After Airbnb (NASDAQ:ABNB) topped nearly $175 days after its initial public offering, trading volume is starting to fade. Investors need to value the American vacation rental online marketplace supplier’s prospects next. The worrisome spread of the novel coronavirus in the United States and globally should hurt the tourism market. That should weaken the upside potential of Airbnb stock.
Savvy investors might look at Airbnb’s valuation differently. The marketplace has no physical inventory of rooms. Its suppliers are homeowners who post the daily availability of rental properties on the site.
So, how should investors value the company?
Airbnb Stock Losing Steam
Chief Executive Officer Brian Chesky expressed humility in the stock’s wild debut on the Nasdaq on Dec. 10, 2020. This suggests that he will not add any new insight into the share price. Besides, investors should not ignore his initial reaction. He was CEO that when it raised money in April 2020 through debt financing, the implied value of its stock stood at $30.
If Cheksy does not know why the market values Airbnb at today’s levels, then investors should not do so, either. This suggests that the stock market is too optimistic in its moat. Conversely, a hotel company like Hilton Worldwide (NYSE:HLT) trades at around one-third that of Airbnb’s market capitalization. The firm has physical rooms that lose money when vacation volumes are down.
The pandemic is hurting the tourism industry, while Airbnb could survive longer.
Airbnb Posts Profit
In November 2020, Airbnb posted a third-quarter profit. Despite the Covid-19 pandemic, the company posted revenue falling by 18% to $1.34 billion. It still managed to earn $219 million. Thanks to the flexibility in cutting down costs, the firm adjusted to the loss in international revenue in the period. Conversely, it benefited from a rebound in travel in the second and third quarters.
In its third quarter, Hilton posted a diluted earnings loss of 28 cents. After special adjustments, it posted earnings per share of 6 cents. The hotel’s turnaround strategy is worth mentioning. It is willing to double-down on the travel rebound by developing new rooms. In the quarter, it approved 17,400 new rooms for development. This is an 8% growth from last year in its room pipeline.
Hilton stopped buying back shares and ended its dividend payment in March 2020.
Fair Value
The majority of Wall Street analysts rate Airbnb shares as a “hold.” Another 10 rate it as a “buy” compared to the 18 as a “hold” (according to Tipranks). The neutral rating is a code word suggesting that investors avoid the stock for now. A dramatic stock market correction for the tourism sector would send Airbnb shares lower. Investors could buy airline and cruise ship stocks to bet on the tourism rebound. The risks are different but the results are the same.
Airbnb has valuation risks that investors should consider. Conversely, travel services firms have high debt and a lack of profits. And the prolonged pandemic is only delaying a revenue recovery for them. If investors grow tired of waiting for the tourism business to rebound, all stocks, including that of Airbnb, will fall.
| ABNB | Industry | S&P 500 | |
| Quality Score | 20 | 54 | 79 |
| Gross Margin | 73.90% | 56.40% | 28.80% |
| Operating Margin | -16.70% | 18.90% | 12.30% |
| Net Margin | -25.20% | 20.10% | 7.50% |
| Return on Assets | – | 12.10% | 5.70% |
| Return on Equity | – | 17.90% | 24.10% |
In the table above, Airbnb scores a 20/100 on quality. This is well below that of the industry and the S&P 500. Chances are low that the market’s sentiment will turn negative. But if the next quarterly report shows a loss, then investors could bail.
Simplywall.st is even more cautious on Airbnb’s fair value. Based on its cash flow discounted to present value, the site figure the stock is worth less than $90.
Investors have no reason to get out of the Airbnb investment yet. The company has an advantage over hotel firms. As the pandemic subsides on the vaccine rollout, the profit margins will grow. When that happens, its Stock Rover quality score will rise to the “A” grade or higher.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
