Although Airbnb's (ABNB -1.21%) latest financial results delivered a nights and experiences booked figure that fell short of Wall Street expectations, revenue and earnings outperformed. The mixed results still saw investors sell off the stock following the second-quarter release, and it's down 17% in the month of August (as of Aug. 25).
But besides the buying opportunity presented by this recent dip, there's another magnificent reason Airbnb looks like a screaming buy right now.
An expanding moat
Warren Buffett, who many consider the greatest investor ever, looks for businesses with an economic moat protecting them from the threat of competition. By having a moat, companies are better positioned to succeed over the long term and put up strong financial results, in turn delivering superior investment returns too.
Airbnb's economic moat is made up of network effects. The business runs a two-sided platform consisting of rental listings on one side and guests on the other. Currently, over 4 million hosts are on Airbnb, and in the most recent quarter, 115 million nights and experiences were booked. That gives you an idea of the sheer scale of the company's operations.
Airbnb is already a popular travel booking site for consumers. However, as more hosts join the platform, the service becomes even more valuable for travelers because the number of properties and experiences continues to rise. And as more guests use Airbnb to book their next getaway, the platform continues to attract hosts looking to list their own properties. It's a positive feedback loop, one that makes Airbnb's platform stronger and more valuable to its user base over time.
Due to its massive size, it's almost impossible for a smaller rival service to compete successfully with Airbnb. A start-up trying to take on the behemoth in the industry would have to figure out how to attract both hosts and guests from a standing start.
But why would anyone use this service when Airbnb can more accurately match renters with the right properties with a much better user experience? This situation clearly demonstrates Airbnb's dominance over the alternative accommodations market.
Still a long runway
To be fair, Airbnb's growth has slowed down a bit, particularly as the business laps tough comparisons to the year-ago period when travel demand was surging. But the revenue increase of 18% in the last quarter still represented a healthy gain.
Zooming out, the $2.5 billion of sales Airbnb generated in Q2 was almost triple the figure for Q4 2020, indicative of the company's tremendous growth in the face of major headwinds like the coronavirus pandemic, soaring inflation, and rising interest rates.
This rapid ascent can undoubtedly be attributed to Airbnb's network effects, which usually result in a business scaling up quickly. Besides top-line growth, the company is also exhibiting outstanding profitability with net income totaling $650 million in the most recent quarter, translating to a superb profit margin of 26%. That's a world apart from the huge losses that were being registered a couple of years ago.
Airbnb's network effects are working wonders for its profitability, something investors are seeing with each passing quarter. Because the technological infrastructure, marketing expenses, and corporate overhead are largely fixed costs, each additional transaction that occurs on the platform between a host and a guest should carry extremely high margins. Therefore, it's unsurprising that Airbnb is posting such a strong bottom-line performance.
Looking ahead, it's easy to get excited about the company's prospects. The global travel market is a gargantuan industry, presenting Airbnb with a huge opportunity to grow its share. Wall Street is optimistic, too, as analysts expect revenue and diluted earnings per share to increase at compound annual rates of 14% and 21%, respectively, between 2022 and 2027.
The wide economic moat is working wonders for Airbnb. Investors should look at this as a sign to consider buying the stock today.
