3 Facts About Airbnb You Must Know Before Buying the Stock

There aren't many businesses that have disrupted entire categories to the point that their name has become a verb. But that is precisely what Airbnb (NASDAQ: ABNB) has accomplished.

The alternative accommodations platform hasn't worked out well for investors, though. While its market cap is in the neighborhood of $87 billion, the stock has climbed just 2% this year and trades 36% below the peak it reached in February 2021.

You might be thinking about adding this growth stock to your portfolio on that weakness. Before you do so, here are three things you need to know about Airbnb.

1. Slowing growth

Airbnb's latest financial update revealed softer growth. During the third quarter, revenue rose 10% year over year to $3.7 billion, a marked deceleration from the 18% gain posted in all of 2023 and 40% in 2022. The third quarter's top-line bump was driven by a 10% increase in gross booking value.

It's not surprising for growth to slow as a business matures and further penetrates key markets, and as each new period's growth must be measured proportionally against a larger baseline. In recent years, Airbnb also benefited from pent-up travel demand following the pandemic's social distancing phase. Now, investors could simply be witnessing a normalization of the travel market.

For the long term, though, management remains optimistic. The company believes Airbnb's total addressable market should be measured in the trillions of dollars, as it looks to expand beyond lodging and further into the business of connecting guests with experiences.

Wall Street analysts forecast that Airbnb's revenue will increase at a compound annual rate of 10.9% between 2023 and 2026. Double-digit percentage gains are still encouraging.

2. Airbnb's moat

Most companies aren't able to protect themselves against existing industry rivals or new entrants. That's why investors would be smart to focus on businesses that possess economic moats -- durable advantages that make it harder for competitors to take their market share.

Airbnb has them.

Its most obvious moat is based on network effects. Airbnb operates a gargantuan two-sided marketplace. On one side, it has 5 million hosts offering 8 million active listings. On the other side, it attracts vast numbers of travelers searching for accommodations -- and those individuals completed and paid for 123 million nights and experiences in just the last quarter. The more listings Airbnb has, the more valuable and attractive its service becomes to travelers. And the more travelers who use the site to book their next trips, the more easily it can attract even more hosts looking to generate revenue. Growth feeds growth in a virtuous cycle.

The company's brand is also a key competitive advantage. Airbnb has become a verb, reflecting the brand's incredible mindshare among consumers. That's hard to beat, and it only comes from years of delivering a great user experience.

3. Don't ignore valuation

Double-digit percentage growth potential, coupled with an economic moat, makes Airbnb an easy company to like. Investors whose strategies involve buying high-quality businesses and holding their shares for the long haul should at least keep this one on their watch lists.

But Airbnb's valuation might cause some hesitation. As of this writing, shares trade at a forward price-to-earnings ratio of 34.8. That's more expensive than its three-year average. It's also a 23% premium to the Nasdaq-100 index, which is a benchmark for the tech sector.

Adding to the bullish argument is that Airbnb is consistently able to generate positive free cash flow, reducing financial risk. However, investors who choose to buy in at the current valuation are giving themselves almost no margin of safety, as the hope is that Airbnb can continue growing rapidly and improving its bottom line. Of course, that's not a certainty. There is competition to think about, as well as regulatory risks in specific markets.

Therefore, I believe the best thing to do would be to wait patiently for a meaningful valuation pullback before buying Airbnb stock.

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