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Airbnb: Omicron Variant Another Risk Other Than Valuation
Stock Analysis & Ideas

Airbnb: Omicron Variant Another Risk Other Than Valuation

Airbnb, Inc. (ABNB) is an online marketplace that connects hosts and guests online or through mobile devices to book travel services and accommodation facilities worldwide. The company provides apartments, villas, bungalows, private homestays, and tourism services. It was founded in 2007, having its headquarters in California.

Airbnb made a bold bet in December 2020, going public amid the pandemic, with an IPO price of $68 and a very successful trading debut, as ABNB stock opened at $146 per share, with gains of 114.7% above its IPO price.

After hitting a high price of about $220 per share, Airbnb is now trading around $170. I am bearish on ABNB stock, with valuation concerns being the main reason. Airbnb faces many challenges and risks now; here is what you should know. (See Analysts’ Top Stocks on TipRanks)

Airbnb Business Highlights

In early March 2021, Airbnb announced the pricing of its offering of $2.0 billion aggregate principal amount of 0% convertible senior notes due 2026 to pay off its debt and fund the cost of entering into capped call transactions.

An interesting fact is that Airbnb has announced that the initial conversion rate is 3.4645 shares of Class A common stock per $1,000 principal amount of notes. In other words, the initial conversion price is about $288.64 per share of Class A common stock. That is a premium of around 70% compared to the current stock price of about $170 per share.

As expected, Airbnb has mentioned that the actual dynamics of these convertible senior notes, i.e., the conversion rate and conversion price, can change upon certain events.

However, the premium in this conversion rate reflects the optimism of Airbnb management over its business model. To improve its business model and service in May 2021, Airbnb released many innovations and upgrades related to hosts, guests, user experience, support center, general information provided.

While some of these functions are not universally applicable to all regions, the “Airbnb 2021” list shows the commitment of a public company to offer continuous and improved value to its customers, a very positive factor.

What Are the Key Risks Airbnb Faces Now?

Unfortunately, the Omicron variant of COVID-19 is a new risk to the travel and leisure industry, which has already caused panic and hit the travel and reopening stocks, such as ABNB stock. Worries that the COVID-19 virus resurgence can harm the global economic recovery are both important and realistic.

The worst-case scenario for Airbnb now would be a series of lockdowns imposed by countries to fight the spread of the virus. In Europe, Austria again imposed a lockdown. At the same time, other EU countries such as Portugal, Germany, and the UK are either thinking about it or already applying tighter restrictions in daily social and business events. In the U.S., coronavirus cases are starting to rise again amid news that a new vaccine to fight the Omicron variant will be ready in early 2022.

If governments restrict travel, an economic slowdown would be imminent. That would harm Airbnb’s revenue, especially after a robust Q3 2021 quarter.

Another factor to consider as a key risk for Airbnb now is that the EU is considering rules to regulate vacation rental platforms:

“The Commission says it wants to support an expansion of competition and players in the sector but also respect EU law which allows for the Member States to apply local rules based on concerns that are in the public interest.” This is in the broader context of the Digital Services Act (DSA) to boost transparency, safety, and risk assessments on large platforms such as Airbnb.

Q3 2021 Earnings: Very Strong, but Is Travel Rebound Sustainable?

Some of the Q3 2021 financial results highlights were Q3 revenue of $2.2 billion, which was the highest ever and 36% higher than Q3 2019, and Q3 net income of $834 million, the most profitable quarter ever, nearly four times larger than a year ago. Also, gross bookings increased 48% year-over-year to $11.9 billion.

Net income surged 280% on a year-over-year basis, and while the Q3 2021 financial results were solid, the question is, can Airbnb turn profitable in 2021? As of 2017, the vacation rental company is unprofitable, with the Fiscal Year 2020 amid the pandemic reporting massive losses of around $4.6 billion.

Any sustained Omicron variant worries and measures to restrict travel could put a stop to Airbnb’s momentum in sales and net income exactly when expectations and valuation are both too high. ABNB stock is overvalued based on its price-to-book ratio (23.9x) compared to the U.S. Hospitality industry average (3x). 

The company has stated that “looking to 2022, vaccination progress and the recovery of international travel in Q4 2021 will be key themes for growth heading into the new year.”

TipRanks’ Smart Score

Looking at TipRanks’ Smart Score rating system, ABNB scores a 6 out of 10. This score is neutral, implying that Airbnb may move in tandem with the broader stock market.

Bullish blogger, analyst, and hedge fund activity, as well as positive technicals, are offset by bearish news, TipRanks investor sentiment, and fundamentals.

Wall Street’s Take

Turning to Wall Street, Airbnb has a Moderate Buy consensus based on 14 Buys, 13 Holds, and only one Sell rating assigned in the past three months. The average Airbnb price target of $198.07 implies 16.8% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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