Airbnb (ABNB 0.75%) stock has drifted lower in recent weeks on concerns about headwinds on consumer spending and rising interest rates. But the sell-off is starting to look like a great buying opportunity.
The travel stock is now down 42% from its peak in 2021 after it shot out of the gate in its initial public offering in late 2020. With the stock now as affordable as it's been in at least four months, let's take a look at three reasons to buy.
Image source: Getty Images.
1. The travel boom is still going
Travel stocks have mostly edged lower in recent months, as investors seemed to believe that the boom from the economic reopening would start to fade.
However, recent reports from travel giants like Carnival (CCL -0.66%) and Delta (DAL 0.08%) have indicated that demand for travel remains strong, despite weakness in consumer spending in other areas like discretionary goods.
In its late-September earnings report, Carnival CEO Josh Weinstein told investors the company saw no signs of demand slowing down. He added: "Now we appreciate there are heightened concerns around the state of the consumer as of late. But the fact is we just haven't seen it in our bookings or our results, and we believe consumers are continuing to prioritize spending on experiences over material goods."
In its third-quarter earnings report on Thursday, Delta posted record revenue in the September quarter, with the top line up 13% from the quarter a year ago. Management said that "robust demand for travel on Delta is continuing into the December quarter."
Delta also said that international travel was a bright spot, with international passenger revenue up 35%.
Those two companies are bellwethers for the industry. Carnival is the world's biggest cruise line operator, and Delta is one of the three biggest airlines in the world, so the demand they're seeing likely bodes well for the industry as a whole.
Additionally, the resurgence in international travel is a positive for Airbnb as approximately half of its bookings come from cross-border stays.
2. We could be headed for a soft landing
For more than a year, the Federal Reserve has been trying to bring inflation under control without causing a recession, a process that has come to be known as a "soft landing." And increasingly, it looks like the economy is headed for that.
According to the Consumer Price Index, inflation rose 3.7% in September from a year ago. It seems to be slowly heading to the Fed's target of 2%, while the labor market remains strong.
The Fed has also indicated that it intends to leave interest rates higher for longer, forecasting a slower decline in the coming years from the current fed funds rate of 5.25% to 5.5%.
That looks like an ideal scenario for Airbnb. The home-sharing giant would benefit from a stabilization in the economy and continued growth in travel demand, while also capturing a benefit from higher interest rates as it collects interest on the money it holds in between bookings and stays. In the second quarter, Airbnb made $191 million in interest income, representing 8% of its revenue.
If the business continues to grow, the company could be headed for $1 billion in annual interest income, which is money it can use to buy back stock, reinvest in the business, and expand in other ways.
3. The business is making improvements
Bashing Airbnb has become something of a meme on social media. Poking fun at the company's cleaning fees and chore lists is a common source of fodder online.
But Airbnb has continued to put up solid growth and expanding margins even with those problems, and the company is now cracking down on them. It revamped its platform to show cleaning fees included with the price upfront, and CEO Brian Chesky has said that the company has more plans to improve the platform.
Airbnb is aiming to improve host pricing tools so people can compare prices with listings nearby and, eventually, with hotels. The company is also doing more work to verify listings so it can be sure that guests are getting the product advertised, and it plans an update around its review system. Chesky also hinted at the company getting into more year-long rentals.
Beyond its core offerings, there's a lot of potential to grow, and Chesky expects to see those new offerings soon. Airbnb should be even stronger if it can fix the source of its biggest complaints.
For investors, the recent dip in the stock is worth buying, especially as travel tailwinds remain, the economy is supportive of the business, and the product is getting stronger.
