Airbnb (NASDAQ:ABNB) has been around so long now that it’s almost hard to remember why it made such a big splash when it first launched. These days, it’s largely thought of as an alternative to a hotel or motel, but what actually makes the homestay marketplace special is how it caters to a wide variety of consumer tastes.
From vacationers to remote workers, Airbnb facilitates those looking for everything from farmhouse stays to Bali thatched-roof homes overlooking pristine waters, and everything in between. Hotels, by contrast, are more like cookie-cutter solutions with similar bedrooms for all guests and based in standard locations. In short, there is nothing particularly customized about the hotel experience.
It’s with that context Airbnb’s acquisition of GamePlanner.ai is so meaningful, and potentially disruptive. While Brian Chesky’s firm today primarily serves as a booking portal for lodgings and experiences, the overlay of artificial intelligence has the potential to amplify the features that distinguished the online marketplace by catering to their individual preferences.
The CEO’s ambitions are for Airbnb to become more akin to a travel concierge who can personalize recommendations and offer insights no other travel firm has the ability to rival.
Disruption Is In the DNA of Airbnb
There is a reason Paul Graham, who founded perhaps the most successful start-up accelerator in the world, YCombinator, speaks so highly of Brian Chesky and his Airbnb co-founders.
Graham readily admits that he didn’t imagine the concept of Airbnb could work. Only in retrospect does it seem reasonable that homeowners would permit strangers to pay a fee to stay in their lodgings.
Instead, the reason Graham’s YCombinator funded the early version of Airbnb was he believed the team had the capability to pivot to a better idea and collectively would succeed. Instead, the three founders scrappily found a way to get Airbnb off the ground and become massively successful.
The firm’s $200 million acquisition of AI firm, Gameplanner.ai, is further evidence of its commitment to disrupt the travel industry, albeit this time through artificial intelligence as an overlay to the existing booking experience.
Yet it’s not the only thing that makes Airbnb special. The company’s business model is also key to its long-term success.
Airbnb Has a Highly Innovative Business Model
When compared to its hotel rivals, Airbnb’s asset-light model means it is more resilient to economic downturns. The lack of fixed costs, comparatively, also means it’s possible to scale operations up, or indeed down, around the world more rapidly depending on how demand fluctuates.
Further, Airbnb can go places where hotels may struggle. Another way of saying that is Airbnb can capture the long-tail of demand, which is out of reach of hotels.
For example, while Airbnb can penetrate major cities with its inventory, it can also tap into less traditional destinations, thereby offering travelers on the hunt for unique and local experiences a solution that otherwise may not be provided by hotels.
And by leveraging technology, Airbnb can better understand each and every customer in order to better personalize offerings to them for repeat bookings. By helping guests find suitable accommodations, Airbnb can drive future growth and boost customer lifetime value.
Indeed, it’s not just lodgings that are available on the platform anymore but experiences, whether that’s local activities, adventures or even classes hosted by experts. Collectively, these help to diversify revenue streams and broaden the company’s reach beyond nightly stays to include experiential travel.
As a result of its unique business model, Airbnb has managed to achieve something few, if any, hotel chains can imagine, a network effect. The company’s strong brand loyalty among users translates to a bigger base of people so each incremental user further enhances the value of the overall network.
Yet, as impressive as the business model is and the growth of the firm to this point, the valuation of the firm looms large in the eyes of prospective buyers.
Is Airbnb Stock Undervalued?
Airbnb share price is up 51% for the year and that move higher had made a material dent in the opportunity for value investors to squeeze out further profits keen to buy now. It seems Wall Street is generally of the same view.
According to 34 analysts, Airbnb stock is undervalued by 5.2% to fair value of $135.72 per share. Price targets span from $75 to $185 per share.
Even a discounted cash flow forecast analysis pegs fair value at $133.57 per share, a similar level, implying just 4.0% upside potential.
With that said, Airbnb’s P/E ratio of 15.1x is not especially lofty, though trading at 8.6x sales suggests it’s likely trading at a premium.
While revenues did slide backwards in Q4 2020 by 22.4% for well-known reasons, the subsequent growth has been nothing short of impressive with a string of eleven quarters in a row of year-over-year top line growth.
In the most recent quarter, operating income hit a three-year high of $1.49 billion suggesting Airbnb is well on track to shore up its already fortress balance sheet that has $8.1 billion in cash and $2.7 billion in short-term investments on tap.
With almost $11 billion in liquid reserves and an $82 billion market cap, and generating $9.6 billion in sales over the last twelve months, it’s hard to see where Airbnb can do anything but go from strength to strength in the coming years, even if the current price has largely factored in good news.
Is Airbnb Stock a Buy?
Airbnb has been on a tear over the past three years. Not only have revenues soared but the share price this year has climbed by 51% versus a 19% gain for the S&P 500.
The rapid rise in ABNB share price has, unfortunately, largely offset the merits of buying at this time given that the valuation is rich.
On a P/E basis, the stock is still reasonable valued and it’s hard to doubt the financials generally, but a dip is needed for value-oriented investors to become more comfortable dipping their toes into the Airbnb waters now.
Is Airbnb stock a buy? On a pullback, absolutely but for now, it seems most prudent to sit on the sidelines and wait for a better opportunity to present.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.