Airbnb (NASDAQ:ABNB) stock is up more than double its IPO price of $68 at $139.28, as of Dec. 16. But here is the thing. There is a way that the valuation for Airbnb stock might not be too high.
On Dec. 10, Airbnb raised $3.49 billion and now it has 600.448 million shares outstanding, assuming underwriters purchase their full allotment of shares. That means that Airbnb now has a market value of $83.89 billion.
But there is a way to look at this company’s valuation where is it is not unreasonable, even at this level.
Airbnb’s Valuation
I will use a similar argument that I used recently in my article on DoorDash (NYSE:DASH), which just had a similarly priced IPO. DoorDash just raised $3.366 billion, its stock rose 72% as of Friday, Dec. 11, and now it has a $55.6 billion market cap.
But both of these companies have a similar business model. They do not have inventory, do not buy inventory, but they take a commission on inventory, which they call gross order volume, in the cash of DoorDash, and gross booking value in the case of Airbnb.
Now in the case of Airbnb, it typically takes a fee from both the listing “host” for apartments and houses, as well as the guests who stay in the Airbnb listings. So this is essentially a commission-based business, with no inventory that a typical hotel company would have. That makes this business model much more valuable.
Moreover, Airbnb now looks like it will generate $4.33 billion in revenue by the end of 2021. This is based on analyst estimates surveyed by Seeking Alpha for 2021. That puts Airbnb stock on a price-to-sales multiple of 19 times.
Moreover, Airbnb has a lower multiple when analyzed from an enterprise value (EV) standpoint. Its EV is lower than the market cap (assuming no debt) by the amount of cash raised. This means its EV is $80.4 billion, and the EV-to-sales multiple is 18.6 times 2021 revenues.
That makes it a bit lower, but, frankly, this still seems quite high. After all, a multiple of 18 times is usually a ratio for earnings, not sales.
So why do I say that Airbnb stock might have a reasonable valuation?
Comparing Airbnb With Square
As I wrote in my article on DoorDash, Square (NYSE:SQ) has a similar business model. It takes a commission on what it calls gross payment volume. That is essentially the same business model as taking a commission on gross booking value with Airbnb, and gross order volume with DoorDash.
Now Square has close to a $100 billion market cap, and its forecast 2021 revenue is $12 billion. This is important when forecasting the valuation for Airbnb stock. That puts it on a price-to-sales multiple of 8.33 times.
For example, Airbnb’s revenue is expected to rise by 30% to $4.33 billion by 2021. Let’s assume that its revenue rises an average of 30% over each of the next five years from that to 2026. That means sales will be 3.72 times $4.33 billion or $16 billion.
Therefore, if Airbnb stock ends up with a similar valuation as Square, its market cap will be 8.33 times $16 billion by 2026. That works out to $133.3 billion, or 59% more than the market cap of $83.89 billion.
What to Do With Airbnb Stock
In other words, in six years, Airbnb stock could be worth $221.41 per share. That represents a potential annual return of 8% each year.
My point is this. Airbnb stock may not be overvalued. In fact, if its annual growth rate in sales is greater than 30% then the potential return for investors is likely to be higher.
This model depends on a comparison with Square. Square has a similar basic business model, just like DoorDash. They all depend on taking a commission on a non-inventory app-based, transaction-based, business model.
Despite this, I still believe that most investors will be better off waiting for an opportunity to get in on Airbnb at a lower price. This will allow the investor to make a higher average ROI over the next five years.
Just to give you an example. Let’s say Airbnb stock falls 20% to $111.40. But based on our model, we forecast that in six years, the stock will be at $221.41. That gives the investor a potential total return of 99% over that period. This works out to a more reasonable 12.1% average annual return over that period, compared to the 8% annual return at today’s price.
In other words, waiting for a 20% reduction in Airbnb stock could provide a 50% gain in the average annual return to investors.
On the date of publication, Mark R. Hake had a long direct position in Square stock (SQ).
Mark Hake runs the Total Yield Value Guide which you can review here.
