Summary
- We believe that the upside of owning Airbnb shares is fairly limited.
- There’s a risk that Airbnb could face a reputational crisis, which will negatively affect its share price in the future.
- Considering that Airbnb already trades at nearly 17 times its sales, we believe that it’s better to avoid it at the current stage.
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Despite being one of the hottest IPOs of the last years, we believe that the upside of owning Airbnb (ABNB) shares is fairly limited. Not only the company will struggle to return to the pre-pandemic levels anytime soon, but there’s also a risk that Airbnb could face a reputational crisis, which will negatively affect its share price in the future. Considering this and the fact that Airbnb already trades at nearly 17 times its sales, we believe that it’s better to avoid it at the current stage.
Lots of Challenges Ahead
Founded in 2008 by students B. Chesky, J. Gebbia, and N. Blecharczyk, Airbnb has grown from couch-surfing service to one of the biggest hospitality companies in the world with 5.6 million listings and a market value of ~$90 billion. The company’s stock has appreciated by over 100% since it went public in December 2020 but in recent months Airbnb’s shares have declined by almost 40% since their peak and currently trade around ~$150 per share. Despite this, Airbnb’s stock still had a better performance than the S&P 500 Index in the last few quarters, and at the current market capitalization the company is valued higher than Marriott International (MAR), Hilton Worldwide (HLT), and Hyatt Hotels (H) combined.
While the stock had performed relatively well for those who managed to purchase Airbnb right after its IPO, the company’s financials show that its business is still far away from recovering to the pre-pandemic levels. While Airbnb’s management tried to minimize its losses to weather the pandemic by decreasing costs of revenues and optimizing the headcount last year, its R&D expenses were still significantly up Y/Y.
In addition, in Q1 alone Airbnb reported $1.17 billion in losses, as its major markets haven’t fully opened during the three months, while some countries even tightened movement restrictions, which led to the poor performance of the bottom line. On top of that, Airbnb also spent $377 million on debt repayment, $292 million in connection with the load agreement warrants, $113 million on operating lease assets and office space improvements, and $229 million on its stock-based compensation program.
On top of that, Airbnb has also reported a negative EBITDA of -$59 million in Q1, while its net operating margin fell to an unprecedented negative value. With such poor results, it’s safe to assume that it will take at least a couple of years for Airbnb’s business to return to its pre-COVID-19 levels.
Another downside of Airbnb is that it seems that it’s not gaining any market share in a post-pandemic world. As travel restrictions are lifted, Americans are looking to travel again and are already preparing for summer vacations. However, according to Statista’s survey, the most popular option of booking accommodations in 2021 is through the accommodation's own website rather than through Airbnb or Booking (BKNG). On top of that, with such a variety of choices and services, it will be significantly harder for Airbnb to outperform its more popular peers due to the lack of a pricing advantage.
What’s worse about Airbnb is that according to Bloomberg, the company is paying its clients, who are becoming victims of various crimes inside the booked apartments, millions of dollars for their silence. Bloomberg even found out that the company has a secret department with a budget of over $50 million, whose employees always try to resolve all incidents before they enter a public domain and before the press is involved, in order to keep its reputation intact.
As a result, hundreds of stories remain unreported, as the company pays to offended clients in exchange for a non-disclosure agreement. By doing so, Airbnb tries to hide facts about unsafe stays in rented apartments and various cases of violence. While so far, this helped Airbnb to avoid a major reputational crisis, it shows that the company’s business model has some major flaws, as it rests on the idea that strangers can trust one another.
As the company grows further and the number of available listings increases every day, there’s a risk that there might be a situation where Airbnb won’t be able to silence some of its offended clients and as a result, it will face a reputational crisis, which will negatively affect its stock.
Considering all of this, we believe that Airbnb is a risky stock to own, especially since it trades at nearly 17 times its sales. The decline in its shares from the peak a couple of months ago shows that the momentum is slowly fading away and we don’t see a potential for a stock to trade higher from the current levels in the long run anytime soon. In addition, the possible reputational crisis along with the risk of further lockdowns in Europe due to the spread of the Delta variant of COVID-19 also outweighs the opportunities of owning the company. For that reason, we believe that it’s better to avoid Airbnb at the current levels, as the company faces numerous challenges that will make it even harder for it to recover to its pre-pandemic levels anytime soon.