3 Hotel Stocks That Are the Biggest Threats to Airbnb

hotel stocks - 3 Hotel Stocks That Are the Biggest Threats to Airbnb

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If you’ve been reading the financial news lately, you’ve probably seen headlines about a massive bubble in U.S. tech stocks. IPO (initial public offering) madness in 2020 has sent stocks such as Airbnb (NASDAQ:ABNB) soaring and delivered great profits for investors. But as hotel stocks are expected to perform well in the post-Covid-19 era in 2021 and the tourism industry starts to recover, this could pose a threat to ABNB stock.

After all, when hotels of all luxury levels and price points are available, maybe staying in someone’s apartment doesn’t look quite so attractive. As a result, investors may want to consider diversifying their portfolios with investments in hotels.

Furthermore, Airbnb is an innovative company with a huge market valuation that simply cannot be justified looking at the fundamentals. It is too highly priced.

And as we now turn to three alternative hotel stocks to buy rather than Airbnb, consider this quote taken from the recent Airbnb Form S-1/A filing: “We have incurred net losses in each year since inception, and we may not be able to achieve profitability.” This statement is bold and transparent. But it is also a strong argument to avoid ABNB stock.

Here are three hotel stocks to consider as alternatives to Airbnb:

  • Booking Holdings (NASDAQ:BKNG)
  • Choice Hotels International (NYSE:CHH)
  • MGM Resorts International (NYSE:MGM)

Booking Holdings (BKNG)

a person opens up Booking.com on a smartphone
Source: Denys Prykhodov / Shutterstock.com

Booking Holdings is the only company on this list of hotel stocks that has a market capitalization in the realm of Airbnb’s. It currently has a market cap of about $84 billion (compared to Airbnb’s $96 billion) and a beta (based on five-year monthly data) of 1.21. In theory, this means that the stock is more volatile than the general stock market, such as the S&P 500, and should perform better in a strong market environment — just like the one we witnessed after the crash in March 2020.

Still, BKNG stock has underperformed the stock market in 2020 with a year-to-date return of -0.23%. The company is the operator of Booking.com, which offers a plethora of places to stay, from apartments and vacation homes to five-star luxury resorts.

With a price-to-earnings (P/E) ratio of 63.24 for the trailing-12-month period, the stock is not a bargain. But in 2020 and amid the pandemic crisis, the only quarter that was a big disappointment for the stock was the one that ended in March 2020.

The sales growth for the first quarter of 2020 was -31.47% compared to the fourth quarter of 2019. Net income for the first quarter of 2020 was negative at -$699 million. But for the second and third quarters of 2020, the rebound in profitability and sales growth was mostly strong.

The sales growth for the second and third quarters of 2020 was -72.47% and 319.05% respectively. Net income reported for the second quarter of 2020 was $122 million. For the third quarter of 2020, net income reported was $801 million, or up 556.56%.

In a year when traveling was hit hard worldwide, BKNG stock has shown remarkable resilience and is already back on strong profitability.

Choice Hotels International (CHH)

A magnifying glass zooms in on the Choice Hotels (CHH) website.
Source: II.studio / Shutterstock.com

Choice Hotels International has the lowest market cap among the three hotel stocks mentioned in this list at $5.72 billion. And like BKNG, it has a negative return for 2020 at -0.63%.

However, what I especially like about CHH stock is that it has a strong, positive trend for the past five years for key ratios such as sales growth, profitability and free cash flows. Its operating income and operating margin are both strong, and those markers represent the core business and its performance.

If a company cannot have positive operating income from its main business operations and sustainable operating income as well, then this is a negative factor for valuation. CHH stock has a consistent trend in its operating income.

For CHH stock, the rebound in sales growth in 2020 seems to have started only during the third quarter with a reported figure of $210.77 million or a sales growth of 38.91%, compared to the second quarter of 2020. And profitability has improved too. A net income of $14.5 million in the third quarter of 2020, an increase of more than 700% compared to the second quarter of 2020, may indicate that the worst business conditions may be over for the company in 2020.

Additionally, management appears to be optimistic about the future of the company. Patrick Pacious, president and chief executive officer of Choice Hotels, stated the following during the third-quarter results release: “We believe that our strategy of growing our limited-service brands in the right segments and the right locations will allow us to continue to grow our share of travel demand over the long term.”

MGM Resorts International (MGM)

A photo of the MGM logo on the MGM casino building.
Source: Michael Neil Thomas / Shutterstock.com

Three things that are very interesting for MGM stock are its beta, its P/E ratio and its price performance in 2020. With a beta of 2.41, this stock should be very volatile compared to the S&P 500, yet in 2020 it is down nearly 8%. If the economic theory was true for this stock, then it should have outperformed the broader stock market. This is not the case.

Then looking at the trailing-12-month P/E ratio of 11.10, the stock seems to be cheap. The current S&P 500 P/E ratio is 37.23 according to Multpl.

The year 2020 told a mixed story for MGM stock in terms of sales growth and profitability. The company saw a collapse of revenue in the second quarter of 2020 to only $289.81 million compared to the $2.25 billion reported in the first quarter. Still, for the third quarter of 2020 MGM saw a huge improvement in sales growth of $1.13 billion.

If we consider 2020 as a year that distorted the trend of key financial metrics for the majority of public companies and examine the past four of five years for a bigger picture, then MGM stock seems to deliver strong financial performance.

On an annual basis for years 2016 until 2019, there is strong sales growth, steady earnings-per-share growth and positive free cash flows. This shows consistency in financial performance.

In the post-Covid-19 era, both the improving demand in the travel industry in the U.S. and the improvement in the broader economy should benefit hotel stocks.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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