Airbnb’s (NASDAQ:ABNB) large losses and the huge valuation of ABNB stock make the shares unattractive. Also making the shares unappealing is the company’s strong susceptibility to competition.
Finally, I remain concerned that, during a time when crime rates are climbing meaningfully in many U.S. cities and nationally, Airbnb could be significantly hurt by rising fears about crime.
Airbnb’s High Losses
For the fourth quarter of 2020, Airbnb’s net cash used in operating activities came in at a loss of $139 million, while its free cash flow was a loss of $147 million. For all of fiscal 2020, the company’s net cash used in operating activities was a loss of $630 million.
And even before the novel coronavirus pandemic, the company was losing a great deal of money. In 2019, Airbnb’s operating loss was $501 million.
On a positive note, the company’s gross profits in 2019 and 2020 were, respectfully, $2.5 billion and $3.6 billion. Companies with high gross profits are likely to eventually achieve positive bottom lines as long as their revenue growth does not slow meaningfully, and they do not tremendously increase their costs.
However, for reasons I’ve mentioned and will describe further, I do not think that investors can expect Airbnb to become profitable in the next few years.
It’s useful to contrast Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), two companies I’m generally bullish on, with Airbnb.
All three companies generated high losses before the pandemic and most likely will continue to do so for some time after the pandemic is over. But while Uber and Lyft are likely to benefit tremendously from the proliferation of autonomous vehicles, I don’t see any technology on the horizon that will tremendously help ABNB stock.
Competition
As I pointed out in my previous column on Airbnb published in December, “competition is a key risk for Airbnb stock.” Indeed, the barriers to entry in the vacation-rental market are quite low, especially for the large hotel chains that have tremendous resources.
Marriott International (NASDAQ:MAR), for example, already launched a vacation rental unit called Marriott Bonvoy’s Homes & Villas, Business Insider reported last September, offering more than 2,000 homes in over 100 destinations. Other large hotel chains could launch similar products in the coming months and years.
Meanwhile, many small websites have entered the vacation rental market, Curbed reported last September. The publication listed 10 such names, including Sonder, Vacasa and Innclusive. Not on the list was Vrbo, the second largest pure-play vacation rental platform after Airbnb. Vrbo claims that it has more than 2 million rentals.
Over time, these small competitors could use word-of-mouth, media coverage and advertising to collectively take meaningful market share away from Airbnb.
Crime Remains a Big Issue for Airbnb
In my previous column, I pointed out that Airbnb does not always review the backgrounds of guests and hosts, making crime a major risk for those who utilize the company’s service.
For this article, I was able to find some examples of crimes that unfortunately took place at Airbnb rentals. For example, three people were shot at a party in an Airbnb rental in California last August, the Sacramento Bee reported. In 2018, an American was sexually assaulted by her host in Ireland.
Crime in the U.S. is currently rapidly climbing. In February, a Washington Post columnist reported that the U.S. is “facing a massive spike in violent crime.” And in January, NPR cited a “massive” yearly increase in homicide rates.
Amid this spike, many Americans may very well conclude that they’re safer staying in a traditional hotel that likely screens all of its employees than in an Airbnb rental whose owners may not have been screened.
Some may argue that crimes could also be committed by Uber or Lyft drivers. That’s true, but I believe that violent crimes are far more likely to be committed in homes and apartments than in automobiles, for the simple reason that there are far more likely to be witnesses to a crime committed in a residence than one committed in a vehicle.
The Bottom Line on ABNB Stock
Airbnb’s steepening competition and Americans’ increased fear about crime could prevent the company from becoming profitable in the next five years.
The shares still trade at a huge forward price-sales ratio of 23x, based on analysts’ average 2021 revenue estimate. ABNB stock is far too expensive, given the threats the company is facing. Further, increased competition and crime could very well slow the company’s growth. It could force it to spend much more money on marketing and background checks.
As a result, longer-term investors should sell the stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
