Is Airbnb Stock Expected To Go Up?

Airbnb (NASDAQ:ABNB) has a storied past that began in 2007 when now CEO Brian Chesky and Joe Gebbia were struggling to pay rent for their loft in San Francisco. They spotted an opportunity when a conference came to town and they discovered that hotels were fully booked up. The idea to rent out three air mattresses in their living room and offer breakfast didn’t seem at the time to hold the potential to one day become a billion dollar company but that’s exactly what happened.

In no time, the entrepreneurial initiative gained traction when the first guests arrived from Boston and Utah. Living in close quarters with them fostered a sense of community that became a cornerstone of Airbnb’s ethos.

As the business blossomed, Nathan Blecharczyk, a Harvard graduate and Gebbia’s former roommate, joined as the third co-founder and pioneered the website development. 

The three founders then changed the name to Airbnb to reflect the broader offering that featured private rooms, apartments, and houses.

In spite of their rapidly rising appeal, it wasn’t until Y Combinator, a startup accelerator founded by Paul Graham, funded the firm that the opportunities to scale became apparent. Soon the company was able to focus more deeply on user experiences, trust and community building, and the rest as they say is history.

Now a NASDAQ-listed company with a $95 billion market capitalization, the looming question is how much further can Airbnb go?

What Sets Airbnb Apart?

What few Airbnb investors know, let alone hosts and consumers is that the company has a pricing algorithm that distinguishes it from traditional hospitality models.

Instead of simply matching supply with demand, Airbnb considers hyper-local factors such as neighborhood trends and seasonal variations as well as historical pricing data and even local festivals and events.

This pricing model turns out to be revenue and profit maximizing because a beachfront property might see a price surge during summer while a ski chalet would be in higher demand during the winter months.

Not only that but changes are made in real-time so if a major event is announced in a city, Airbnb’s system can automatically adjust prices in that area to reflect the expected increase in demand.

By employing a dynamic pricing model, hosts can optimize their earnings without constantly monitoring the market themselves while Airbnb enjoys higher commissions on pricier bookings, creating a win-win scenario.

Yet pricing isn’t the only thing that distinguishes Airbnb from rival hotels and motels. Unlike a hotel that is anchored by popular destination spots to cater to the most demand, Airbnb can feature accommodations that provide unique experiences in unusual locations. As a result, Airbnb can serve the long-tail of demand while hotels are restricted to the bell curve in a normal distribution.

This diversity allows Airbnb to penetrate markets typically underserved by traditional hospitality sectors, such as rural or non-touristy areas. Certainly, high-end luxury villas and even castles are available on the platform but local authenticity and flavor is addressed too, and in turn attracts a broader customer base on the hunt for adventure or simply a sense of discovery.

Management’s decision to expand into Experiences and Adventures reflects this trend among Airbnb’ers to move beyond straightforward accommodations and include travel and activities like cooking classes with local chefs, art workshops, and guided tours off the beaten path.

Where hotels are limited by bed and breakfast options, and perhaps a concierge, Airbnb includes experiential activities as integral parts of the overall stay in order to facilitate deeper cultural immersion and foster more personal connections.

The Adventures are wide-ranging in nature from multi-day treks to camping in remote locations. Critically, what they mean for Airbnb is more travel spend captured and an expansion of revenue streams beyond simple lodging options.

The strategic move to offer these options also highlights how well management has their finger on the pulse of Millennials and Gen Z, who prioritize experiences and unique activities over traditional sightseeing.

So Airbnb has a business model that sets it apart from traditional hotel accommodations, but is the stock a buy now?

Is Airbnb Stock Expected To Go Up?

According to 34 analysts, Airbnb stock is not expected to go up further with fair value 3.5% lower at $139.22 per share. 

What Airbnb highlights right now is the disparity between price and valuation. Across a host of key metrics, the company is highly attractive. For example, the gross profit margin over the past twelve months was an astonishing 82.7%.

Another notable point is how Airbnb has managed to turn around its financials over the past three years from reporting earnings before interest and taxes of $3.0 billion in the red in Q4 2020 alone to $1.49 billion in the black in the most recent quarter. 

Not only is the income statement pristine but the balance sheet has close to $11 billion in cash and equivalents too, offset by just under $2 billion in long-term debt.

That cash pile can only grow if Airbnb is producing huge massive cash flows and it is. Over the past twelve months alone, management reported $4.2 billion in levered FCF.

Where the fundamentals are extraordinary, so too unfortunately now for new investors is the price. And that’s evident in the multiples, which are sky high, whether looking at revenue valuations, EBITDA or price-to-book multiples.

The reality now is that strong cash flows, solid growth, and excellent profitability have not gone unnoticed. Investors have flocked to the stock and bid up the price to a level where the valuation has eclipsed the firm’s intrinsic worth, at least according to analysts.

We’ll note that a cash flows analysis confirms the thesis that the stock is overvalued at this time. A 5 year DCF analysis places fair value close to $119 per share at this time, suggesting meaningful risk to new investors buying at these levels.

The bottom line is Airbnb has a phenomenal business model and extraordinary fundamentals but its share price has run a little too far beyond fair value at this time to make for a compelling investment opportunity, at least on a short-term basis. Over the long-term, the odds are in favor of the buy-and-hold investor reaping handsome rewards.

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