Airbnb Still Has Upside Based on Its Valuable Business Model

Airbnb (NASDAQ:ABNB) is up by 10.5% to about $154 since my article last month. However, I think Airbnb stock still has prospects of moving higher from here.

Airbnb (ABNB) app on a smartphone screen
Source: BigTunaOnline / Shutterstock.com

This is based on two things. First, I suspect growth will come in higher than forecast by Wall Street. As the impact from Covid-19 restrictions subsides, and especially as the vaccine distribution widens, people will travel more.

There is huge pent-up demand for travel that has been set aside by many people. This will have the effect of increasing demand for Airbnb’s inventory, possibly even more than most analysts expect. That will help push up ABNB stock as revenue growth estimates move higher.

And second, last month I wrote about a way that ABNB stock could end up with a higher valuation. This method uses a yardstick that analysts typically use with Square (NYSE:SQ).

Airbnb’s Take Rate and Comparison

For example, Square makes a “take rate” on the gross payment volume (GPV) of transactions that its Seller side and Cash App facilitate. In Q3, Square made $3.03 billion in net revenue on its GPV of $31.7 billion. Therefore, its take rate was 0.956%, or almost 1% during the quarter.

Airbnb has a similar business model. On page 3 of its final prospectus, Airbnb describes its business model. It uses Gross Book Volume (GBV), instead of GPV, to describe its basic transactions.

Airbnb’s GBV was $38 billion in 2019. Since net revenue was $4.8 billion, its “take rate” was 12.6%. This is significantly higher than Square’s 1% rate.

Therefore, it stands to reason that Airbnb should have a significantly higher price-to-sales (P/S) ratio than Square.

Airbnb’s Valuation

Both of these companies have a similar basic business model. They do not have inventory, and do not buy inventory, but they take a commission on inventory. Square’s inventory is its transactional volume or Gross Payment Volume. Airbnb’s commissions are based on bookings, which it calls Gross Booking Volume.

Now, since this fee or commission is 12 times higher at Airbnb than Square, you might expect that ABNB stock will be valued higher.

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.

Airbnb now has a market capitalization of $94 billion. That puts Airbnb stock on a P/S multiple of 21.7. By comparison, Square has a lower P/S ratio. But remember, it makes a much lower commission or “take rate” on its underlying volume of business. So it might be seen as worth less than Airbnb.

For example, Square has close to a $103 billion market cap, and its forecast 2021 revenue is $13 billion. That puts it on a P/S multiple of 14.98 times.

That means that Airbnb’s 21.7 ratio is higher than Square’s 14.98 times ratio. But why shouldn’t it be? Remember, above I went over how Airbnb’s fundamental revenue model is 12 times better than Square’s.

Just to recap, Airbnb made 12 times the commission or take rate (in one year) on a similar amount of money than Square (in one quarter). For example, Airbnb made $4.8 billion in 2019 on $38 billion in GBV, whereas Square made $3.03 billion (in Q3) on $31.8 billion in GPV.

What To Do With Airbnb Stock

Therefore, it makes sense to value Airbnb much higher, although maybe not 12 times higher, than Square. One thing is for sure: Having a P/S ratio that is only 1.45 times higher than Square’s does not make sense.

For example, using a P/S ratio that is 3 times Square’s might not be out of the question, given its much more valuable business model. That would imply that ABNB stock should trade at 3 times the P/S ratio of 15, or 45 times sales.

This implies that Airbnb should have a market capitalization of $194.85 billion (i.e., 45 times $4.33 billion est. 2021 sales). That would mean ABNB stock should be priced significantly higher.

In other words, given that Airbnb’s basic business model is fundamentally very valuable, ABNB stock still has plenty of room to rise. Sometimes it is useful to have a simple valuation paradigm like this to provide a yardstick on a stock’s value.

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. 


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