Airbnb (ABNB 0.10%) has been trading on the Nasdaq exchange for almost 13 months now, having kicked off its initial public offering on Dec. 10, 2020 with a superb debut and a 112% gain on its first day of trading.
Yet, because we were coming out of the national lockdown period of the pandemic, it was easy to have an optimistic outlook about the prospects for travel, tourism, and getting away for vacation. Airbnb's business was hit hard by the forced closure of businesses and restrictions on travel, so a reopened economy filled investors with a lot of hope.
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While that thesis was largely correct, 2021 was also a year marked by outbreaks of various COVID-19 variants. The harsh delta variant almost plunged the country into lockdown mode again (and some states and localities did reimpose restrictions), and while that was followed by the omicron variant, it's increasingly seen as a very mild form, and medical professionals are hopeful it is the way we get through the pandemic.
Still, the large unknowns about this virus have made investors timid when it comes to travel and tourism stocks, and Airbnb's shares are down 22% from the highs it hit early on.
Let's see how you would have fared had you invested $10,000 in the short-term rental specialist at its IPO, and whether Airbnb is a good investment to hold on to for years or even decades or if its stock should be put back up for sale on the market.
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Fast out of the gate
There are more than 130 million households in the U.S., and around 1 billion globally, making the potential market for Airbnb's business quite large.
It ended 2020 with around 5.6 million active listings, but underscoring the faith investors had in Airbnb to navigate its way out of the coronavirus outbreaks, it has seen those active listings grow every single quarter in 2021 (it presumably will update the total when it reports its full-year results).
Gross booking value, or the total amount of what Airbnb charges for guests to stay at a residence, including cleaning and other fees, jumped 48% to $11.9 billion compared to last year, and it's up 23% compared to the same quarter in 2019.
While hosts earned a record $12.8 billion in income from the rental company, up 27% from the year-ago period, Airbnb's own revenue grew to $2.2 billion, a 67% increase. Because it has no real overhead since there is no inventory that it needs to maintain, it is able to do quite well for itself by simply taking a small slice off every rental transaction.
The asset-light business model is also good for profit margins. Third-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 49%, by far its best margin ever, and it was 30% greater compared to 2019. That was also the first time its adjusted EBITDA exceeded $1 billion.
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Fighting with one hand tied behind its back
So why hasn't the market been kinder to Airbnb's stock? The uncertainty of COVID-19 is the biggest elephant in the room. The world is entering its third year of the pandemic, and the U.S. Centers for Disease Control is telling consumers not to take cruises. While that doesn't directly impact Airbnb, it hangs over the entire leisure industry anyway.
Airbnb is also inconsistently profitable and still reports net losses on a GAAP basis, but it trades at a very rich premium of just under 20 times sales and 63 times the free cash flow it produces.
Yet, therein also lays its potential. Despite the ongoing impact of the pandemic, Airbnb generates a significant amount of free cash flow, the money that's left after it pays all its bills. Year to date, it has produced $1.8 billion in free cash flow, a record high for the vacation-rental company.
Airbnb's international business is growing faster than its domestic one, and 90% of its active listings now accept long-term rentals. As more new opportunities open up, it will generate even greater levels of cash profits.
Here's how much $10,000 invested in Airbnb a year ago is worth now
So what does that mean for investors who got in at the start? Well, you'd be doing a lot better if you had put your money in an S&P 500 index fund. While Airbnb priced its IPO at $68 a share (above the expected $56 to $60 per share range), it opened for trading at $146 per share.
That means that unless you were lucky enough to get included in the IPO itself at $68, the $10,000 you sunk into its stock when it opened for trading at $146 is now around $11,760, a 17.6% gain. Not too shabby until you realize that the benchmark index gained 27% in 2021 and is up more than 30% over the same time period, turning $10,000 into more than $13,000.
Still, Airbnb is likely to narrow that gap rather quickly as the world returns to a sense of normalcy again, meaning keeping your money parked in the hospitality specialist is the sensible thing to do.
