia have still not fully recovered from the pandemic, which could provide a significant boost to Airbnb's revenue.
