1 Popular Stock To Flee Immediately

Airbnb has been on a tear since 2020 when it reported losses of $3 billion in a single quarter. Lockdowns sparked concerns that the company would not survive a world without travel but soon hope emerged that life would return to normal and the financials soon followed.

A full U-turn followed with the company growing the top and bottom lines at a rapid pace. But we see one major red flag that suggests high danger now.

Key Points

• The company’s business model has stood the test of time, bouncing back from COVID lows to produce enormous shareholder gains.
• Airbnb has lots of cash on hand, and is producing enormous cash flows but one metric signals danger lies ahead.
• New shareholders should be especially wary of entering now that the market capitalization has left fair value in the rearview mirror. 

The Rock Solid Model

Airbnb has a whole lot going for it. The pricing algorithm isn’t just an ordinary matching of supply and demand but rather a composite of 70 factors that include spotting when new events are listed so prices can adapt in real-time to forecast the upsurge in demand. The company is smart about price swings so beach accommodations are expensive in summer and ski chalets in the winter.

The company has extended its revenue streams to include adventures and experiences so a traveler who wants to learn how to make fresh coffee can learn from local baristas while cuisine aficionados can learn pastry-making from local chefs. That cultural immersion is what helps Airbnb stand out from the usual hotel stay.

Another key characteristic of the platform is the ability to find accommodation in a far-off land, for example in a rural area where hotels and motels won’t survive. The fact that Airbnb can side-step the traditional brick-and-mortar costs is crucial to its ability to serve a broader base of customers.

So with a wide moat that separates it from the experiences offered by regular hotels, why is Airbnb a stock to avoid?

Why Run from Airbnb?

Nothing in the fundamentals would provide a reason to run away from Airbnb stock. The cash plus short-term investments are north of $10 billion. The profitability is exceptional and the company reported over $4 billion in cash flows over the past year.

So why stay away?

The answer is not in the cash flows the company produces but the net present value of those cash flows forecast over time. When analysts run the numbers they find the valuation of Airbnb that makes most sense would place the share price closer to $140 per share. A discounted cash flow forecast analysis projecting out the numbers over the next 5 years places the value closer to $120 per share.

No matter which way you slice or dice the figures, the reality now is that any mis-step is likely to be punished by the market because the share price has eclipsed fair value and then some. Of course, history is littered with examples of a momentum stock continuing to defy the odds so this isn’t necessarily a time to short, but it certainly doesn’t appear to be a time to get enthusiastic about buying either.