Short-term rental platform Airbnb (NASDAQ:ABNB) stock has recently made an impressive entrance to Wall Street. ABNB stock’s initial public offering (IPO) of Dec. 10 was one of the most widely-followed IPOs of 2020.
The company initially set its opening price at $68 per share, but ABNB shares opened at $146 on the first day of trading.
Then on Dec. 15. they saw a low of $121.50, but gradually picked up and hit $174.97 on Dec. 22. Now Airbnb stock is flirting with $148. Put another way, it has been a volatile first month for the home rental vendor.
Today’s article looks at what the expect from Airbnb stock in the early 2021. ABNB stock is currently richly valued. If you are not yet a shareholder, you may consider waiting to invest around $125, where the risk/return profile is likely to be better. Here is why.
San Francisco, California-based Airbnb operates an online platform for stays and experiences. Since its early days in 2008, it has grown to 4 million hosts with 5.6 million active listings in about 100,000 cities across the globe.
The growth in Airbnb has corresponded with the growth of global hospitality industry. In 2006, the “total contribution of travel and tourism to GDP” worldwide was $5.16 billion. In 2018, that number was $8.81 billion.
The company’s business model is also a likely contributor to its significant success in recent years. Recent research argues, “Airbnb gives way to a hyper-flexible rental market that for tenants implies increasing insecurity and displacement concerns.”
Tarik Dogru of Florida State University, Dedman School of Hospitality, Tallahassee, FL, highlights, “Multi-unit hosts and hosts offering entire home listings generate the majority of Airbnb’s revenues… Airbnb’s growth is spurred by its concentration in 12 states in the U.S., which generate 74% of the company’s revenues.”
Last year was a a difficult years for travel operators. The latest issue of the UNWTO World Tourism Barometer indicates, “…due to Covid-19, international tourist arrivals (overnight visitors) fell by 72% in January-October 2020… Most UNWTO Panel Experts expect a rebound in international tourism by the third quarter of 2021 and a return to pre-pandemic 2019 levels not before 2023.”
Put another way, despite the crosswinds this year, Airbnb stock is likely to benefit from the long-run growth in the hospitality and tourism industry.
But Airbnb Stock Is Expensive
Despite the growth, many investors still wonder if the current revenue levels are enough to justify the Airbnb stock’s lofty multiples.
According to SEC filings issued by the company for the IPO, during the nine months ended Sept. 30, 2020 revenue was $2.5 billion, down 32% YoY. The gross booking value (GBV) for the same period was $18.0 billion, down 39% year over year. Net loss was $696.9 million.
In the Dec. 7 filing the company admitted it didn’t know how Covid would affect its business. It brightened, though.
“[W]e believe that as the world recovers from this pandemic, Airbnb will be a vital source of economic empowerment for millions of people,” the company added in a statement.
Moreover, ABNB’s business is not only vulnerable to the pandemic. Local state and/or country regulations are a big challenge for profitability. There are countries that consider short-term rentals as illegal or may apply additional taxes for such cases.
A recent Forbes article points out, “The risk of future regulations in any of the 100,000 cities Airbnb operates could materially impact the business’ operations.”
Put another way, there are several short-term headwinds that could negatively affect the price of ABNB shares in the near future. Airbnb stock’s current P/S and P/B ratios are 22.28 and 287.99, respectively. This is a rich a valuation even for a growth company. By comparison, the metrics for Booking (NASDAQ:BKNG), one of the leaders in online travel industry, are 18.22 and 10.17.
The Bottom Line
As I find Airbnb stock frothy at these levels, I’d wait to invest. Shares of the virtual hospitality provider would offer an improved margin of safety around $125.
Potential investors could also consider buying an ETF that holds Airbnb, such as the ETFMG Travel Tech ETF (NYSEARCA:AWAY).
Similarly, those market participants who are interested in participating in the growth of newly listed companies may consider the First Trust US Equity Opportunities ETF (NYSEARCA:FPX), the Renaissance IPO ETF (NYSEARCA:IPO), the Invesco S&P Spin-Off ETF (NYSEARCA:CSD), the Defiance Next Gen SPAC Derived ETF (NYSEARCA:SPAK), or the First Trust IPOX Europe Equity Opportunities ETF (NASDAQ:FPXE)
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation and publishes educational content on investing.