After years of anticipation, Airbnb is finally going public. But, while some may be excited to buy it at the open, I’m skipping it for now. And so should you. Why? With investors chomping at the bit to buy, expect shares to be overvalued when they debut.
With its offering price rising, it’s clear this stock could zoom to even higher prices in its first days of trading. Yet, with the hospitality industry still struggling due to the novel coronavirus, it doesn’t look wise to buy this at a stretched-out valuation.
Sure, the company has adapted to the new normal, pivoting its vacation-rental-marketplace app toward destinations accessible by car rather than by plane. But, until we can put the pandemic in the rearview mirror, expect its rebound to remain a work in progress.
So, what does this mean? Don’t chase this IPO. At lower prices, it may be a recovery play. But, at its likely debut price? Not so much.
Airbnb: Overvalued Right Out of the Gate
As InvestorPlace’s William White wrote on Dec. 7, the company will have its IPO (initial public offering) on Dec. 10. With its shares trading on the NASDAQ under the ticker symbol ABNB, the company plans to raise as much as $3.1 billion.
Although the industry is in a bit of rough patch right now (more below), the offering price keeps rising. Previously targeting an IPO price of between $44 to $50 per share, it’s since been raised to between $56 and $60 per share. That means a valuation of up to $42 billion.
With pent-up demand from IPO investors pushing up the offering price, it’s clear Airbnb stock could soar significantly once retail investors who couldn’t directly participate in the offering buy shares on the open market.
How high could shares climb in the near term? It’s hard to say. This year, IPOs have averaged a daily pop (increase from offering price on first day) of 36%. But, there have been several big-name IPOs where shares more than doubled on the first day of trading.
But, whether shares double, only move up double-digit percentage points, or tread water from $60 per share, one thing’s clear. With its sales still depressed by Covid-19, it’s not reasonable to assign ABNB such a frothy valuation.
Don’t Pay Full Price While Covid-19 Headwinds Continue
Just before the pandemic, Airbnb was flying high. Sales in 2019 came in at $4.7 billion, up from $3.6 billion the previous year. But, in the first nine months of 2020, pandemic headwinds put the brakes on this growth train. Not only did the top line fall significantly, but losses accelerated as well.
For the nine-month period ending Sept. 30, the company’s sales came in at $2.5 billion, a more than 32% year-over-year decline. Losses more than doubled to $697 million.
And, while Airbnb has adapted to the current environment, it’s still a long road to full recovery. With strict lockdowns back in effect in states like California, travel demand for both business and leisure remains depressed in many major U.S. destinations.
Many restrictions on international travel remain in effect as well. And although a vaccine may seemingly be around the corner, supplies may be limited until next summer. At best, things could be getting back the old normal by the end of 2021.
This wouldn’t be an issue, if Airbnb were priced like a pandemic rebound play. But instead, it’s priced as if the U.S. and Europe are fully in recovery mode. As seen from results published in the company’s S-1 IPO filing, trailing-12-month sales are around $3.62 billion. At the $60 top-level IPO price, shares would have a price-to-sales (P/S) ratio of around 11.6.
Shares Remain Too Hot to Touch
Granted, for a company like Airbnb, a 11.6x sales multiple isn’t too rich of a price. And, based on sales numbers from the quarter ending Sept. 30 ($1.34 billion), the worst may be over for this company, which has been especially hard hit by Covid-19’s impact on business and leisure travel.
But, given it’s still a long road back to the “old normal,” I don’t see a reasonable valuation being that much higher. If other investors come to the same conclusion, chances are shares will dip, or at least fail to rally, from $60 per share.
At lower prices, it may have been a worthwhile opportunity as a pandemic rebound play. But instead, with investors excited to buy, investors are ignoring the outbreak’s continued impact on its short-term prospects. With this sentiment at play, it’s not worth it at its likely debut trading price.
Yes, the company has managed to somewhat adapt to the “new normal.” But, with its recovery still in progress, it’s simply not worth chasing Airbnb stock when it first goes public.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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