Share prices of Airbnb (ABNB 8.14%) have taken off since the company's IPO on Dec. 10. Despite listing at a tumultuous time for the travel industry, Airbnb's shares currently trade at $180.40 -- more than double its IPO price of $68 a share. At $108.44 billion, Airbnb's market capitalization has already eclipsed the combined valuations of rivals Booking Holdings (BKNG 5.23%) and Expedia Group (EXPE 8.85%).
Investors who missed the rally may wonder if they should chase up Airbnb's soaring stock price. But first, they need to understand why Airbnb is getting so much love.
Airbnb has a highly scalable and resilient business model
Alongside Uber, Airbnb is seen as the poster child of the sharing economy. It runs a software platform connecting hosts (people who own homes) and users (those looking to stay in a particular area). This highly capital-efficient business model is one of its biggest merits.
By turning unused bedrooms into an alternative to hotel accommodations, Airbnb has made travel a less expensive affair. In the process, it has also unlocked a valuable source of extra income for homeowners. Since Airbnb was founded in 2008, hosts have earned over $110 billion through the platform.
The scalability of Airbnb's business model has helped revenue grow from $919 million in 2015 to $4.8 billion in 2019, an over fourfold increase.
Along the way, the company has become a sort of legend among start-ups. After scoring seed funding from Y Combinator in 2009, Airbnb raised capital from a Who's Who list of venture capitalists including Sequoia Capital, Kleiner Perkins Caufield & Byers, and Andreessen Horowitz.
At the time, Airbnb's potential upside was obvious. But investors knew little about how well it would survive black swan, economy-crushing situations such as a pandemic. Then COVID-19 hit.
Lockdowns killed off long-distance travel, and Zoom Video Communications calls took over face-to-face business meetings. For many investors, this might have sounded the death knell for airlines and other travel industry players. Shares of Airbnb rivals Expedia and Booking Holdings dropped to multi-year lows.
By April 2020, Airbnb's bookings had slumped 72% year on year. It was forced to slash a quarter of its workforce, and raise emergency funding. But bookings have since recovered to 70% of pre-COVID levels. How has this happened?
While COVID-19 shut down international travel, many have kept moving within national borders. People just don't like to stay home, but they don't want to be in crowded hotel lobbies either.
Furthermore, a new Airbnb use case emerged as people began combining work-from-home and travel, resulting in longer stays. According to a report in The Economist, the average length of an Airbnb stay in June 2020 was a week, nearly double what it was pre-COVID. The share of domestic reservations also more than doubled to over 80%, while stays less than 200 miles from home generated 56% of bookings, up from 33%.
All this has proved the resiliency and flexibility of Airbnb's business model -- even in the face of wild demand fluctuations.
Seizing a multi-trillion dollar market opportunity
Airbnb is a very recognizable brand in the global travel industry, where it estimates its total addressable market is worth $3.4 trillion. In 2019, the company recorded $38 billion in gross booking value -- just 1% of this market opportunity.
To expand its business, Airbnb is slowly transforming from a bed-and-breakfast provider into a global travel marketplace working with airlines, hotels, and tour guides.
There are good reasons to believe Airbnb can keep growing, thanks to its massive global scale. This includes 4 million hosts who've placed over 5 million listings across 220 countries and regions. This huge selection naturally attracts and retains users, which in turn draws more hosts onto the platform. This network effect will drive a rising number of users, hosts, and listings toward Airbnb, sustaining its long-term growth -- while reducing the amount it needs to spend on marketing.
Despite the strengths of Airbnb's business model, there are risks investors shouldn't ignore. For instance, Airbnb still faces the threat of a prolonged COVID-19 pandemic. While vaccines are now available, cases remain high and are on a rising trend. That means international travel is still severely restricted.
In coming years, Airbnb will increasingly go head-to-head with industry bigwigs like Booking.com, Tripadvisor, and Expedia. Meanwhile, companies like Hostfully are giving hosts a way to manage listings across multiple platforms.
All this could prevent Airbnb from turning profitable anytime soon as it plows cash into retaining users and attracting new ones. The company has never had a full year of profitability.
Promising prospects, but a sky-high valuation
By now, it's quite obvious Airbnb is a wonderful business that's poised to grow over the long term -- post-COVID-19, of course. Given its explosive potential, Airbnb was never going to trade at a cheap valuation.
But at $180 a share, Airbnb trades at 30 times its trailing 12-month revenue. That's jaw-dropping, considering Facebook -- the biggest social media company in the world -- trades at barely half that multiple.
Rational investors will look for a good entry point promising adequate returns, and some margin of safety. Right now, they are better off not hitting the road with Airbnb stock.