It's impossible to research every stock on the market -- there are literally thousands to choose from. Because our time is limited, we sometimes ignorantly dismiss a golden opportunity instead of diligently digging deeper. It's scary to think I almost did that with Airbnb (ABNB -1.35%).
Airbnb's initial public offering (IPO) was expected to price below $50 per share. But outsized demand caused the company to raise its pricing range to between $56 and $60 per share. Yet that still wasn't enough. The December IPO eventually priced at $68 per share before closing its first day of trading at a stunning $144 per share.
By that point, I was positive Airbnb stock was overhyped and overvalued. But curiosity finally compelled me to investigate. I decided to read the company's registration documents and that's when I saw it. My most basic underlying assumption about Airbnb's business was wrong. And now that I realize my error, I want to own a piece of this company.
Is it possible you've made this wrong assumption as well? Prepare yourself to be pleasantly surprised.
Image source: Airbnb.
Laying out my faulty narrative
Author and sociologist Everett Rogers concocted a useful model in the 1960s called the Diffusion of Innovations -- a bell curve showing where groups like "early adopters" or "late majority" fall in the adoption cycle. Personally, I've always been part of the late majority crowd. Perhaps I'm even among the laggards at times. That said, I've been a happy Airbnb user for years, booking outstanding travel experiences in three different countries so far through the platform. If I'm already an experienced user, surely the whole world is already on the platform.
I assumed Airbnb reached mainstream adoption long ago. But this assumption is supported by something the company shared when it registered its IPO: During the first three quarters of 2020, a full 91% of all Airbnb traffic was either direct or through unpaid channels. In other words, 9 out of 10 people don't need to be told about Airbnb; they seek it out on their own.
If Airbnb has truly reached widespread adoption already, then that would be a problem for investors today. Mature businesses can make good investments when the price is right, but Airbnb is a pricey stock. Rewinding the clock to 2019 (before the negative impact of COVID-19), the company generated $4.8 billion in full-year revenue. However, its market capitalization is currently around $120 billion. Generally speaking, paying 25 times trailing revenue is a bad idea when companies are already sliding down the back side of Roger's innovation bell curve. It's challenging for businesses to grow into lofty valuations at that point.
Image source: Getty Images.
This fact completely shattered my assumptions
Fortunately, we don't have to make assumptions when it comes to Airbnb's adoption. The company provides user metrics. Again, it's helpful to go back to 2019 before the pandemic impacted travel. That year, Airbnb had 54 million active bookers -- customers who booked a stay or an experience during the year at least once. That's it. Just 54 million.
While 54 million active bookers might sound like a lot, it pales in comparison to other technology platforms with global reach. Consider Pinterest ended 2020 with 459 million users browsing images on its platform at least once a month. And there are over 265 million using the Snapchat app from Snap every single day. Granted, those platforms are free and have daily utility, whereas you wouldn't pay to book a stay on Airbnb all the time. However, I believe it's fair to say Airbnb's platform is far from hitting a user ceiling.
Revenue is far from its ceiling as well. Airbnb's management estimates its serviceable addressable market (the market for which the company already has services) is $1.5 trillion. This includes short-term stays and experiences. Remember, it had less than $5 billion in revenue in 2019.
Anecdotally, this high market upside doesn't surprise me. The travel industry is enormous, and once you've booked a short-term stay in a private home, it's hard to imagine going back to hotels. The same could be said of a cozy experience with a local instead of a polished package from a travel company.
Image source: Airbnb.
The bottom line
Of course, there are plenty of other reasons to like Airbnb stock and also some risks to worry about. But with just 54 million users, I believe this company is years away from reaching maturity. Given how much I believe in the product, the explosive future growth potential has me excited. In the interest of full transparency, I don't own shares yet because of the Motley Fool's disclosure rules. But this is a stock I hope to buy as soon as I get the chance.
