Airbnb (ABNB 0.75%) stock has performed well in 2023, giving investors an approximately 65% return year to date. The company delivered strong results in recent quarters, explaining the investor optimism.
But for those who missed the boat, is now the right time to consider the stock? And for existing investors, should they continue holding after the year's rally or sell it to lock in the profit?
Image source: Getty Images.
Airbnb has a resilient business model
The pandemic is probably one of the most challenging tests businesses have faced. Many failed, especially companies in tourism, hospitality, and related services. Airbnb arguably operates in all three.
So when global economies closed down, the demand for travel and accommodations plummeted, sending Airbnb's bookings down by a staggering 72%. Many questioned whether the company could survive the hit, and they prepared for the worst.
Yet, Airbnb bounced back rapidly in the next two years. In 2021, revenue surged 77% to reach $6.0 billion, surpassing its previous peak of $4.8 billion from 2019. But it didn't stop there: In 2022, revenue jumped another 40% to a record $8.4 billion. Net profit reached $1.9 billion that year, the company's first profitable year.
The strong recovery after the pandemic reopening is a testament to management's ability to stay flexible while responding to external challenges. For instance, when the pandemic hit, the company quickly gave refunds to its customers, raised cash, and cut costs. The refunds helped improve its customer perception, while the cash raise and cost cuts helped the company survive the downturn and position it for better times.
Airbnb's global presence and variety of accommodations allow the business to satisfy travelers' diverse and changing demands. For example, people wanting to avoid crowded cities because of lingering coronavirus fears had no problem finding accommodations in smaller towns and more remote destinations.
And as remote work arrangements have become much more commonplace in the past several years, Airbnb has seen long-term stays -- defined as reservations of 28 nights or longer -- quickly rise in popularity. In the second quarter, they made up nearly one-fifth of the company's gross nights booked.
The pandemic has been a severe test for most companies, even more so for those in the travel industry, but Airbnb's performance during this period is a testament to its business model's strength.
Prospects remain bright
Airbnb has proven its staying power, but its best days are yet to come.
For one, despite being a household name in the global travel industry, it has a less than 2% share of its total addressable market, giving it plenty of runway for growth. To grow its piece of the pie, Airbnb is steadily increasing the supply of rooms available. Active listings grew 19% year over year in the second quarter, which will naturally attract new users and boost the spending of existing ones.
The company is focused on improving the user experience for both hosts and guests, introducing new features and upgrades on its platform to make hosting easier for homeowners and renting more appealing to travelers. For example, it recently reduced service fees for stays over three months and made it easier for hosts to provide monthly discounts.
Happy hosts and guests mean more frequent transactions, which will sustain Airbnb's long-term growth in the coming years.
But the stock is pricey
So far, we have generally focused on the appeal of Airbnb's business, but an investment decision isn't complete without considering the company's valuation.
And here's the issue: The stock is expensive with price-to-sales (P/S) and price-to-earnings (P/E) ratios of 10.4 and 40.9, respectively, as of this writing. Fellow hospitality giant Booking Holdings has also seen a resurgence following the pandemic with growth and profitability that even outshines Airbnb, but it trades at only 6.1 times sales and 26.7 times earnings.
In short, Airbnb might be an attractive business but not as attractive a stock due to its premium valuation.
So, is Airbnb a buy, hold, or sell?
Airbnb has a resilient business model, and its growth prospects remain bright over the long run. But the deal-breaker is its high valuation, offering no margin of safety for investors -- I'd be hesitant to buy the stock at this price point.
But existing shareholders and the risk tolerant would not be misguided to hang their hats on Airbnb's potential to continue disrupting the travel and tourism industry. They just need to keep in mind the stock may see elevated volatility going forward, so a strong stomach and long-term focus are essential.
