It came to market late in the year, but Airbnb (NASDAQ:ABNB) was easily one of 2020’s most ballyhooed initial public offerings (IPOs). That anticipation was warranted as ABNB stock is delivering for investors.
For the month ended January 15, this travel stock returned 35.63%. Despite a 6.22% decline on that day, Airbnb wrapped up the first half of the month with a market capitalization of $102.77 billion. Airbnb, a company not even two months into life as a public entity, currently sports a market capitalization that’s more than double that of Marriott International (NASDAQ:MAR).
That is to say there is some merit to the claim ABNB stock is overvalued, particularly when accounting for the fact that this is the latest in a long line of “unicorns” that’s not yet profitable.
Based on traditional valuation metrics, Airbnb is indeed pricey, trading at more than 67x sales. That’s expensive regardless of scenario, but even more so when considering the travel and leisure industry is still grappling with the effects of the novel coronavirus pandemic.
However, a case can be made that, given Airbnb is a “disruptor,” traditional valuation metrics aren’t useful here and even if they are, the stock merits the premium multiples. As Susquehanna Financial Group analyst Shyam Patil notes, Airbnb created a “powerful flywheel” allowing it to generate revenue from both guests and the owners of the homes in the company’s network.
ABNB Stock: Ideal Disruptor
Investors are getting increasingly acquainted with the concept of disruptive growth stocks. Academics and experts are sure to offer up more convoluted definitions, but in layman’s terms, a disruptive company is one that can turn an old industry or niche on its ears.
Today, the market is littered with lumbering old industries being disrupted. Think fintech intruding upon banking and electric vehicles altering the automotive landscape. In fact, some experts argue consumer discretionary — the sector where travel and leisure equities reside — is among those most ripe for disruption. That speaks to the long-term case Airbnb upside.
Over the near- to medium-term, Airbnb isn’t just a disruptor. It fills a void. The Covid-19 pandemic isn’t just altering the travel and leisure business, it’s shifting travelers’ priorities. With all the shelter-in-place orders and shutdowns, many folks haven’t seen family and friends that live in other regions in sometime. That is to say, the standard American vacation to a destination market isn’t what travelers are after.
“They’re not yearning to see Times Square. What they are yearning to do is to see their friends and families they have not seen in a long time,” said Airbnb CEO Brian Chesky in an interview with Reuters.
On a related note, Airbnb has another compelling opportunity to tap into. Owing to the pandemic, travelers are eschewing trips that require flights in favor of drivable destinations. A prime example of that phenomenon is the out-performance of regional casino equities over Las Vegas-centric peers.
The road trip resurgence is constructive for Airbnb because many of the less urban drivable destinations may have limited, overpriced or undesirable hotel supply, providing an ideal segment for Airbnb disruption.
Admirable Balance Sheet
Somewhat lost in the Airbnb conversation, probably because this is a sexy disruptor, are two factors. First, the asset lite model eliminates many of the long-term fixed costs traditional hoteliers deal with. Second, Airbnb’s balance sheet is quite impressive, particularly for a young, emerging growth company. Per Morningstar:
“The firm had $5.6 billion in pro forma cash and marketable securities, with just $1.8 billion in debt as of Sept. 30, 2020 … Also, it generated $5 million in free cash flow during the first nine months of 2020. As a result, we think Airbnb has enough means to invest in its platform, barring a prolonged shutdown of global travel.”
Add up the vulnerability of traditional lodging to the disruption purveyed by Airbnb, the company’s status as a premier pent up demand play and a very strong balance sheet and it’s not surprising ABNB is pricey. But it may just be worth paying up for.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
