Is Airbnb Stock a buy?
Airbnbit’s (NASDAQ: ABNB) December IPO arrives at a calculated time. The coronavirus pandemic has hit the tourism industry, causing the peer-to-peer accommodation company’s revenue to drop 32% year-over-year to $2.5 billion and pushing its operating loss to $490 million in the nine months ending September 2020.
The public listing gave Airbnb a much-needed capital injection of $3.5 billion and allowed early investors to withdraw their positions. But with a market capitalization of $101 billion at the time of writing, new investors could be left behind if Airbnb fails to meet high market expectations.
Let’s dig deeper to see if the stock is worth adding to your portfolio.
The coronavirus is not going away anytime soon
As a vacation rental company, Airbnb’s business model is built on a robust travel and tourism industry. Research firm Statista estimates that tourism fell by 42% in 2020 due to the adverse effects of the coronavirus pandemic. And the industry could experience continued headwinds in 2021, despite the rollout of COVID-19 vaccines.
According to data from Johns Hopkin University, the coronavirus pandemic may be accelerating around the world. And some countries will not have widespread access to vaccines until 2022. Among countries that have access to vaccines, progress in administering these vaccines has been painfully slow. Dr Anthony Fauci estimates that 85% of the United States will need inoculation for the country to achieve herd immunity, but only 3% of the population has received the first vaccine at the time of writing.
Nonetheless, Airbnb as a business has recovered from the worst impacts of the crisis. Third-quarter revenue was down 18% year-over-year to $1.34 billion, a significant improvement from the 72% year-over-year decline in second trimester. But the company still faces a very uncertain future, which challenges its optimistic valuation.
Airbnb’s stock appears to be priced perfectly
With a market capitalization of $101 billion compared to 12-month sales of $3.6 billion, Airbnb has a price-to-sales (P/S) ratio of 28, which is significantly higher than the average P/S from the hospitality and tourism industry by 4. The good news is that Airbnb’s lean business model can give it an edge over its competitors.
Unlike traditional hotels, Airbnb shifts most lodging expenses to hosts on the platform. This strategy has kept operating costs relatively stable over the past two years. Airbnb also cut its marketing budget amid the pandemic, generating $419 million in operating profit in the third quarter. However, third-quarter earnings may still not be enough to justify the stock’s exorbitant valuation.
Airbnb has historically experienced significant seasonality (with declining revenue and profits in the fourth quarter). And many of its cost-cutting measures, including cutting executive salaries and marketing spending, could reverse when the pandemic ends.
Airbnb stock is not a buy
Investors love to bet growth stocks with disruptive business models due to their potential for long-term success. But while Airbnb is an exciting stock to watch, it doesn’t look like a good investment. at present due to potential overvaluation.
The company is already priced perfectly despite significant uncertainty from the coronavirus pandemic, and investors should wait for some of the hype to wear off before considering adding Airbnb to their portfolios.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.