December’s Airbnb (NASDAQ:ABNB) IPO was one of the largest and most successful IPOs of the year. ABNB stock doubled its IPO price on its first day of trading and has continued higher in the three months since.
Airbnb is now sitting on a $125.8 billion market cap. It certainly has a long-term growth trajectory. But ABNB stock has no business at prices above $200 per share.
ABNB Stock Missing Variant Perspective
Investor expectations for Airbnb have obviously changed a lot in the past three months. ABNB stock was priced at $68 for its IPO. Three months later, the company’s market cap has more than tripled.
The danger with that type of performance is exactly what in the world the company could possibly do to exceed the extremely high bar the market has now set for next several years.
ABNB stock investors love to talk about the boom in travel demand coming in the next couple of quarters on pent-up pandemic demand. I get it, and everyone else in the market gets it.
Yes, Airbnb is a travel rebound play. Yes, Airbnb has an impressive long-term growth outlook. That was the expectation for the company when it went public three months ago. Nothing has changed about that outlook now that the stock has tripled in three months.
Airbnb reported its first quarterly report in February, and the numbers were not good. Revenue was down 22.3% and the company generated a net loss of $3.89 billion in the fourth quarter. Those growth numbers will improve dramatically in 2021 and beyond. I’m an ABNB stock skeptic, but even I believe that. Everybody believes it, which is part of the problem with the stock.
I pointed out that there was no variant perspective in Beyond Meat (NYSE:BYND) in September 2019. In the 16 months since that story the S&P 500 is up 33%, but BYND stock is up just 0.8%. Expectations were so high for the stock back then that there was no way to possibly exceed them. I believe Airbnb is now in the same boat.
Morningstar analyst Dan Wasiolek is projecting 35.1% revenue growth in 2021 and 31.5% growth in 2022 for Airbnb. He is projecting the company’s $4.58 billion net loss in 2020 will shrink to $765 million in 2021 and flip to a $454 million net profit in 2023. He expects that growth will continue in the long term and is targeting 21% average annual revenue growth over the next 10 years.
“While COVID-19 has materially affected near-term travel demand, we think Airbnb exhibits solid financial health to withstand these headwinds,” Wasiolek says. “Further, we expect Airbnb’s global online travel agency, or OTA, position to sustain over the next decade, driven by a leading alternative accommodation network (source of its narrow moat) of 4 million hosts and 247 million guest arrivals in the pre-pandemic year of 2019.”
I think that description is a reasonable take on Airbnb’s near- and long-term outlook. The future is bright for the company.
But for any ABNB stock bulls who think Wasiolek’s financial projections and optimistic views on the company make him a bull are dead wrong. Morningstar has a “sell” rating and $75 fair value estimate for ABNB stock.
And if you think a price target representing 64% downside is absurd, consider this perspective. Three months ago, Airbnb hired the best investment banks in the world to sell the company to IPO investors at a fair price. The price they came up with was $68 per share. Again, that process happened just three months ago. Wasiolek’s target represents 10% upside from that IPO price.
How To Play It
For anyone who remembers the details of the 2019 Uber (NYSE:UBER) IPO, the honeymoon period of investor enthusiasm began to die down about three months after the IPO. After climbing as high as $47.08 in its opening months of trading, Uber shares were back down under $27 six months following its IPO.
ABNB stock trades at 35.6x sales. Uber trades at 9.8x sales. Online travel competitor Expedia (NASDAQ:EXPE) trades at 4.8x sales, and Expedia actually turned a $565 million net profit in 2019 prior to the pandemic.
I have nothing against Airbnb as a company. I’ve used Airbnb, and it’s awesome. The company will continue to grow and succeed. But I warned investors to stay away from Uber stock after its IPO, and people who followed my advice avoided two years of underperformance.
It’s not Airbnb’s fault that its stock is caught in a market euphoria. But you can still love a company and its service and think its stock is a bad investment. For me, Airbnb fits that description perfectly.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.