Airbnb (NASDAQ:ABNB) stock has been able to remain strong after its explosive IPO on Dec. 9. Since their debut, the shares have logged an impressive return of 166%.
That is really not surprising. After all, the IPO market has been on fire this year.
But then again, early in the year Airbnb’s prospects looked quite awful because of the impact of the Covid-19 pandemic. The company’s revenues plunged, so it had little choice but to raise $2 billion. Management also was quick to cut the company’s costs, reducing its global workforce by 25% and suspending various initiatives.
Perhaps the company’s biggest call was its decision to focus on local visitors who were staying at their destinations for short amounts of time. That strategy helped stabilize the company’s revenues. As a result, Airbnb has performed better then other online travel companies like Expedia (NASDAQ:EXPE) and Booking (NASDAQ:BKNG). And that made it possible for Airbnb to pull off one of the year’s hottest IPOs.
About 12 years ago, Airbnb got its start. The founders saw the website not as a business, but really as a side hustle. They needed a way to pay their rent in San Francisco!
But as the company’s growth continued to be strong, it was becoming clear that Airbnb was pioneering a new category of home-rental sharing. So the founders aggressively raised venture capital from some of the world’s top investors like Sequoia, Greylock, Dragoneer, Andreessen Horowitz and Kleiner Perkins. Even Ashton Kutcher invested in the business.
As a result, Airbnb has become the dominant platform in the industry, with its strong brand causing its marketing costs to be relatively low.
Keep in mind that about 91% of the traffic on Airbnb’s website comes from direct channels that don’t charge the company any fees. By contrast, many online-travel sites must rely on paid channels like Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google search engine, Facebook (NASDAQ:FB), and so on.
Another advantage is Airbnb’s network effects. Many of the 5.6 million active listings are exclusive. In other words, Airbnb has powerful competitive advantages. Marketplaces also don’t require much capital. That is why Airbnb has been able to post profits and strong cash flow.
So with its substantial resources, the company can invest in new areas in an effort to enhance its platform. One of its most interesting initiatives is “experiences.” This involves putting together travel packages that are personalized for customers.
And finally, as the Covid-19 vaccines are rolled out, there will likely be a spike in travel in the U.S. Consequently, Airbnb’s growth is likely to accelerate meaningfully in 2021, while it’s likely to be profitable next year.
The Bottom Line on Airbnb Stock
Airbnb is certainly unique. It will also likely generate robust long-term growth. But the nagging question is: Could Airbnb stock just be way too expensive?
Of course, that seems to be the main question about most of the recent tech IPOs. The current environment does feel similar to that of the dot-com boom. And of course, during the latter era, investors suffered major losses when the bubble burst.
Note that various analysts have issued reports on Airbnb stock and their consensus price target is $111. By comparison, Airbnb stock closed yesterday at $163. Thus, it appears to be significantly risky.
Now as we’ve seen during the past year, hot stocks can get hotter and hotter! But going into the new year, there could be some turbulence. There is a new President coming into office, and that could cause volatility. Interest rates and even inflation could climb.
As a result, it’s probably best for investors to be patient when it comes to Airbnb stock because the shares could fall to a better entry point if the markets falter.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.