Buying an unprofitable growth stock is always taking a chance. That's why the rewards are often fantastic, especially when the company begins to post profits.
It didn't quite work out this way for travel giant Airbnb (ABNB 0.61%), whose stock shot up amid great fanfare when it went public, only to fall in the bear market even as it was growing its profits. There wasn't much opportunity to buy in before the stock skyrocketed. But now that it's still 33% off its previous highs, investors have a renewed chance to buy it again at a more reasonable price. But should you? Let's see where it could be in five years and what investors should expect going forward.
Turning a corner
Let's face it: Airbnb changed many lives as it disrupted the travel industry. I remember the frustration of trying to find a vacation rental in a city with expensive hotels, calling friends and checking out myriad individual websites. As I write this article, I'm in the middle of booking a rental for a vacation this summer, and it couldn't have been easier.
I'm not the only one. Airbnb has demonstrated massive growth since it began operating about 15 years ago as a way to get a room in someone's apartment on the cheap, even if it was only an airbed and breakfast (hence the name).
Let's take a look at where it was five years ago, before it was even a public company, and where it is now.
| Year | Revenue | YOY Growth | Operating Margin | Net Income/Loss | YOY Net Income Growth |
|---|---|---|---|---|---|
| 2018 | $3.7 B | 42% | 5% | $(17 M) | N/A |
| Trailing 12 months | $9 B | 13% | 22% | $2.3 B | 41% |
Data Source: Airbnb financial filings. YOY = year over year.
Five years is a good time to go back to, as it operated normally just before the pandemic when business went haywire. Airbnb has shown solid growth over the past five years, but it hasn't been outrageous.
More notable are its improvements in profitability, with a huge change in operating income and incredible growth in net income. It's quickly becoming a value stock as sales growth decelerates and profitability soars. I'll point out that net income of $2.3 billion is nearly the same as total revenue in 2017 at $2.6 billion.
Sustaining its momentum
So where does that leave Airbnb's potential for the future? I think in a very good place.
Airbnb has now established itself as the premier online platform for vacation rentals, and it's expanded its host list, residences, user base, types of experiences, and regions reached. This powers a positive cycle, as the more places it can offer, the more users will look to its platform and find what they're looking for.
The broad range of rentals, unmatched by traditional hotel companies, gives it a huge edge now and in capturing market share going forward. Listings increased 19% over last year in the second quarter, with the largest increase in net active listings for any quarter in Airbnb's history. It now has seven million active listings.
Can it repeat similar growth from the past five years over the next five years? Probably, at least in part, because it's still rebounding from and facing pressure from pandemic trends. Cross-border travel is still recovering, and some global regions are just lifting lockdown restrictions. Cross-border nights booked increased 16% over last year in the second quarter, with some sky-high regions, such as an 80% increase in travel to the Asia-Pacific region.
At the same time, people are returning to cities, with nights booked in high-density urban areas up 13% over last year. It also has the benefit of tailwinds in working from home, and long stays (28 days or more) remained stable, with the first quarter at 18% of bookings.
It continues to release new features that facilitate easier booking, more transparent pricing, and better search results. It sees real benefits from these changes. For example, it released several new features for longer stays, and nights booked for longer stays have accelerated every month since the release.
These innovations work and are where Airbnb is pumping in its investments. As an asset-light platform model, it isn't bogged down with heavy, expensive inventory or buildings, and it has figured out where to invest to stay cost-efficient. It generated $900 million in free cash flow in the second quarter and $3.9 billion for the trailing 12 months.
More tailwinds to come
Airbnb is still facing the pressures of inflation and macroeconomic headwinds, which are slowing its business. But between its broad business drivers, it's well-positioned to accelerate growth when these headwinds die down.
In five years, it should be posting strong sales growth and increasing profits, with more listings and even greater brand power. That, in turn, should lead to the stock rising from here.
