Airbnb Looks Expensive, But Revolutionary Business Model Makes Most Steps Unnecessary
Traditional valuation metrics indicate that the rental pioneer Airbnb (NASDAQ: ABNB) is a largely overvalued stock with an unfavorable risk / reward profile. With roughly 17 times the estimated revenue for this year, Airbnb is not going to land on the desks of many valuable investors. Image doesn’t improve when stock is stacked against competitors in the online travel booking space, like the owner of VRBO Expedia, which is trading at less than four times expected sales.
For many, the valuation story ends there, with Airbnb’s price-to-sales measure pushing the stock out of investor comfort zone. I think this can be a monumental mistake, however, as current valuation metrics fail to capture the long-term growth potential of a game-changing company like Airbnb.
Revolutionize a massive industry
Airbnb represents an opportunity to invest in a revolutionary company that is reshaping a travel and experience market valued at $ 3.4 trillion, according to the company’s IPO prospectus.
By creating a whole new way to travel and vacation, Airbnb has exponentially expanded accommodation and destination options. At the same time, its platform provides a convenient way for people to earn extra money by renting out their homes.
I’m not suggesting that Airbnb will completely wipe out the hospitality industry in the way Netflix erased Blockbuster Video, but companies like Marriott and Hilton feel the heat. Marriott’s foray into the rental housing market in 2019 through its Home & Villas unit is a direct response to the growing threat posed by Airbnb.
In March 2019, Bloomberg Second Measure reported that 12% of large hotel guests in 2018 had also made a reservation with Airbnb, up from just 1% in 2013. This willingness of travelers to break the boundaries of traditional accommodation is also revealed in market share. The same Second Measure report estimates that Airbnb absorbed nearly 20% of all US consumer spending on accommodation in 2018. This places the company well ahead of the estimated 11% market share of HomeAway, but it also leaves room to continue reducing the 70% market share held by all the major hotel operators.
That data is a bit out of date, but Airbnb has only strengthened its position over the past two years, with the pandemic highlighting its growing popularity.
Resilience indicates growing acceptance of non-traditional stays
As the pandemic hit the travel industry last year, the timing of Airbnb’s IPO in December 2020 seemed far from ideal. Indeed, the company was not immune to the effects of the virus as the gross reservation value (GBV) fell 39% to $ 18.0 billion for the nine months ended September 30, 2020.
The sharp drop cast a shadow over a stellar 2019, when 54 million active bookers and 2.9 million hosts (4 million at the end of 2020) helped push GBV up 29% year-over-year. on the other at $ 37.9 billion.
However, the pandemic has shed light on one quality that I believe will translate into strong growth and market share gains, as a reopening economy helps ease pent-up travel demand: resilience.
Revenues, which represent the reduction Airbnb gets from a reservation, fell only 30% in 2020. In comparison, revenues for Marriott, Hilton and Hyatt, ranged from 50 to 60%, while the online booking companies Expedia and Booking.com saw their income decrease by 67% and 55%, respectively.
Some may argue that this is not an apple-to-apple comparison, as Airbnb’s exposure to the hardest-hit business travel space is much lighter. That’s a good point, but the shift in work anywhere that emanated during the pandemic dovetails perfectly with Airbnb’s ability to provide safer accommodations in nearby destinations.
Although 2020 has been a very difficult year for Airbnb, its relative outperformance in the high end means that momentum will pick up and more people will use its platform due to its greater variety of options. ‘accommodation for shorter and localized trips compared to hotel chains.
Underestimating game changers can be very costly
Despite this bullish picture, some may still wonder what upside potential might exist for a seemingly expensive stock like Airbnb.
To answer this question, let’s take a look at two other very important companies that have revolutionized massive industries: Facebook and PayPal.
When Facebook went public in May 2012, its IPO price of $ 38 resulted in a trailing price / sales of 28x. At the time, many experts and investors were hesitant about the exorbitant valuation. Nine years later, Facebook is trading at almost $ 330, good for a spectacular 750% gain.
Likewise, PayPal’s rich rating was a hot topic of conversation after the company was split by eBay in 2015. While underestimating the growth potential of the leader FinTech, many focused on the fact that PayPal was valued at around 60% of eBay at the time of the spin-off, despite generating less than 50% of eBay’s total annual revenues. Investors would have done well to ignore the criticism as the stock has climbed 560% since the spin-off.
Maybe Airbnb ultimately doesn’t match the astronomical gains Facebook and PayPal are making. In my opinion, however, the potential long-term benefits of investing in a pioneer like Airbnb far outweigh the perceived risks associated with its high price / sales metric.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.