Should you buy Airbnb shares now?

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Airbnb (NASDAQ: ABNB) becomes synonymous with short trips and short term rentals. The company’s online platform and app encourages hosts to list places for rent, from traditional rooms and houses to even treehouses and individual garages.

The wide assortment of accommodation types to book, coupled with its high availability in regions and countries, makes it a popular online destination for people looking to find accommodation while traveling. That being said, popularity doesn’t always translate into returns on investment for shareholders.

Let’s take a closer look at the company to see if investors should buy Airbnb shares right now.

Airbnb has a huge total addressable market. Image source: Getty Images.

A lightweight company with huge potential

A critical aspect of Airbnb’s business is that the company does not own or operate any rental property. Similar to eBay, it creates the platform and manages the interactions between hosts and guests. The light asset business model has the potential for excellent profit margins, as there is no need to pay to build or maintain expensive structures like hotels or resorts. Additionally, Airbnb may hire customer service staff in low cost parts of the world to assist guests staying at properties in high cost areas like Los Angeles.

The coronavirus pandemic caused Airbnb’s revenue to fall by 29.7% in fiscal 2020. Prior to the outbreak, Airbnb increased its revenue by 42.6% and 31.6% in 2018 and 2019, respectively. Overall revenues were the highest in 2019, where they totaled $ 4.8 billion. Yet management believes this is just the tip of the iceberg. He estimates Airbnb’s total addressable market at around $ 3.4 trillion.

To put that number into context, Statista estimates that the global hotel and resort market peaked at $ 1.47 trillion in 2019. It appears that management’s estimate of its total addressable market is rather bullish.

Is Airbnb share a purchase?

Airbnb’s stock is not cheap, with its price-to-sell ratio of 23. However, if you consider another metric, its price to free cash flow at 70, it is significantly lower than over. 240 for which it was negotiating earlier in the year (see table below). Additionally, Airbnb’s huge total addressable market, combined with the potential for healthy profit margins given its light-asset business model, could make the high price tag attractive.

A graph showing the Airbnb price-to-sales ratio and the price-to-free cash flow ratio.

Data by YCharts.

However, risks remain for the travel agency. Unlike hotels and resorts that have staff on hand to improve security and respond to emergencies, Airbnb does not have such features. Its hands-off approach allows customers to interact directly with hosts and only offers customer support by phone or email. The company will have the challenge of ensuring the quality, safety and consistency of the experience for customers.

In addition, its light asset business model also leaves it open to new competitors entering the market. Airbnb can spend years building a customer database, attracting hosts and guests, only to see a competitor with an improved offering take market share.

Even after recognizing Airbnb’s risk and considering that the stock is not cheap, investors may feel good about buying the stock. This is one of those cases where the potential rewards are so great that the risks are worth taking.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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