Airbnb (NASDAQ:ABNB) stock is coming back to earth after a blockbuster debut. Shares of the home-rental giant plunged 25% within a week of debuting.
However, Wall Street believes the stock could slump further. And with shares trading at a price-earnings ratio of 21.3x, can you blame them?
Airbnb is not a bad stock, but overvaluation is a problem. My colleague Thomas Niel makes that point in his article, arguing that until the novel coronavirus pandemic is firmly in our rearview mirror, “there’s no way this stock deserves the current valuation premium.”
So, I would wait for shares to crater some more before you buy in. Wall Street’s still generally bearish on Airbnb stock, with a 12-month consensus price target of $123 a pop.
The bear case estimate is for $75 per share; I believe this is a more realistic price target. Travel demand will take time to recover, and the company is focused on growth over profitability at this stage. When you add legal troubles to the mix, Airbnb’s stock valuation seems even more overstretched.
Positive Catalysts for Airbnb
You have to get credit where it’s due. It’s a peculiar time for a lodging company to go public. But that didn’t stop Airbnb from having a monster debut. Shares were offered at $68 per share on Dec. 9. However, when the stock started trading the next day on Nasdaq under the ticker symbol ABNB, it climbed to approximately $144 a share. That translates to a market cap of $100 billion.
The enthusiasm surrounding ABNB stock makes sense. Although 2020 won’t be remembered fondly by the general public, it wasn’t bad for tech startups. Snowflake (NYSE:SNOW), Airbnb, and DoorDash (NYSE:DASH) all had excellent debuts, feeding an IPO frenzy that hasn’t been seen since the dot-com bubble of the late 1990s.
Airbnb is disrupting traditional holiday accommodation. Its asset-light business model differentiates it from the competition. Hosting and managing a website isn’t as costly as managing hotels and resorts. Additionally, its IPO has grossed $3.4 billion, an ample amount for any expansion plans.
Airbnb is also aggressive in expanding overseas, with the U.S. making up just 37% of its total revenue. None of its competitors can boast of such geographic diversification.
And finally, if the work-from-home trend remains strong post the pandemic, it should serve as a secular tailwind for the platform. This is because people are using rental properties for staycations. That should provide it with a stable revenue stream until pre-pandemic travel demand returns.
Let’s Talk About the $100 Billion-Plus Valuation
Gordon Haskett analyst Robert Mollins said Airbnb’s IPO surge “more than stretched” the firm’s share prices in a note downgrading the home-rental company. Mollins is not the only one bearish on the stock. Three analysts reporting on the stock give an average one-year price target of about $96. That’s a 36% downside to current prices.
Why the pessimistic outlook?
First, it will take time for air travel to rebound. Vaccines are rolling out. But the general population isn’t getting early access. Essential workers and then the elderly and at-risk patients will be offered inoculations. In the current environment, business and recreational travel may resume late in 2021 at the earliest.
Plus, no one can tell if pre-pandemic norms will return once things start getting back to normal. Remote working is all the rage these days. If this pattern holds, the company’s estimates for 40% sales growth next year will be hard to realize.
Airbnb has another major problem to contend with – the lack of profitability. Previously, it was a standout among unicorns because it was turning a profit. But now, it’s one of the many tech companies hitting the public markets without being profitable.
The company is spending a lot of money on safety issues, tech upgrades, and marketing. Meanwhile, sales are down 32% in the first three quarters of 2020. Despite excellent gross margins, the company is suffering because of administrative and tech costs. Its reportedly spending more than $100 million a year on upgrading its platform.
It also had to set up a $250 million fund for hosts in 2020, after overriding hosts’ cancellation policies and refunding guests $1 billion worth of bookings. The move hurt the sentiments of its 4 million hosts, a majority of whom complained about inconsistent reimbursement and being paid a fraction of what was owed to them.
In the past, the tech giant has faced regular class-action suits from hosts whenever they have felt their contract was violated. Unauthorized gatherings and advertisement of illegal properties have also led to subpoena orders and substantial damages.
Wait for ABNB Stock to Drop More
Airbnb operates an attractive business model. That’s why investors rushed in like most of the technology IPOs these days. However, valuation remains a genuine concern. Revenues should return to normal soon; Airbnb is the largest platform of its kind for host-based accommodation.
Competition does exist, but the scale of its operations is larger than any of its peers. It has hosts and guests across 220 countries. Its design is also unique, focusing on host-based accommodation. In comparison, rivals adopt a two-pronged approach, trying to mesh the Airbnb style with traditional hotels. This muddies their strategy when you contrast with Airbnb and its single-minded approach.
But, in the near term, the risk-reward is not compelling enough to take a dip. It’s certainly worth a fair premium over its IPO price, but the current valuation is bubbly. It’s best to wait on the sidelines for shares to drop a fair bit before buying in.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan is a contributing author for InvestorPlace.com and numerous other financial sites. A former data journalist at S&P Global Market Intelligence, he’s passionate about helping retail investors make more informed decisions regarding their portfolio.