I love to see operating leverage in a business, and Airbnb has it.
For investors who love profits, short-term rental platform Airbnb (ABNB 0.75%) has them in spades. In 2022, the company recorded its first full calendar year of positive net income. And it did so in style.
Airbnb generated revenue of $8.4 billion and earned net income of $1.9 billion.That's a profit margin of nearly 23% -- among the highest on the stock market. And there's a simple explanation for the company's quick and dramatic rise to profitability.
Finally, operating leverage from a tech company
Operating leverage is a great concept for investors to have a firm grasp on. And Airbnb is giving investors a master class on the subject, starting back in early 2020. But before we look at its profits, I'll first give some context.
Over 6.6 million active listings were available for rent on Airbnb's platform at the end of 2022, and these aren't owned by Airbnb. Rather, Airbnb provides the marketplace that connects travelers with hosts and it takes a cut of the transaction.
Since it doesn't own the properties available for rent on its platform, Airbnb is a high-margin tech company -- the company's gross profit margin in 2022 was 82%.
Now, a gross margin of 82% for Airbnb is quite good but it's not necessarily unheard of among tech companies. For example, Adobe, Asana, and Skillz all have higher gross profit margins than Airbnb, as the chart below shows.
ABNB Gross Profit Margin data by YCharts
When companies have a low cost of revenue, it should be easy to achieve bottom-line profitability in theory. However, many choose to forgo profits to grow the business. And it makes sense. After all, why pay taxes on profits now when money can instead be spent to grow revenue? This choice could lead to greater profits in the future when reinvestment opportunities no longer exist.
That's the argument at least. However, robust profits from high-margin tech companies are rarer than one might expect. In some cases, money is reinvested to grow a business -- that's what you want to see. In other cases, money is spent to maintain a business. And it can be hard to distinguish between the two.
Take Skillz, for example -- the highest-margin company among those mentioned here. Since it went public in late 2020, the company has routinely spent more on sales and marketing than it generated in revenue. But revenue was going up, so it appeared that spending was justified.
Companies that can increase revenue without increasing expenses have operating leverage. However, when Skillz started pulling back on marketing spend -- an operating expense -- its revenue began to fall, as the chart below shows. This leads me to believe that the company doesn't have operating leverage -- it was spending just to keep users on its platform.
SKLZ Sales and Marketing Expense (TTM) data by YCharts
As mentioned, Airbnb's journey to profits in 2022 started in early 2020. As the COVID-19 pandemic began, no one really knew what would happen to travel. Therefore, management quickly took action by cutting costs and preparing for the worst.
In its first letter to shareholders in the fourth quarter of 2020, Airbnb's management wrote, "In response to COVID-19, we undertook an internal review of our cost structure and rapidly made changes, including material reductions to discretionary spending, suspension of performance marketing, and a reduction in our workforce."
Airbnb's financial results were quick to rebound. In fact, the company's revenue of $8.4 billion in 2022 was 75% higher than its revenue of $4.8 billion in 2019.However, Airbnb's operating expenses of $6.6 billion are only up 24.5% during this time.
One particular area of operating leverage for Airbnb is its workforce. As management pointed out, its revenue jumped 75% from 2019 to 2022 but it now employs 5% fewer people than it did back then.
As business rebounded for Airbnb, management could have taken a different approach by ramping spending back up, justifying the decision in the name of growth. However, it didn't have to choose between profits and growth. Rather, the company has continued to grow at an impressive rate while maintaining cost discipline, leading to its record year for profitability in 2022. And I believe this is setting Airbnb apart from many of its tech stock peers.
Airbnb stock has a high valuation, and this may prevent some investors from buying today. But I believe the company is proving itself to be high quality, which should land it on your watch list at the very least.
Jon Quast has positions in Adobe and Airbnb. The Motley Fool has positions in and recommends Adobe, Airbnb, Asana, and Skillz. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
