Is it time for me to buy some shares, even after the near 30% rise so far this year?

Earnings season in the US

The shares really popped last week, so why was that? Earnings season is in full swing in the US right now, and Airbnb released its quarterly update to the market. Revenue grew 67% to $2.2bn, beating analyst expectations of $2.07bn. Gross bookings were huge at $11.9bn, up by 24% from two years ago (crucially pre-Covid).

This is a good sign for the holiday and travel market that has been subject to months of disruption because of the pandemic. It also shows there’s high demand out there for a different kind of hotel, suggesting that Airbnb really does continue to disrupt the sector.

Airbnb’s growing market

But it was the outlook for the company that really captured my attention. CEO Brian Chesky (the founder who rented out his loft space), stated that new travel trends are likely here to stay. This hints at a new market for Airbnb.

What Chesky was suggesting relates to the new work-from-anywhere culture that I think is evolving due to Covid. A lot of people now have the freedom to work remotely, and how better else to work than renting via Airbnb in a nice location?

If the firm can continue to capture this market, then revenue should grow further from here. This is on top of the market share it’s already taking from the big hotels as it carries on its mission of turning the hospitality sector on its head.

Risks remain

It’s not all perfect though. I’m still concerned that the pandemic is far from over. Cases are rising in Europe, and any new strain of Covid-19 may just upend the recovery in Airbnb’s core holiday market. During the early stages of the pandemic, Chesky had to cut thousands of jobs at the company, and was subject to more than $1bn in cancellation fees. This would be tough to take for a second time.

I’m also put off by the valuation. The company is loss-making so a price-to-earnings ratio isn’t meaningful. On a price-to-sales ratio though, Airbnb is rated on a lofty 21 multiple. This means investors are already pricing in a lot of growth, and I’m not sure I’m prepared to pay up for the shares on this valuation.

Wait and see

I do like Airbnb, both as a user of the platform, and for the potential I see in the shares. However, the valuation puts it out of my reach for now. I’m going to keep it on my watchlist for now as I think there are other, more affordable, growth stocks I could buy today.

I’ve said before that Airbnb appears to have a lot of potential from an investment point of view. However, I’ve never hit the ‘buy’ button and actually picked up stock. Is now the right time? Let’s take a look.

Airbnb: strong Q3 earnings

Airbnb’s most recent results, for the third quarter of 2021, showed the company has a lot of momentum right now.

For the quarter, the group generated record revenue of $2.2bn, up nearly 70% year-on-year, and up 36% on Q3 2019. Meanwhile, net income came in at a record $834m, up 280% year-on-year. Total nights and experiences booked were 79.7m, up 29% year-on-year.

Looking ahead, Airbnb said that it expects Q4 revenues of around $1.4bn-$1.5bn, which would take full-year revenues to around $5.8bn-$5.9bn.

What stands out to me here is that revenues for 2021 are expected to be well above 2019 levels ($4.8bn). That’s very impressive. I say this because the majority of the major hotel chains aren’t expected to generate revenue anywhere near 2019 levels this year.

For example, UK-listed InterContinental Hotels Group, which owns a range of top hotel brands including InterContinental, Holiday Inn and Kimpton, is expected to generate revenue of $1.5bn this year, versus $4.6bn in 2019. It’s a similar story for Hilton and Marriott.

This suggests Airbnb is capturing significant market share from the traditional hotel operators.

ABNB share price targets raised

Since Airbnb posted its Q3 earnings, a number of Wall Street firms have raised their price targets for the stock. One such broker is Susquehanna, which raised its price target to $235 from $200, saying ABNB is a “must-own stock for the recovery given its strong positioning, long-term opportunity, and profitability improvements.”

Another is JP Morgan, which increased its price target to $195 from $170. Its analysts said the company looks set to benefit from shifting consumer preferences, such as a move towards non-urban destinations and alternative accommodation.

Overall, broker sentiment towards Airbnb stock appears to be very positive right now after the company’s Q3 results.

Should I buy Airbnb stock now?

I still have some concerns over the stock’s valuation however. After the recent share price rise, Airbnb now sports a market-cap of a whopping $126 billion. That means that the stock has a forward-looking price-to-sales ratio of about 22. That’s high and it doesn’t leave a huge margin of safety. If the company has a bad quarter, the share price could take a big hit.

There are a few other risks here as well. One is new regulation that could impact hosts. Another is potential lawsuits from unhappy customers.

So should I buy shares now? I’m certainly tempted to initiate a small position here. However, I’m going to hold off for now and wait for a more attractive entry point.

All things considered, I think there are better growth stocks I could buy right now.

Unlocking travel

The key to a recovery in Airbnb’s share price by is a global unlocking of travel. This can only happen when Covid-19 is under control. In the UK, every adult has been offered at least one vaccine dose, while in Europe and the US, more than half of people have had one dose. As school holidays start across the Western world, governments are coming under increasing economic and societal pressure to allow tourism to restart.

The Delta variant is causing concern, but I think that as more and more people are vaccinated, the worst of the pandemic is behind us. Two days ago, CEO Brian Chesky predicted a “travel rebound of the century.” The company has spent six months making over 100 improvements to its app. This includes faster checkout, clearer cancellation policies and doubling customer service agents. It is also taking on more hosts to cope with anticipated higher demand. 

I think the company could benefit from the drive to flexible working. If millions of employees are spending only two days per week in the office, they might live somewhere cheaper, then spend one night a week in accommodation closer to work. 

A top stock to buy in August

While the company has stayed resilient throughout the pandemic, it is still a travel company, First-quarter results did not make for pretty reading, with a $1.2bn loss. However, half of the $1.2bn loss can be ascribed to repaying a long-term loan and paying compensation for cancelled bookings. I think these are not the expenses of a bad business, but a result of strain from external sources. Revenue was actually higher than in the same quarter last year, partly because long-stay bookings were up 14%.

Gross income from customer bookings increased by 52% to $10.3bn compared to the same quarter last year. This seems to support the CEO’s opinion of the travel rebound. I think the pent-up demand is high, and when travel opens up again, it could make Airbnb a top stock to buy in August. 

Encouragingly, with less than 2% short interest outstanding, hedge funds are not betting on its valuation to fall. Moreover, the company has built up $6.59bn in cash against debts of $2.46bn to give a net cash position of $4.13bn. Its profit-to-share (P/S) ratio is at 25. This can seem high, but I believe has to be put in the perspective that its core customers have been unable to use its business nearly two years. 

I think there are risks to the company though. Ongoing lawsuits from unhappy customers and negative press from poor experiences need to be handled delicately. If coronavirus resurges, travel restrictions are likely to remain in place. Furthermore, new laws limiting too many hosts from using their properties for Airbnb may be coming down the pipeline. However, I think on the balance of risk, Airbnb is a top stock for me to buy in August.

Inflation fears weighing down Airbnb shares

The fall in Airbnb shares started at the beginning of the week, even before the important Q1 results were released yesterday. Why was this? The reason for the broader sell-off in markets this week was due to concerns about rising inflation expectations. 

In the US, inflation for April rocketed 4.2%, much more than expectations. It was also higher than the March figure of 2.6%. The concern here is that the US Federal Reserve will be forced to raise interest rates to stop inflation running away. 

This will hurt companies that have large amounts of debt, as it becomes relatively more expensive to pay back and take on new debt. So it follows that Airbnb shares logically fell due to the debt pile it has. Last year, it took on around $2bn of debt financing to help it get through the pandemic. Even with some repayment, the company does have a high level of borrowings.

So part of the fall in Airbnb shares before the results was driven by this sentiment from investors about inflation and the knock-on impact regarding interest rates.

Latest results

In the latter half of the week, the fall was due to Q1 results. A headline figure of a loss of almost $1.2bn is never going to be taken well by the market. But on closer inspection, I don’t actually think results were that bad.

Gross booking value from customers was $10.3bn, up 52% on the same period last year. Of note was that fact that Q1 revenue was higher than Q1 2019 figures as well. I think this shows the level of pent-up demand among people who long to travel. Since bookings are forward-looking, I think this offers a good outlook for Airbnb shares.

In the short term, there was understandably a lot of focus on the large loss. This was made up of a few one-off expenses. Some $113m of this was impairment on the value of the San Francisco office space. Another $377m was related to having to repay a term loan. Finally, $229m was related to compensation expenses.

On balance, I do think the slump represents a good dip and it’s worth buying Airbnb shares, so I’m considering buying now. The loss doesn’t accurately reflect the state of the business, I feel, and the outlook is positive. In fact, the CEO commented that “we expect a travel rebound unlike anything we have seen before. Travel is coming back and Airbnb is ready”.

Has this share price pullback created a buying opportunity for me? Let’s take a look at the investment case.

Airbnb shares: the bull case

There are a number of things to like about Airbnb from an investment view, in my opinion.

The first is that the global travel industry looks set to boom now that Covid-19 vaccines are being rolled out. Right now, there’s an enormous amount of pent-up demand to travel. After more than 12 months of lockdowns and other coronavirus challenges, people are desperate to take a holiday. This backdrop should favour Airbnb in the years ahead.

Secondly, Airbnb’s offering is very well suited to the current environment. What a lot of people are looking for right now is a holiday with friends and family. Instead of taking a touristy-type holiday (i.e. visiting Paris to see the Mona Lisa), they want to spend quality time with the people close to them. They also want to protect themselves from Covid-19. Airbnb’s apartments, houses, and villas could be a perfect solution.

Third, Airbnb is the clear leader in the holiday rentals online marketplace space. It does have quite a few competitors now. However, ABNB is the dominant player in the space by a wide margin. Its powerful brand (which has become a verb) gives it a competitive advantage.

Finally, it’s worth noting that broker sentiment towards Airbnb shares has been quite positive recently. In March, for example, Citigroup raised its price target for the stock to $197 from $165. More recently, Evercore initiated coverage of the stock with a $245 price target.

The bear case

There are risks to the investment case, however. One is that in the short term, results could be weak due to global lockdowns. Airbnb is set to release its Q1 results tomorrow, after the US market closes. Currently, Wall Street analysts expect the group to post revenue of $715m and earnings per share of -$1.15 for the quarter. If results are below expectations, the stock could be volatile.

Another issue is that it’s hard to know how long it will take for the travel industry to really get going. In the short term, we could continue to see setbacks due to Covid-19.

Finally, Airbnb’s valuation remains quite high. At its current share price, it has a market capitalisation of around $87bn. That’s only a little below the combined market caps of Marriott International ($46bn), Hilton Worldwide Holdings ($34bn), and InterContinental Hotels Group ($12bn). This high valuation adds risk. It seems a lot of future growth is priced in.

ABNB stock: my move now

Weighing everything up, I’m going to keep Airbnb stock on my watch list for now. If it falls further, I may buy some shares.

However, at the current share price, I’m not convinced that the risk/reward proposition is brilliant.

This year however, Tesla’s performance has been a little underwhelming. Year to date, TSLA stock is only up about 4%. That’s less than the return from the S&P 500 (about 10%).

Here, I’m going to highlight three US growth stocks that are outperforming Tesla this year. All have delivered double-digit returns in 2021, beating the broader market. 

Microsoft is beating Tesla

One growth stock that’s doing really well in 2021 is technology powerhouse Microsoft (NASDAQ: MSFT). It’s up about 15% year-to-date.

Microsoft’s strong performance doesn’t surprise me. This is a company with heaps of momentum right now. It’s also a fund manager’s dream – revenue growth is strong (and looks sustainable), free cash flow is fantastic, return on capital employed is high, and the balance sheet is robust. It’s easy to see why Terry Smith (aka ‘Britain’s Warren Buffett’) likes the stock.

Would I buy Microsoft for my portfolio today? Yes. In my view, the stock’s valuation (forward P/E ratio of 32) isn’t stretched. There are risks to the investment case (such as competition from Big Tech rivals). However, overall, I see a lot of appeal in Microsoft. I can see this company getting a lot bigger in the years ahead as its cloud division grows.

Airbnb is crushing TSLA

Another stock that’s beaten Tesla this year so far is Airbnb (NASDAQ: ABNB). Year-to-date, it’s up about 20%.

Airbnb shares have risen in 2021 for a few reasons. Firstly, results haven’t been as bad as some investors thought they would. Secondly, many brokers have raised their price targets recently. Citigroup, for example, recently raised its price target to $197 from $165. Third, investors have piled into the stock on the back of vaccine/reopening optimism.

Would I buy Airbnb shares today? No. Right now, the valuation ($106bn) is a bit high for me. There’s also uncertainty related to Covid-19. That said, this is a stock I’d like to own at some point. If it pulls back, I may buy it for my portfolio.

Fiverr has outperformed Tesla

Finally, freelance employment platform operator Fiverr (NASDAQ: FVRR) has also outperformed Tesla this year. Year-to-date, it’s up about 13%.

Fiverr is another company with a lot of momentum at present. Just look at the company’s fourth-quarter 2020 results posted in February. For the quarter, revenue was up a huge 89%. Looking ahead, the company said it expects continued business momentum with revenue growth of between 46% to 50% for 2021.

Would I buy this growth stock today? Yes. It’s not my favourite play in the freelance employment space – my top pick is Upwork. However, I think Fiverr is worth buying too, due to the fact the freelance employment market is booming right now and looks set to get much bigger in the years ahead.

I’ll point out that Fiverr is a higher-risk, speculative stock. Its earnings are still very low and the valuation is high (the price-to-sales ratio is 27). The stock is likely to be volatile.

I’m comfortable with the risks though. I think the long-term potential here is significant. 

The brief back story

Airbnb is a US-based (and US-listed) property marketplace that allows users to book accommodation around the world. The business started in 2008, but has since revolutionised the holiday and business rental market. The ease with which someone can list their space (be it a bedroom, flat, even a treehouse) for booking is attractive, as is the booking process. With a high focus on technology, Airbnb grew quickly over the past decade. 

As with other early stage growth companies, Airbnb was loss-making for several years. It eventually turned profitable in 2016, but hasn’t maintained profitability since. As a private company, the market couldn’t value Airbnb via the share price. Therefore, internal funding rounds happened at various different valuations over the years. In April last year, $1bn was raised with a valuation of $26bn, down from a $31bn valuation in 2017.

Airbnb pushed back going public due to the pandemic impact. With a lack of reporting requirements, I can’t accurately say how much revenue or bookings fell during last year. However, it’s definite that it was significant, with the firm having to cut its workforce by 1,900 employees.

Is the Airbnb share price on the up?

The issues of last year are not beyond us. I’d imagine it will likely report underwhelming figures tomorrow on all fronts. However, I’d also expect a positive outlook for 2021, based on a global economic recovery and vaccine rollout. The easing of lockdown has already begun in some countries, with the UK looking to be open by June.

Given this outlook, I do think the Airbnb share price could offer good value. If we see a dip on results tomorrow, I’d look to buy the shares to hold for the long term. I think the share price could mirror the bounce-back that we should see in airline shares and other travel stocks. If more people are flying and travelling, more people need accommodation. 

The concern I have with the Airbnb share price is the already generous market capitalisation. It sits at $112bn, with the share price around $187. For comparison, Booking Holdings (the main competitor) has a market value of $96bn, having been listed for decades. Maybe investors are already pricing in a bumper year for Airbnb. In other words, the 28% rise since the start of the year may mean that the ship has already sailed. If I already held the shares and expected a surge, I might be disappointed.

Ultimately, I think a lot will depend on the tone of the results tomorrow. Therefore, I’m going to wait for them to be released and make a judgement call then. I’m ready to buy if we see a share price drop.

Since then, some volatility has set in. On Tuesday, AirBnB stock was down to almost $120. Yesterday, it was trading near $140.

Should I be considering the company for my ISA or steering well clear? Let’s start with some positives. 

Why I like AirBnB stock 

According to its website, AirBnB has 5.6 million active listings in 100,000 cities worldwide. This clearly gives it far greater geographical diversification than even the most established global hotel firms. 

Then there’s the variety on offer. According to its website, AirBnB “offers 90,000 cabins, 40,000 farms, 24,000 tiny homes, 5,600 boats, 3,500 castles, 2,800 yurts, 2,600 treehouses, 1,600 private islands, 300 lighthouses, and 140 igloos“. Companies that have something for everyone tend to remain popular. 

And then there’s the brand itself. In my experience, the question “Did you AirBnB it?” is quickly becoming the travel equivalent of “Did you Google it?“. And we all know what’s happened to parent company Alphabet‘s valuation. 

On a purely anecdotal basis, I’ve also found the whole process of booking a place to stay on weekend city breaks easy, convenient, and strangely quite fun in itself.

Given the above, you might wonder why I haven’t bought the stock already.

Reasons to be wary

My first reason relates to valuation. For all the excitement that its IPO caused, AirBnB is still massively loss-making and likely to remain so for some time. With a current market cap of over $80bn, this simply can’t be ignored.

Tellingly, at least some analysts have already turned bearish on the company. Equity research firm Gordon Haskett believes AirBnB stock will likely underperform after such a strong start. I’m confident it won’t be the last.

Aside from the valuation, the fact that AirBnB is just one of the host of companies coming to market recently is worrying. A flurry of IPOs suggests founders believe market conditions won’t get much better.

Another, perhaps inevitable reason why I’m hesitating to buy is due to the uncertainty caused by the pandemic.

While the emergence of effective vaccines has been glorious news, it will still take a while before we can all remove our face masks. Moreover, many people, although desperate for a holiday, may still feel initially safer in hotels with strict hygiene rules. The psychological impact of the pandemic may persist for longer than we think. 

On top of this, I can’t discount the possibility of greater regulation on holiday rentals. 

Be patient

As a Foolish investor, I take a long term approach. My philosophy is simple: buy right and hold. I leave the risky stuff to traders. Right now, I’m placing AirBnB stock in the latter category.

A wobbly share price doesn’t make it a bad investment, of course. Anyone who remembers Facebook‘s 2012 IPO will know that it plunged in value shortly afterward. These days, it’s one of the biggest companies around!

Even so, I’m prepared to be patient. The time to buy will be when expectations are reset back to vaguely sensible levels.

In my view, AirBnB needs to come back down to earth.

Here, I’m going to look at the investment case for the Airbnb stock. Should I buy it for my own portfolio?

Airbnb stock: should I buy?

Let me start by saying there’s a lot I like about the business. I personally started using the platform in 2012 and, since then, I’ve used it to stay in fantastic apartments all over the world. I’ve always found the platform easy to use and had great travel experiences using it. To my mind, it offers great alternatives to hotels.

Airbnb is also the clear leader in the holiday rentals online marketplace space. It does have some competitors, sure. But they don’t have the same kind of brand power and reputation. Airbnb’s dominance gives it a competitive advantage.

Additionally, the company’s growth has been very impressive. Between 2015 and 2019, for example, revenues climbed from $919m to $4.8bn. I believe there’s plenty of growth ahead. Today, the online travel market is worth about $600bn. Yet, by 2023, this market is forecast to be worth around $900bn.

This market growth should benefit Airbnb stock. The company should also benefit from the retirement of the Baby Boomers sector. This segment of the population – which generally loves to travel – is the site’s fastest-growing demographic.

The ABNB share price could fall

Having said all that, I do have some reservations about Airbnb stock right now. My first concern is there’s a lot of hype around the stock. Airbnb shares were priced at $68 in the IPO, giving the company a valuation of $47bn (up from $18bn earlier in the year).

However, the share price opened near the $150 mark. It seems to me that a lot of short-term traders piled in hoping for quick gains. Now that the ABNB share price is falling, these ‘weak hands’ appear to be exiting the stock.

My second concern is valuation. When the company was valued at over $100bn last week, it was worth more than Marriott, Hilton, Intercontinental Hotels, and Wyndham put together. That strikes me as excessive.

Finally, another concern is the timing of the IPO. You see, Airbnb’s most recent quarter was relatively strong due to the fact it was summer in the US and Europe and Covid-19 rates were down. Gross daily rate – which represents gross booking value per night and experiences booked – for July, August, and September was up 19%, 21%, and 18% respectively.

The problem is, Q4 is likely to be terrible due to Covid-19. And looking at what’s going on right now across the US and Europe, Q1 2021 is likely to be worse. That means we could see some awful numbers from Airbnb in the near term. I expect the stock will be highly volatile as a result.

Airbnb shares: my plan

Weighing all this up, I’m going to keep Airbnb stock on my watchlist for now. This is a company I’d like to invest in. But only at the right price.

I think with a little bit of patience, I’ll be able to buy Airbnb stock next year under $100. Perhaps even under $80. For now, I think there are better stocks to buy.

According to the Financial Times, at an IPO price of $68 per share, the implied market capitalisation of Airbnb is $40.6bn. That would have put the IPO valuation of Airbnb, had it stuck to the $56–$60 range, somewhere between $34.6bn and $35.8bn.

Airbnb matches owners and renters of properties for travel and leisure and collects a fee for doing so. Booking.com does something similar (its more of a merchant of rooms) and has a market capitalisation of $86.3bn, which is around 9.6 to 9.9 times total revenue. At a market capitalisation of $40.6bn, Airbnb would appear to be valued at 8.4 times 2019 total revenue. All things considered, the Airbnb IPO does not look to be priced at eyewatering levels.

Bed and breakfast

Where the price goes once trading in Airbnb stock begins is anyone’s guess. But it is likely that a UK based investor trying to buy Airbnb stock in a Stocks and Shares ISA, for example, will not be able to buy at $68 per share. Whatever the price is, buying Airbnb shares requires a belief that the company will continue to grow and find a way to be profitable. Referring to the income statement below, it can be seen that year-on-year revenue growth has been falling from 80.14% in 2016 to 31.58% in 2019. 

Source: Airbnb IPO prospectus and author’s own calculations

Airbnb has been around since 2007. In fact, it reached 10m total bookings in 2012. In 2018 around 2m people were staying in an Airbnb rental on an average night. For a company at Airbnb’s stage in corporate life, revenue growth of 31.58% is still high. The market for home and apartment holiday and travel rental is huge but fragmented. Airbnb has come in and consolidated it, and I think revenues will continue to grow.

Airbnb’s gross margins have hovered between 75.1% and 76.35 from 2015 to 2019. Although Airbnb actually made an operating profit of $18m in 2018, 2019 was another loss-making year. Operating expenses excluding stock-based compensation as a percentage of revenue fell from 86.3% in 2015 to 74.4% in 2018. But they rose to 83.5% in 2019.

After the Airbnb IPO

Covid-19 hit Airbnb hard, but, after a precipitous drop, third-quarter 2020 revenues have recovered sharply. However, coming back from the virus is likely to drag on well into 2021 at least. Yet, Airbnb has demonstrated that it can turn an operating profit, so I am cautiously optimistic it can do this again.

As with all IPOs, investors should read the prospectus thoroughly (there is much more information there) and proceed with caution. There is a non-trivial risk that Airbnb will never become consistently profitable. Given the new and disruptive business model, there are regulatory risks. And, as with many tech IPOs, multiple share classes are mean reduced voting power for non-insiders.