In a year of blockbuster IPOs, Airbnb (NASDAQ:ABNB) did not disappoint.
Shares of the vacation rental giant more than doubled out of the gate on its IPO day, reaching a high of $165, all the way up from its $68 listing price. Since then shares have cooled off, falling in each of the subsequent three sessions as the euphoria around the new issue seems to be wearing off. Some analysts have called the stock overvalued after the big opening day pop.
The IPO stock remains highly volatile, and Airbnb now has a comparable market cap to Booking Holdings, the biggest online travel agency, even though it's growing much faster. Given Airbnb's unique position in travel, investors may be wondering if it's worth hopping on board. Here are three reasons to take a closer look at the travel disruptor.
1. It's the dominant brand (by far)
It's no secret that Airbnb has disrupted the travel sector. The company pioneered the vacation rental industry, starting when co-founders Brian Chesky and Joe Gebbia rented out airbeds in their San Francisco apartment during a conference to help pay rent. Today, Airbnb has more available rooms than the top five hotel operators combined, and a much wider reach.
In the lodging industry, Airbnb is now the leader, and peers like online travel agencies and even traditional hotels have become followers hustling to adapt to the changes the disruptor has wrought. They've added "alternative accommodations" like vacation rentals and apartments, and even hotels have started to imitate Airbnb, opening their own unique properties like vacation rentals and villas.
Despite the competition, Airbnb is the clear leader in the vacation rental industry. Its closest direct competitor is probably Expedia-owned Vrbo, which includes the HomeAway brand. Vrbo brought in $12 billion in gross bookings in 2019, compared to $38 billion for Airbnb, and Vrbo grew gross bookings last year by only 4%, much slower than Airbnb's 29% growth rate.
Perhaps the best example of Airbnb's brand domination is that the name is synonymous with the industry, and is both a noun and verb. It's common for travelers to say something like, "I'm staying at an Airbnb down the road," or "I'm Airbnbing my apartment for the month." That kind of mindshare and brand power is very difficult to wrest away. Additionally, most of the company's 4 million hosts only list their properties on Airbnb, giving it another advantage over its rivals.
2. It's a great business model
At its core, Airbnb is an e-commerce marketplace. It connects buyers (prospective travelers) with sellers (hosts), collecting a commission to do so. Investors love this business model. It's a significant reason why Amazon is one of the most valuable companies in the world, and also why Etsy, MercadoLibre, and Alibaba have been big winners on the market.
Online marketplaces offer a number of competitive advantages. There are network effects as guests want to search on the platform with the most hosts, and hosts want to be where the most guests are. There are also switching costs, especially on the host side, as collecting positive reviews on Airbnb will make a property more desirable than it would be elsewhere with no reviews.
The company was not profitable in 2019, primarily because it began an investment cycle that included China, Airbnb Experiences, Airbnb Plus, Airbnb Luxe, and other initiatives, but it has demonstrated profitability in the past. In 2018, it posted a generally accepted accounting principles (GAAP) operating profit of $18.7 million and $170.6 million in adjusted EBITDA. It's also delivered positive free cash flow in each of the last four full years, peaking at $504.9 million in 2018, showing it's been able to self-fund for a while.
Finally, the company has an asset that would make Warren Buffett perk up. Because it often collects bookings weeks or months before the trips take place, it gets to invest that money on a short-term basis, earning interest. In 2019, the company earned $85.9 million in interest income.
Beyond its current business, Airbnb has plenty of optionality. It's already expanded from accommodations to experiences, like cooking classes, bike tours, and photography, and has dabbled in hotel-booking with its acquisition of Hotel Tonight (Airbnb itself offers listings of boutique hotels on its platform). In the years ahead, it's easy to imagine the company doing things like adding a loyalty program, offering ads for travel-adjacent businesses, or adding "concierge" services for hosts to help out with things like cleaning or property management.
Though its growth has been disrupted by the pandemic, it's clear that management has plenty of big ideas.
3. 2021 could be huge
Coronavirus vaccination distribution has already started, and experts like Dr. Anthony Fauci have said that most Americans could have access to a vaccine by April. That means that by this summer the pandemic could essentially be over. No one knows exactly how the recovery will play out, but one thing seems pretty clear. Travel is likely to explode with pent-up demand, especially if it's safe to travel by the summer.
Some travel operators are already reporting a surge in interest and experiences for "bucket list" trips like African safaris, Machu Picchu, and the Galapagos islands, and delayed trips mean that much of 2021 is already booked for such excursions. Uber CEO Dara Khosrowshahi, who previously led Expedia, also anticipates a wave of pent-up travel demand when the pandemic ends, saying all the way back in March: "It is amazing how quickly travel comes back, but it has to have the right circumstances to come back and clearly you don't have those circumstances. But, I think again, once the circumstances are OK for travel, I think those floodgates will open."
Airbnb seems particularly well-positioned to capitalize on travel demand, as its base of hosts is still in place and likely eager to get back to normal business. It doesn't have the same dependence on business travel that traditional hotels do, which is likely to be slower to recover as many business professionals have been content to replace work travel with Zoom calls for now. The wave of travel could also spark an increase in new hosts, especially as much of the global economy will be trying to emerge from coronavirus-induced recession, and long-term trends favor Airbnb as well.
Wall Street only has modest expectations for Airbnb next year, calling for $4.45 billion in revenue, which is actually less than the $4.8 billion in revenue it generated in 2019. That seems conservative, at least if the pandemic ends in the spring and it's safe to travel again. In that case, Airbnb will almost certainly see record bookings, and should resume its formerly strong growth rate.
Should you buy Airbnb stock?
While the stock is still volatile following the IPO, investors who are eager to get a piece of Airbnb may want to consider dollar-cost averaging, or buying a bit of the stock at time. This strategy will give you some exposure to the stock, but also allow you to capitalize on any sell-offs.
Airbnb stock faces a number of uncertainties in the coming weeks, including the fading euphoria around the IPO, incoming analyst coverage, uncertainty around the pandemic itself, and the expiration of its IPO lockup period in a few months, which could trigger a rush of insider selling.
Still, over the long term, the company has several key qualities that could make it big winner. It has a significant economic moat, it's the disruptive leader of an industry it's pioneered, its business model should be solidly profitable at scale, and it's tackling a serviceable addressable market of $1.5 trillion.
For now, short-term valuation concerns will weigh on the stock, but over the long term, especially once the pandemic is history, there's a lot to like about this stock.