Airbnb Stock: A Victim or Beneficiary of the Pandemic?

Airbnb has chosen a peculiar time to go public. The COVID-19 pandemic has halted travels worldwide and limited individuals to the confines of their homes. As a vacation rental business, Airbnb stands as one of the companies hurt most by the pandemic. In theory, going public after a historical dip in revenues should alarm investors, yet the stock price suggests otherwise. Since the company’s IPO in December 2020, investors have bid up the stock to $179 a share, nearly 200% of the initial listing price of $68, placing the company at over $100 billion in valuation. The disconnect between expectation and reality raises questions regarding the timing of Airbnb’s IPO. Could the Airbnb stock have traded higher in the absence of the lockdown, or did the lockdown help boost the company’s potential?

 Founded by Brian Chesky and Joe Gebbia in 2008, Airbnb connects hosts and travelers through an online marketplace. Unlike its traditional hotel peers, Airbnb owns no properties. Its unique value propositions to hosts, including rental income and publicity, as well as to guests, including variety and lower price, have enabled the company to scale massively and attract over 800 million guests in over 220 countries. In return, the company charges a percentage-based service fee on the bookings, typically 14.2% for guests and 3% for hosts. As revenues grew ten-fold to $4.7 billion between 2014 and 2019, Airbnb seemed unstoppable. Then COVID-19 struck and paused the company’s growth. However, the crisis did not deter Airbnb from the IPO, nor did it discourage investors from adding the stock to their portfolios.

 Since Airbnb’s public debut, the stock has risen 24%, while its traditional counterparts have collected a meagre 2%. From a valuation perspective, Airbnb’s current price implies a forward price-to-sales multiple of 24.0x, much higher than those of hotel players like Expedia (2.5x) and Booking Holdings (8.4x). At first glance, Airbnb appears grossly overvalued. Although the company’s recent revenues suffered a lower decline than those of Expedia and Booking Holdings, economic reopening supported by vaccine programs should restore all three companies’ revenues to pre-pandemic levels in the upcoming years. According to Hilton’s recent survey, 94% of respondents plan to travel once lockdowns end. Since valuation encompasses all future cash flows, differences in short-term cash flows should not produce widely diverging multiples. One may also argue that Airbnb’s asset-light business model improves operating flexibility and allows the company to save on property operating expenses. However, the savings appear insufficient to drive a significantly higher multiple. As neither revenue growth nor cost structure can justify Airbnb’s unusually high valuation, investors must have perceived a fundamental change in the travel and tourism industry in favor of Airbnb.  

The pandemic has created new and potentially sustainable revenue opportunities for Airbnb. Needing an escape during the pandemic, families have booked short-term Airbnb rentals, a segment that has logged a 38% year-over-year growth for the three quarters ended September 2020. Not only does Airbnb’s CEO Brian Chesky believe that people have shifted from "yearning to see Times Square” to “yearning to see their friends and their families they have not seen in a long time," he argues that consumer preferences have permanently changed. If true, Airbnb will no longer remain simply a platform for finding casual getaway rentals but become an official substitute for hotels, offering more customized experiences at lower prices. 

In the $810 million alternative accommodation market, Airbnb’s $108 billion market capitalization appears disproportionately large, especially when compared to its latest $4.8 billion in annual revenue. Since alternative accommodation includes both hotels and short-term rentals, the current valuation suggests several strong assumptions about market expectations of Airbnb’s future performance. First, investors likely expect Airbnb to venture into providing hotel-like accommodation experiences. Second, investors may expect improvements in cost structure as Airbnb scales in size, reducing marketing and R&D expenditures. Third, expansions, which Airbnb has proven it is capable of, will remain a part of the company’s core strategy. Fourth, while Airbnb currently holds 39% of the short-term rental market (excluding hotels), its household name and continuous innovation will drive out smaller competitors and discourage new entrants. Finally, Airbnb’s breakthrough development of the Host Endowment to support hosts’ entrepreneurial visions will transform the Airbnb-host relationship from one of a short-term to one of a long-term, potentially redefining the sharing economy. Successfully navigating these challenges and making the most of the opportunities will help not only maintain but possibly increase Airbnb’s current valuation.

Although Airbnb may be fairly priced, the nearly three times difference between its pre-IPO listing price and current trading price raises concerns. Have investment banks made an error pricing the IPO, underplaying Airbnb’s massive market potential, or has investor euphoria generated excessive hype around the company? The lack of precedents on which to base the fairness of Airbnb’s valuation complicates the assessment. Increased scrutiny from local governments in the US and countries around the world may also drag down valuation. As vaccination programs continue and lockdown restrictions ease, investors will be better equipped to answer these questions. 

On the surface, Airbnb appears to have been a victim of the pandemic. Despite an ugly 2020, during which the company witnessed historically low occupancy rates and slashed a quarter of its workforce, Airbnb has sold investors on its sky-high valuation. The pandemic may have tilted the playing field toward Airbnb, but the company itself has also worked hard to capitalize on new trends and to expand its product offerings. For the valuation to hold, Airbnb has much to do in terms of fulfilling its promises and securing its competitive advantage. So long as COVID-19 still plagues nations worldwide, the company’s valuation remains more an art than a science. Whether undervalued, fairly priced, or overvalued, Airbnb needs to show investors the ability to generate positive cash-flows in the short term, because selling dreams can only last so long before investor patience runs out.