Mar 24 2021 - A Bearish Market-Implied Outlook For Airbnb
- Airbnb is hard to value.
- There is very high dispersion among outlooks from Wall Street analysts.
- The option-implied volatility is also very high.
- The market-implied outlook (derived from options prices) is substantially bearish.
- My overall rating is bearish.
Airbnb (NASDAQ:ABNB) is a challenging stock to analyze. First, of course, the company has only been public since late 2020. Second, there are huge uncertainties as to how quickly the company's revenues will grow as people start to travel again. The company's revenues declined 30% for 2020 vs. 2019 and it is remarkable that the decline was not more severe, given the huge impact of COVID on travel in 2020.
The long-term outlook for ABNB is compelling. The company's brand is incredibly widely known. Also, as more people work in contingent jobs (freelance, consulting, gigs), having the additional potential to pick up income on an as-needed basis by renting out space will become more popular. There are substantial regulatory risks in ABNB's business model, however, that can constrain the business model. Each city can set its own rules on short-term rentals such as Airbnb services. The hotel industry is also lobbying for laws to compel Airbnb hosts to abide by some of the regulations applied to traditional short-term lodging providers.
For young disruptive firms, the entire story comes down to confidence in building an outlook for future revenues and earnings because current valuation measures are a small fraction of expected value. Projections for these kinds of firms are, obviously, more uncertain than for more established companies in mature industries.
My approach to evaluating ABNB is a meta-analysis: an analysis of a group of analyses. I am not going to discuss the balance sheet or come up with my own forecast of earnings. I am analyzing ABNB by looking at (1) the Wall Street analyst consensus outlook and dispersion between analysts, and (2) the market-implied outlook for ABNB derived from the options market. The market-implied outlook is also a consensus view, representing the cumulative opinions expressed by buyers and sellers of options through what they buy and sell and the prices they pay or are paid.
Wall Street Analyst Outlook
eTrade has compiled the views of 31 ranked Wall Street analysts who have issued or affirmed price targets and ratings for a stock within the last 90 days. Their consensus rating is bullish and their consensus 12-month price target is 3.84, slightly lower than the current price. I interpret the eTrade results as neutral overall (even though the consensus rating is neutral) because the price has already reached (and very slightly exceeded) the 12-month price target.
One striking feature of the analyst price targets is the very high dispersion. The lowest price outlook implies a 44.45% decline and the highest implies a 29.43% gain. There is research on the implications of high or low dispersion among analyst price targets. Specifically, when there is low dispersion and a consensus price target that is significantly higher than the current price, this predicts high future returns. When dispersion is high, the consensus price targets are not predictive or, in the case of stocks with high short interest or low institutional ownership, are actually negatively correlated to future returns. As the authors note, "the dispersion in predicted returns may simply be capturing fundamental uncertainty and investor disagreement."
Wall Street analyst consensus rating and 12-month price target (source: eTrade)
The consensus outlook calculated from 32 Wall Street analysts compiled by Seeking Alpha is neutral, with a price target of 7.59, about 4% below the current price.
Wall Street analyst consensus rating and price target (Source: Seeking Alpha)
For a young disruptive company, the price outlooks are likely to be more uncertain than for a mature company with years of consistent earnings growth and the dispersion between the analysts is consistent with this view. In this context, the differences between the consensus price targets and the current price are tiny. One might reasonably conclude, however, that the consensus view of the analysts is that the stock is fully priced.
Outlook From the Options Market
By analyzing the options prices at a range of strikes, it is possible to create the market-implied (aka option-implied) price return outlook for the period from today until the expiration date of the options. This approach generates what is, in effect, the consensus outlook for the probabilities of all possible price returns. This is charted in the form of a probability distribution. For those who are unfamiliar with this concept, please see my overview discussion. Option-implied price return outlooks are used in a range of applications in economics and finance, although they are less well-known among individual investors.
When I chart the option-implied probabilities of price returns, I rotate the negative side of the probability distribution around the vertical axis, so that it is easier to see the relative probabilities of positive vs. negative returns of the same magnitude. An explicit example is provided in my overview post. A value of 10% on the Negative Return curve gives the probability of having a price return of -10%, for example (see the chart below).
Option-implied price return probabilities for ABNB from now until June 18, 2021 (Source: author's calculations using options quotes from eTrade)
I have analyzed call and put options expiring on June 18, 2021, to create a price return outlook for the period from today until that date (2.8 months from now). This outlook is significantly bearish, with a markedly higher probability of negative returns as compared to positive returns of the same magnitude for most outcomes. For returns of magnitude greater than +/- 42%, the probability of positive returns is higher. This is a manifestation of positive skewness.
The single most-probable price return implied by this distribution (the highest probability outcome on the chart) for the period between now and June 18th is -15%. There is a 56% chance of a price return less than or equal to zero over this period. The annualized volatility derived from this distribution is 62%, which is very high for an individual stock.
Option-implied price return probabilities for ABNB from now until January 21, 2022 (Source: author's calculations using options quotes from eTrade)
When I analyze call and put options expiring on January 21, 2022, to build an outlook for price returns from now until that date, the bearish view is reinforced. The single most-probable price return over this period is -30% and the annualized volatility is 62%. The elevated probability of negative returns vs. positive returns of the same magnitude (the vertical distance between the solid blue line and the dashed red line) is pronounced for returns in the range from -70% to 70% (from 0% to 70% on the chart). There is a 60% chance of having a price return less than or equal to zero over this period.
These results are similar to those I obtained in a recent analysis of Teladoc (NYSE:TDOC) and Snowflake (NYSE:SNOW). Both of these stocks exhibited the pronounced negative mode and positive skewness, as seen in the results above. The annualized volatility calculated for SNOW was 62%, equal to that calculated for ABNB. I have discussions of some of the research on stocks with high positive skewness in these posts.
Setting a rating on a company like ABNB is very challenging, for reasons outlined earlier. I have no confidence in my own ability to model the company's trajectory. In formulating an opinion, I prefer to rely on the consensus of Wall Street analysts, along with the market-implied consensus outlook derived from options prices. As such, I am not analyzing the company so much as aggregating opinions of the equity analysts and the options traders.
The consensus of the Wall Street analysts is that the stock price matches the 12-month outlook. There is, however, very high dispersion between the analyst opinions and this reflects a lack of consistency in interpretation of the fundamentals. This makes sense, given how rapidly the company and its markets are changing.
Overall, the equity analyst outlook can best be summarized as neutral and highly uncertain. The option-implied (aka market-implied) outlook for ABNB is substantially bearish and substantially positively skewed. The most probable outcomes are for negative price returns between now and mid-January of 2021.
There is also a low probability of very high positive returns - a manifestation of positive skewness. Stocks with high positive skewness typically underperform. Considering the neutral/high dispersion analyst outlook and the bearish option-implied outlook, my final rating is bearish even though I expect the company to thrive in the long term.