Shares of Airbnb (NASDAQ:ABNB) have taken off after its blockbuster IPO in December. Its IPO comes when the effects of the global pandemic have battered the travel and hospitality industry. Despite the challenging times, Airbnb stock is worth more than $200, nearly three times its original IPO price.
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Its resilient business model and effective management have positioned it as an incredible rebound play. However, it is one of the priciest stocks in its sector, trading more than 38x forward sales.
That’s why investors should wait for a pullback at this time.
When the company was founded in 2007, the idea of renting out rooms to strangers felt like a preposterous idea. Fast-forward to 2021 and the company has a market capitalization of over $120 billion and more than 4 million hosts on its platform.
As we get closer to a post-pandemic reality, it is likely to regain its lost ground and continue to expand its market share in the sector. Regulations and the company’s massive debt balance are near-term risks but are too significant at this point. The problem lies with its price, which warrants a correction before investors put forward their bets.
Like several of its competitors, Airbnb’s performance was weighed down by the pandemic. Bookings tanked 72% in April 2020 and 50% year-over-year in May. Additionally, its revenues for the nine months ended in September were down 32% year-over-year. Accordingly, the company took steps to curb costs by reducing full-time employees by 25% and substantially reducing discretionary expenses and capital expenditures.
Though the slowdown was significant, the company fared much better than its peers due to its resilient business model and strong brand. For instance, active listing only dropped 2% for the nine months ended in September. Moreover, long term stays dropped only 13% year-over-year in April and witnessed growth from May through September. Additionally, Airbnb’s cancellation rates were more than 50% lower than its peers during the pandemic.
Another area where the company excels is its organic growth rate. Approximately 91% of its traffic came from unpaid channels during the first nine months of 2020. Also, 82% of its guests ended up giving 5-star ratings for 12 months ended in September. It now has more than 400 million cumulative reviews on its platform.
Once traveling trends normalize, I expect the company’s retention rates to stabilize again. A significant risk to the company’s path to recovery is if the pandemic continues to drag on. However, with the vaccine rollout, things are likely to move in the right direction.
One of the main problems with ABNB as an investment is its lofty valuation. From the table, we can see that Airbnb stock is overvalued across all metrics and that too by massive margins. It is currently trading at more than 38x its forward revenues, which is astounding. Mean targets for the stock are at least 25% lower than its current price. Moreover, it is currently trading at the higher end of its estimated price target.
Airbnb netted off one of the biggest first-day rallies, rising roughly 113% to reach a valuation in excess of $100 billion. The surge in demand for the stock relates to the immense confidence investors have in the company.
However, how much of it is justified is a question investors must ask themselves. Meanwhile, Airbnb stock is up another 19% in the last month.
Final Word on Airbnb Stock
During these troubled times, Airbnb’s blockbuster IPO is a testament to its resilient business model and robust outlook. The company has fared significantly better than its competition during the pandemic, and with the normalization of traveling trends, things are only going to get better.
However, its price is a concern, and a major correction would be needed for investors to get excited about the stock.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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