3 Must-Know Facts About Airbnb Before You Buy the Stock

This dominant internet-enabled enterprise should be on your investment radar right now.

A poster child of the so-called gig economy, most investors have surely heard about Airbnb (ABNB -1.63%) by now. This company has a presence in almost every country across the globe, and its name has become synonymous with booking getaways.

The travel stock hasn’t been the best for its shareholders. As of this writing, it’s down 33% from its peak price. But the valuation is compelling at a price-to-earnings ratio of 20.

Before scooping up shares, though, it’s important to know these three important facts about Airbnb.

How Airbnb makes money

While you might first assume that Airbnb is in the business of investing in and owning properties, this isn’t true. Instead, the company has developed the underlying technological platform that simply connects travelers and hosts across the world.

So how does this business make money? Airbnb generates revenue by charging fees to guests that typically equal 3% of the cost of the booking. And fees are charged to hosts on the platform, usually 14%. There are cleaning fees, too.

This has proven to be an extremely lucrative and in-demand business. Airbnb raked in $9.9 billion in sales in 2023, which was more than double the total from pre-pandemic 2019. Executives believe there is still a massive opportunity to expand in the years ahead.

One area where Airbnb is making progress is extended stays, or those that are for 28 days or longer. A notable 17% of the company’s nights booked in the first quarter were in this category, a trend likely fueled by more flexible working arrangements following the public health crisis.

Competitive advantages

Airbnb’s competitive position is protected from the threat of disruption by two important factors. And these attributes are precisely what make this a high-quality enterprise.

The company’s brand has become vital to its success. As mentioned before, Airbnb is successful in that its name is now used as a verb, a clear indicator of the consumer mindshare it possesses. It’s worth pointing out 90% of traffic comes directly to the app, instead of via paid marketing channels, according to management.

As a global two-sided platform, Airbnb also benefits from network effects, a competitive edge that has become more prevalent in the internet economy. The business currently has 5 million hosts that have served 1.5 billion guests. More hosts attract more travelers looking for a wide range of options. And more travelers make listing your home on Airbnb a no-brainer decision.

Financial situation

Airbnb has become incredibly profitable on a consistent basis. The business has generated positive operating income every year since 2021.

As I noted above, Airbnb operates an asset-light business model. Because there are minimal capital expenditures required, free cash flow (FCF) is robust. Last quarter, the company produced FCF of $1.9 billion, a usual occurrence.

For investors, owning companies that are profitable on a cash basis substantially reduces risk, because it’s a sign of financial discipline. It means that Airbnb shouldn’t need to raise external capital to fund its operations. And it proves that the business model actually works. That can’t be said about many companies out there.

While the income statement reduces financial risk for shareholders, so does the balance sheet. As of March 31, Airbnb had $11 billion in cash, cash equivalents, and short-term investments, compared to just $2 billion in long-term debt.

After learning how this business makes money, its competitive advantages, and its financial situation, you might be wondering why you don’t own shares.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb. The Motley Fool has a disclosure policy.

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