As COVID-19 forced the world economy shut, several industries were changed overnight. Travel and tourism were hit hardest as people led lives at home, leading to an unprecedented lack of demand in the industry; but a few travel stocks present a different narrative.
Since going public in December 2020, vacation rental company Airbnb, Inc. ($ABNB) has had a wild ride in the stock market. The stock increased 112% in value on its first day of trading and now, more than 3 months after going public, it hit a high of $216, nearly 50% above its opening price of $144. For a tourism company going public right in the midst of a pandemic, Airbnb stock has fared surprisingly well.
Airbnb maintains confidence in its business model. In their SEC filing to go public, the company stated, “We believe that the lines between travel and living are blurring, and the global pandemic has accelerated the ability to live anywhere,”. The company has since backed these claims with multiple reports and surveys depicting that changing travel trends are in their favor.
People now prefer smaller, lower profile destinations over the grandeur and tourist-filled spots. With COVID and cost concerns, Americans want to travel to remote places near their homes, not just for vacation, but to work and live in a place apart from home. The ability to monetize travel in smaller places is what distinguishes Airbnb from several other companies in the travel industry.
Airbnb issued their first earnings report (Q4 2020) on February 25th, 2021, reporting $3.89 billion in losses and $859 million in revenue. The large loss however does not seem to bother investors as it included $2.8 billion in costs associated with the company’s IPO (process to go public) in December.
The highlight of the earnings report was the quarterly revenue as it beat analyst’s expectations of around $740 million. The stock closed 13.3% higher the next day as firms including Canaccord Genuity, Jefferies Group, and Mizuho raised their price targets, displaying confidence in the company.
This confidence stems from optimistic quarterly revenues along with a linear pattern of positive recovery. Airbnb posted a profit of $219 million in Q3 2020 along with yearly revenue of $3.4 billion, which was down only 30% year-over-year as compared to the 50% dip forecasted by Airbnb.
The higher than expected revenue also hints towards a post-pandemic rebound in the travel industry, a notion supported by several analysts. One should however take this with a pinch of salt as increased demand may not be enough to justify Airbnb’s current high valuations.
The pandemic damaged Airbnb’s relationship with its room hosts as the company overturned policies to allow for client refunds on bookings. This refund burden was mainly pushed onto the hosts who took heavy losses while receiving little compensation from Airbnb. With an expected growth in demand for smaller rentals, it’s imperative that Airbnb not only mends its relationship with existing hosts but also expands its network of hosts.
Airbnb recently announced a change in their marketing plan, stating that they will no longer invest nearly as much in performance marketing and will instead focus on building public relations. This comes as an after-effect of the company retaining 95% of their original online traffic despite having slashed their marketing spending during COVID.
“What the pandemic showed is that we can take marketing down to zero and still have 95% of the same traffic as the year before,”
– Brian Chesky, Ceo Airbnb, Inc.
Airbnb has now also ended their affiliate program which paid bloggers and influencers to promote their Airbnb experiences online. Instead, Airbnb will focus on host recruitment. In additional efforts, Airbnb launched a host endowment fund and a host advisory board in October 2020. The fund consists of Airbnb shares and will be used to support and reward hosts while the board will allow the hosts a voice in the management of the company.
If Airbnb is successful in increasing its host network, it is clear that it would benefit from any increases in travel and tourism.
So should you catch this flight?
The recent earnings report created an investor frenzy, causing the Airbnb stock to soar and even hit $216 at one point. Since then, however, there has been a cool-off in the stock and it currently trades at the $175-$190 price range.
This may have created an opportunity for investors to buy into the stock as it trades at a price similar to that seen in January. The stock seems to sit safely at this price range as multiple analysts have expressed their confidence through raised price targets.
Jefferies raised their price target from $170 to $210, while Mizuho raised it to $176 and Canaccord Genuity raised it to a more optimistic $220. Factset reports an average price target of $183.96 from 34 analysts, while several other analysts report an even higher price target.
While this does not ensure positive returns, it does lay a great foundation for the Airbnb stock. The stock, while versatile in the short run, presents great prospects as a long-term investment. This is primarily due to three reasons.
- Pent up travel demand: Airbnb’s shareholder letter emphasizes the goal to capitalize on the expected travel rebound in 2021. Others, including Trivago, also report that COVID has created pent-up demand and that 2021 could see increased travel. Recent news also reports of “Things going back to normal” in the spring and increased vaccine rollouts.
- Airbnb’s Finances: While the company still reports losses, recent structural changes have allowed the company to heavily cut down on costs. Airbnb reported both improvements in adjusted EBITDA(income minus the costs of day-to-day operations) and reduced operating expenses in 2020, as compared to 2019. The company had average yearly revenue growth of 40% before the pandemic and expects 2021 revenue to hit 2019 levels. Airbnb also announced that they will offer $2 billion in convertible notes (an asset that pays interest and can be converted into company stock) which will both allow them to invest in new opportunities and repay all of their debt.
- Growth prospects: Airbnb remains the dominant player in the home-sharing market and given its recent efforts to increase its hosts, it has the potential to capture a multi-trillion dollar market. With a business model that is not asset-heavy, Airbnb can explore new markets without much risk.
While Airbnb would benefit from a travel rebound, it would be naive to ignore other travel stocks that could gain value as life returns to normal. An interesting resource to track how travel is changing is the TSA throughput data. This data allows one to check the number of people going through airports in comparison to the previous years.
Airbnb stock is popular with investors, and given that the world is slowly recovering from the pandemic, travel will increase. The stock is bound to see price fluctuations in the near future and as per analyst price targets, $170-$180 is a safe range to buy into the stock. Can Airbnb sustain the growth rate it has seen in the past?