Airbnb Stock: Bear vs. Bull

Airbnb (ABNB 1.17%) went public in Dec. 2020 at $68 per share. The short-term rental provider's stock opened at $146, hit an all-time high of $219.94 last February, then pulled back to the $160s over the past year.

Airbnb clearly remains a battleground stock for the bears and the bulls. Let's review both arguments and see which thesis makes more sense.

What the bears will say about Airbnb

The bears generally don't like Airbnb for four reasons: the competition, the regulatory headwinds, its high valuation, and the pandemic-related threats.

Airbnb enjoys an early-mover's advantage in the short-term rental market, but it faces a lot of competition from traditional hotels and online travel agencies (OTAs). In the hotel space, Accor (ACR 3.53%) bought Airbnb's competitor One Fine Stay in 2016, Marriott (MAR 1.82%) partnered with the home rental platform Hostmaker in 2019, and other hotel chains are launching cheaper brands to compete against Airbnb.

Image source: Airbnb.

In the OTA market, Booking Holdings (BKNG -0.47%) provides home and apartment listings on Booking.com and Agoda Home, while Expedia (EXPE 0.58%) offers similar rentals on VRBO. Bad experiences on Airbnb's marketplace could send more customers back to those rivals. Meanwhile, Airbnb's questionable impact on an area's safety, long-term rental prices, and property values have caused more homeowner's associations and cities to restrict or ban short-term rentals. Those tightening restrictions could eventually strangle Airbnb's business.

Airbnb's revenue rose 32% in 2019, then declined 30% in 2020 as global travel ground to a halt during the pandemic, but rebounded 77% year-over-year in the first nine months of 2021 as those lockdown-related headwinds waned. Analysts expect Airbnb's revenue to rise 75% to $5.9 billion for the full year, then grow 24% in 2022 and increase 22% in 2023. That's a stable growth rate, but its stock isn't cheap at 14 times next year's sales.

That higher price-to-sales ratio leaves Airbnb exposed to the interest rate-driven tech sell-off, and plenty of tech companies are still growing faster than Airbnb but trading at comparable or lower valuations. The bulls might argue that Airbnb's first-mover's advantage and disruptive potential justify that premium, but the competitive and regulatory headwinds could nullify that thesis.

Lastly, the recent surge in new COVID-19 cases, which has already caused several countries to tighten their border restrictions again, indicates the travel and hospitality sector isn't out of the woods yet. New lockdown measures could easily cause Airbnb to miss analysts' long-term forecasts.

What the bulls will say about Airbnb

The bulls like Airbnb for three reasons: its brand appeal, the expansion of its ecosystem beyond short-term rentals, and its rising profits.

To many people, Airbnb's brand is synonymous with short-term rentals. That brand appeal enabled it conquer roughly a fifth of the U.S. hospitality market in 2019, according to Second Measure, and it remains the leading alternative to traditional hotels. Airbnb even overtook traditional hotels as the preferred lodging for adult travelers in the U.S. for the first year ever in 2021, according to a YPulse survey. That shift is likely driven by Millennials, an aging demographic that accounts for about 60% of Airbnb's guests.

To further differentiate itself from large hotel chains and OTAs, Airbnb launched Experiences in 2016 to let hosts craft unique activities for guests. It also launched a remote version, Online Experiences, during the pandemic in 2020. It rolled out its own boutique hotel listings in 2018, then expanded its reach by buying the listing platform HotelTonight in 2019.

The expansion of that ecosystem could widen Airbnb's moat and ensure that it remains a compelling alternative to traditional hotel chains and OTAs.

Airbnb is often compared to Uber (UBER -2.03%), since they both disrupted legacy markets with peer-to-peer platforms. However, Airbnb has a clear path toward profitability, while Uber remains deeply unprofitable.

Airbnb was unprofitable in 2019 and 2020, but it turned a profit on a generally accepted accounting principles (GAAP) basis in the third quarter of 2021. Its margins also continued to expand on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

Source: Airbnb.

Analysts expect Airbnb to post a narrower loss for the full year, generate a net profit in 2022, then grow its earnings per share by 78% in 2023. The bulls will claim that improving financial discipline makes Airbnb a more stable growth stock than unprofitable companies like Uber, even though it's still richly valued at 177 times next year's earnings.

Is Airbnb worth buying right now?

Airbnb is in better shape than many of the market's battered growth stocks, but its top-line growth is decelerating, and its valuation is still a bit too rich.

Investors who believe in Airbnb's long-term growth potential can nibble on some shares here, but they should also be prepared for a much steeper drop -- which could reduce its price-to-sales ratio to a reasonable ten or lower -- if rising interest rates continue to crush higher-growth tech stocks.