Valuation Concerns Loom Over Airbnb As It Clobbers Its Hotel Rivals

Founded in 2008, Airbnb (NASDAQ:ABNB) has since become a hot commodity for lodging and vacation rentals. In just 13 years, the company has grown to 4 million hosts. It has stayed over 800 million guests. And it has done so in close to 100,000 cities around the world. It’s an amazing story and the company is backed by some legitimate tailwinds for growth coming out of the pandemic. However, I would advise caution when investing in ABNB stock.

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

Its current valuation is expensive. And that’s not the only risk to consider. Let’s dive a bit deeper into the story behind Airbnb’s stock.

How Did Airbnb Do During Covid?

The hotel industry was one of the hardest-hit industries during 2020. As a result, vacation stay companies saw huge decreases in revenue. Airbnb’s revenue declined 30% year-over-year. Marriot (NASDAQ:MAR) declined 50% YOY. Hilton (NYSE:HLT) declined 54.43% YOY. Wyndham (NYSE:WH) declined 37% YOY.

ABNB, HLT, MAR, WH 2020 Revenue Growth
Source: Thomas Logue, data from ABNB/WH/HLT/MAR investor relations pages

One key takeaway about the Airbnb’s relative success in 2020 (compared to its competitors) was its U.S. revenue segment. This segment declined only 7% YOY. For comparison, HLT’s North America revenue segment declined 53% on the year.

Historically, ABNB’s revenue has dominated internationally, with international revenue accounting for 67% of its total revenue in 2018 and 63% in 2019. With the U.S. segment representing almost half of the company’s 2020 revenue, it is clear that when U.S.-based citizens wanted to travel domestically, they chose Airbnb over the traditional hotels. With people adapting to the “work from anywhere” trend, Airbnb’s inherently less intrusive and restrictive nature made the choice to stay at an Airbnb an easy one.

Coming Out of Covid-19

The “work from anywhere” trend appears to be sticking for Americans. According to YouGov, 86% of Americans currently working from home would like to continue to do so post Covid-19. The ability to take a “vacation” without actually taking a vacation has resonated with Americans.

This trend bodes well for ABNB in 2021 and beyond. But there’s more to the story here.

The U.S. has done relatively well (in comparison to Europe and other countries) with Covid vaccinations. As of March 19, 2021, 21% of the U.S. population has received at least one vaccine dose. By May, all U.S. adults will be eligible for the vaccine.

According to 6pages, this means that we could hit the 70% vaccination needed for herd immunity by June 2021. With concerns about Covid-19 being addressed, travel is set to boom in 2021 with “99 percent of U.S. and Canadian travelers” stating that they are itching to travel again.

Even with vaccination and herd immunity, I predict that the preferred vacation stay will be at an Airbnb due to the general intrusiveness of hotels as well as the potential for continued hotel restrictions into the future.

Europe’s Situation

It is great that the U.S. has made notable strides in overcoming Covid-19. Europe, on the other hand, is having some serious issues. Over the last few weeks, Covid-19 cases in Europe have soared and a few European countries have implemented new lockdown restrictions. It could be a long a time before travel within Europe and travel to European countries returns to pre-covid levels. This is problematic for Airbnb as international revenue still represented 45% of total revenue in 2020.

Historically it has been the company’s biggest source of revenue. As such, prospective ABNB stock investors should keep a close eye on how Europe’s cases and restrictions evolve over the next few weeks.

Airbnb’s Valuation and Profitability 

Europe’s Covid-19 resurrection is just one of the issues I have with ABNB stock. The second issue being its extremely expensive valuation.

Right now, the company currently trades at a market cap greater $110 billion, yet only generated $3.37 billion revenue in 2020. This gives it a price-to-sales (P/S) ratio of 33x. For reference, MAR’s P/S ratio is 4x, HLT’s P/S ratio is 7.6x and WH’s P/S ratio is 4.8x. It leads me to believe that the current arguments I’ve stated for ABNB becoming a more popular option may already be already priced in.

The lack of future profitability creates another glaring issue for the company. Airbnb just reported an adjusted earnings-per-share (EPS) figure of -1.74 for 2020 and analysts are projecting -1.68 EPS for 2021 and -0.61 EPS for 2021. I’ve included this in some of my past articles, but as legendary investor Peter Lynch states, “stock prices often move in opposite directions from fundamentals but long term, the direction and sustainability of profits will prevail.”

Final Thoughts on ABNB Stock

Airbnb’s relatively strong 2020 U.S. revenue shows how resilient its business model is when dealing with adverse situations compared to traditional hotel companies. As the company penetrates a larger portion of U.S. travel and stay, and international countries eventually — wishful thinking — recover, Airbnb’s business should only expand. Airbnb should become a much bigger global company as a result.

However, with the company’s current market cap sitting above $100 billion and no profitability projected for at least two years, I would be careful of investing in ABNB stock.

As of this writing, Thomas Logue, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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