Investors could bolster their portfolio returns by focusing on businesses that have outsized growth prospects. As sales rise and market share grows, higher profits could be on the way. 

Airbnb (ABNB 0.75%) is a company that fits the description. Yet, shares of the home accommodation business are currently trading 42% below their peak price in February 2021. Could this sizable discount mean that now is a good time to buy the growth stock? Let's take a closer look.

The power of network effects 

As a two-sided marketplace that connects hosts with travelers, Airbnb benefits from having a network effect. As more hosts list their dwellings on the site, travelers benefit because there are greater choices. And as the number of customers increases, hosts stand to gain from a bigger likelihood of renting out their property and generating revenue. 

Airbnb's scale quickly points to its dominance. There are currently over 4 million hosts and more than 7 million listings on the site, which demonstrates how massive the supply is. This is a far cry from the earlier days. In its first four years, the business served a total of 4 million guests. 

On the demand side, it's a similar situation. In 2022, Airbnb reported 394 million nights and experiences booked on the platform, resulting in $63 billion of gross booking value. These two metrics are much higher than they were prior to the pandemic in 2019. 

Besides network effects, investors might point to Airbnb's strong brand presence in the alternative accommodations market as another key factor that has helped its success. Similar to Uber's standing, Airbnb has become a verb for consumers looking at places to stay when traveling. Additionally, the fact that 74% of traffic to the site comes directly, as opposed to referrals, search, or social media, is indicative of Airbnb's position in the industry. 

Posting strong financials 

While Airbnb might fit the description of a growth tech stock, it's also extremely profitable today. In the second quarter, net income totaled $650 million, translating to a superb margin of 26%. That's an improvement from all of 2022 when Airbnb posted a profit margin of under 23%. 

Free cash flow (FCF) is another important metric investors should pay attention to now. This figure came in at $900 million last quarter, a 13% year-over-year increase. Because Airbnb doesn't own any of the properties that are listed on its platform, the business is a capital-light enterprise. This means that capital expenditures aren't excessive, resulting in strong FCF generation. 

The network effects I previously mentioned play a part in bolstering the financials. Airbnb has proven that it can scale extremely well in a profitable manner. In other words, its marginal costs are almost nonexistent, as listing another property or serving another guest might have zero costs. It's not crazy to think that Airbnb's profits could soar even more in the years ahead. 

Finding ways to improve 

A focal point for the management team is to constantly introduce new features and updates that can enhance the user experience. Recent examples are creating a tool that can help hosts set more competitive pricing, as well as wish lists that can help guests plan for more complicated trips. So not only does the service get better as it adds more hosts and travelers, as I discussed above, but the ability to add on tech upgrades only helps Airbnb better serve its user base. 

Wall Street is optimistic as consensus-analyst estimates call for Airbnb's revenue and earnings per share to increase at annualized rates of 14.3% and 20.9%, respectively, between 2022 and 2027. Those forecasts are encouraging for shareholders. But to be fair, macro uncertainty, particularly around rising interest rates and the potential for a recessionary scenario, is a near-term risk to keep in mind. 

Zooming out, though, it's hard not to get excited about Airbnb. Investors should seriously consider buying the stock now.