Traditional valuation metrics indicate that home rental pioneer Airbnb (NASDAQ:ABNB) is a vastly overpriced stock with an unfavorable risk/reward profile. At about 17 times estimated revenue for this year, Airbnb isn't going to land on many value investors' desks. The picture doesn't improve when the stock is stacked up against rivals in the online travel booking space, such as VRBO owner Expedia, which is trading at less than four times expected sales.
For many, the valuation story ends there, with Airbnb's nose-bleed price-to-sales metric putting the stock well out of investors' comfort zones. I believe this may be a monumental mistake, however, since common valuation measures fail to capture the long-term growth potential of a game-changing company like Airbnb.
Revolutionizing a massive industry
Airbnb represents an opportunity to invest in a groundbreaking company that's reshaping a travel and experience market valued at a staggering $3.4 trillion, according to the company's IPO prospectus.
By creating an entirely new way to travel and vacation, Airbnb has exponentially expanded accommodation and destination possibilities. Simultaneously, its platform provides a convenient way for people to earn extra cash by renting out their homes.
I'm not suggesting that Airbnb will completely wipe out the hotel industry the way that Netflix erased Blockbuster Video, but companies like Marriott and Hilton are feeling the heat. Marriott's foray into the rental home market in 2019 through its Home & Villas unit is a direct response to the increasing threat posed by Airbnb.
In March 2019, Bloomberg Second Measure reported that 12% of major hotel customers in 2018 also made a booking with Airbnb, compared to only 1% in 2013. This willingness of travelers to step outside the boundaries of traditional lodging is also revealed in Airbnb's substantial market share. The same report from Second Measure estimated that Airbnb nabbed nearly 20% of all U.S. consumer spending on lodging in 2018. This puts the company well ahead of HomeAway's estimated 11% market share, but it also leaves room to keep chipping away at the combined 70% market share held by all major hotel operators.
This data is a bit stale, but Airbnb has only strengthened its position over the past two years with the pandemic shining a light on its rising popularity.
Resiliency points to growing acceptance for non-traditional stays
As the pandemic pummeled the travel industry last year, the timing of Airbnb's December 2020 IPO seemed less than ideal. Indeed, the company was not immune to the effects of the virus as gross booking value (GBV) dove by 39% to $18.0 billion for the nine months ended September 30, 2020.
The steep downturn cast a shadow over a stellar 2019, when 54 million active bookers and 2.9 million hosts (4 million as of the end of 2020) helped drive a 29% year-over-year jump in GBV to $37.9 billion.
However, the pandemic shed light on a quality that I believe will translate into strong growth and market share gains as a reopening economy helps unwind pent-up travel demand: resiliency.
Revenue, which represents the cut that Airbnb takes from a booking, was down only 30% in 2020. In comparison, revenue declines from hotel operators Marriott, Hilton, and Hyatt, ranged from 50-60%, while online bookings companies Expedia and Booking.com saw revenue decreases of 67% and 55%, respectively.
Some may argue that this isn't an apples-to-apples comparison since Airbnb's exposure to the harder-hit business travel space is much lighter. That is a fair point, but the work-from-anywhere shift that emanated during the pandemic dovetails nicely with Airbnb's ability to offer safer accommodations in nearby destinations.
While 2020 was a very difficult year for Airbnb, it's relative top-line outperformance implies that momentum will resume and that an increasing number of people will use its platform due to its wider variety of lodging options for shorter, localized trips relative to hotel chains.
Underestimating game-changers can be very costly
Despite this bullish picture, some may still question how much upside potential could exist for a seemingly expensive stock like Airbnb.
To address that question, let's take a look at two other very prominent companies that revolutionized massive industries: Facebook and PayPal.
When Facebook went public in May 2012, its $38 IPO pricing resulted in a trailing price/sales of 28x. At the time, many pundits and investors balked at the sky-high valuation. Nine years later, Facebook is trading near $330, good for a spectacular 750% gain.
Similarly, PayPal's rich valuation was a hot topic of conversation after the company was spun-off by eBay in 2015. While underestimating the FinTech leader's growth potential, many focused on the fact that PayPal was valued at about 60% of eBay at the time of the spin-off, despite generating less than 50% of eBay's total annual revenue. Investors would have done well to ignore the critics as the stock has rocketed higher by 560% since the spin-off.
Perhaps Airbnb ultimately doesn't match the astronomical gains achieved by Facebook and PayPal. In my view, though, the potential long-term rewards of investing in a pioneer like Airbnb far outweighs the perceived risks associated with its lofty price/sales metric.