There’s No Good Way to Actually Judge Airbnb’s Value

The Airbnb (NASDAQ:ABNB) story is well recognized among investors today as the company that invented a travel and lodging category that did not formally exist before. ABNB stock has had a storied time since the company went public.

Airbnb is a so-called two-sided online marketplace (meaning both hosts and guests are considered customers) that claims to operate in over 100,000 cities in 220 countries. As of year end 2020 there are 4 million hosts, of which 85% are not located in the U.S. Revenues this year are expected to top $5 billion as personal and business travel recovers.

Recent IPO But Complex Structure

On December 14, 2020, ABNB went public in a transaction where approximately 50 million Class A shares were sold at price of $68, raising approximately $3.4 billion in net proceeds. Airbnb has a complex capital structure with various share classes and voting control and is considered a “controlled” company:

“Our Class A common stock has one vote per share, our Class B common stock has 20 votes per share, our Class C common stock has no votes per share, and our Class H common stock has no votes per share. As of December 31, 2020, the holders of our outstanding Class B common stock beneficially owned 79.5% of our outstanding capital stock and held 98.8% of the voting power of our outstanding capital stock, with our directors, executive officers, and holders of more than 5% of our common stock, and their respective affiliates, beneficially owning 48.5% of our outstanding capital stock and holding 59.6% of the voting power of our outstanding capital stock.”

Growth Prospects for ABNB Stock

ABNB stock is a mixed bag of growth prospects where the incredible global opportunities ahead might be offset by the incredible amount of business risks present in the business model. In the near-term, the pent-up demand for travel post-pandemic may continue to be a strong tail-wind for the company.

Economists have estimated that Americans have at least $2.2 trillion in excess savings as a result of government stimulus, of which a large portion could be spent on travel. In addition, the concept of alternative accommodations appears to be a trend that is not slowing down. Expansion of services should also provide revenue tailwinds, as the Experiences concept is still in its infancy stage.

Headwinds for ABNB Stock

I think the alternative accommodations concept may provide much slower growth rates than expected. Many folks may not want lodging arrangements where they have to confront strangers in their living room before going to a bedroom formally used by a teenager who just moved off to college. Yes, there are, of course, whole unit options and private entrances, but are those even worth it?

In my experience, after service fees and cleaning fees, Airbnb rates in most big cities are not materially different than budget or mid-range level hotels or motels. Plus, you get cleaning services and no annoying host that asks how your day went as you walk by!

General economic conditions are a potential issue for all travel and lodging companies. After 12 years of economic growth without a recession, we may be due for one, particularly if interest rates rise. Also, traditional lodging operators are barred from discrimination by the Civil Rights Act of 1964 — Airbnb hosts are simply required to abide by a non-discrimination policy provided by the company, which has created problems.

ABNB Stock Valuation

The biggest headwind for ABNB stock is valuation. This is an unproven business model with limited historical comparisons with which to evaluate margins or profitability levels. It trades at about 24 times revenues on an enterprise value to revenue basis. There are even analysts that are trying to create a value for ABNB stock based on gross bookings. Surely this isn’t tantamount to a “price-to-eyeballs” metric used to justify pre-revenue companies in 1999.

With no sustainable competitive advantage, ABNB stock could be the poster child for the bull market excess we’ve seen in recent years. Tesla (NASDAQ:TSLA)? Well, they do make cars. Netflix (NASDAQ:NFLX)? The valuation is absurd and unsustainable, but people like to watch it. Nikola (NASDAQ:NKLA) and Lordstown (NASDAQ:RIDE)? Both doomed for failure, but a great purpose driven concept nonetheless. But Airbnb? They may be around for a while, but when things shake out, it also could be worthless.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.