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Airbnb Is a Cyclical Play with a Muddled Case for Investment

Airbnb (NASDAQ:ABNB) has represented an interesting investment opportunity since its initial public offering (IPO) late last year. All in all, ABNB stock has some great things going for it.

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

For instance, the company remains a pioneering force in the lodging industry with a unique business model. And there’s plenty to like about the business from that perspective. What the company offers to customers is very solid and is still attractive. 

However, the investment side of that narrative is decidedly more muddled. There are compelling arguments on both fronts. Let’s take a look at a few of them. 

ABNB Stock: A Reasonable Cyclical Choice

ABNB stock has one tailwind propelling it forward that may be less obvious. That is, the stock fits broadly within cyclical stocks. As you can probably glean from the name, cyclical stocks are ones which ebb and flow with the cycles of the economy. 

Hotels are a sector within that broader group which express lots of cyclicality. The reason is clear: people don’t travel during weaker economies because they have less cash on hand and prioritize frugality and saving. 

Pundits who’ve been following broader market trends lately may have noticed that many of the strongest cyclical stocks are currently bid up. That’s because investors are betting on an impending economic reopening, which should send those stocks soaring.

For example, Wyndham Hotels (NYSE:WH) is above pre-pandemic prices and Marriott (NASDAQ:MAR) stock is back at pre-pandemic levels. That’s arguably illogical, given the fact that those companies have seen year-over-year (YOY) revenues decline 37% and 50%, respectively. At the very least, there is no reasonable investment thesis for either at this moment. 

As a relatively newly listed stock, ABNB lacks a pre-pandemic price by which we can judge, but it clearly hasn’t been bid up in the same manner as other lodging stocks. Valuation concerns persist with ABNB stock, but there is a fair argument that it constitutes a strong cyclical, economic reopening play in the hotel field. Further, its YOY revenue decline was a more modest 30%.

Valuation Lends Caution

Airbnb is unique to other lodging stocks in its business offering. That much is clear. So, comparing it with peers like Marriott and Wyndham is not perfect. But it is necessary. 

Many would agree that Airbnb represents a shot at quick appreciation while cyclical stocks are being bid up. However, many would also counter that with a “but.” Why? Because valuation concerns persist with ABNB stock.

If we compare the three companies across forward price-sales (P/S) ratios, Wyndham and Marriott make much more sound investment choices. Those companies have forward P/S ratios of 4.11 and 3.64, respectively. Meanwhile, Airbnb carries a P/S ratio of 23.67 and appears severely overvalued. 

Yet, if we look at other commonly used valuation ratios, the case again becomes muddled. Both Wyndham and Marriott have forward P/E ratios worse than many of their peers. Wyndham’s forward P/E ratio is worse than 63% of its industry. Marriott’s P/E ratio is worse than 87% of industry peers. On the other hand, Airbnb is years from profitability, so we can only say its peers aren’t clear and away superior. 

Growth Ahead

But Airbnb is still a company with lots of growth ahead of it. In fact, a glance at its annual gross booking value (GBV) shows how rapidly the company has grown.

The company recorded $8.1 billion in 2015 GBV (Page 118). That figure increased to $21 billion two years later and $38 billion in 2019. However, GBV in 2020 dropped to $23.5 billion due to the pandemic. 

But GBV will rebound as the pandemic eases and vaccines are distributed. North America also had the highest GBV per night among Airbnb’s geographic mix and it looks like the U.S. will be opening sooner than other geographies due to a quicker vaccine rollout. So, that’s a positive there. 

The Takeaway

All in all, I think ABNB stock still has tremendous potential

Yes, there are continued valuation concerns. However, I think the strong future narrative makes it a worthwhile investment. Airbnb certainly isn’t a clear winner, but it should reward investors handsomely in time.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/abnb-stock-is-cyclical-play-muddled-case-for-investment/.

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