Among all the craziness that 2020 brought, Wall Street still managed to bring two unicorns public. Airbnb (NASDAQ:ABNB) and DoorDash (NYSE:DASH) went through their IPOs under very tough conditions. The global economy was and still is in shambles. This is especially true for ABNB stock because it depends on people moving around. That’s the opposite of what we’ve been doing.
In spite of this the stock is trekking along just fine. Today we determine if it’s a good time to buy some of it or not.
The novel coronavirus pandemic caused tremendous economic devastation especially to the travel and leisure sectors. Countries went on lockdowns for months at a time. In the U.S., the biggest states reverted to stay-at-home orders after the summer. It’s been difficult to be in the hospitality business to say the least.
Somehow Airbnb stock has so far done better than DoorDash. It’s up almost 50% in three months, which is three times better than DASH. For absolute comparisons, Booking Holdings (NASDAQ:BKNG) is almost flat, and the S&P 500 is up 6% for the same period. This gives me confidence to say that the long-term thesis is to hold ABNB stock for the continued success.
I made this point last year in December and that trade delivered 30% upside. My notion then and now remains that “it will do well in the future so it’s worth owning.” From a trading perspective I’d wait for a dip though.
Value Is the Wrong Metric for ABNB Stock
There are skeptics even among my friends. A lot of investors have a problem buying growth stocks. That’s because analysts too often use the wrong valuation tools to judge them. This is a mistake because in order to deliver growth companies must spend heavily. Amazon (NASDAQ:AMZN) did not build its empire on the cheap. Yet all along the way it had very harsh critics. It proved them all wrong and the concept works for Airbnb.
The fact that this stock is also expensive from the traditional metrics is irrelevant. Investors should look for continued growth, which means to heavily consider the top end of the P&L statement. Earnings at this stage are far less important for gauging the investment viability.
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Along those lines, ABNB price-to-sales is above 30. Although that is high, it’s not outrageous. Zoom’s (NASDAQ:ZM) P/S is double that of Airbnb. Most startup EV companies have no sales yet investors are piling into them regardless. This company about doubled its revenue in four years before the pandemic. To judge it harshly because of value is ridiculous.
The lockdowns have had a negative effect on that but it survived it with flying colors. Therefore, it comes down to timing, and that’s where it gets tricky. Momentum stocks like this rally so fast that they don’t leave clear entry points. If we’re lucky, we can buy it on a really bad day as it falls into prior support. To do that we need to study the charts to get clues.
Using charts, modern investors can avoid the obvious mistakes. So far today I’ve been very positive Airbnb stock as an investment for the long term. That doesn’t mean I jump into it blindly at any point in time. I would much rather miss out on a few upside bucks in order to find reasonable entry points. At $210 per share this is not an obvious point of entry.
Since it’s IPO it has had four consistent negative stints of about 8% to 15%. Therefore, I will wait for the next one to hopefully buy it for less than $200 per share. There is a way around this if I use options instead of waiting for a dip. An investor can get ANBN stock and leave a huge buffer zone from current price.
For example, I can today do the March $175 put and collect almost $7 for it. This is a trade that does not need a rally to profit. In fact, the stock can fall more than 21% before I risk losing money. Ideally I want the stock to fall below $175 per share so I can own it. If not then I am already long and gained 3.2% out of thin air. This strategy works very well for those who want to buy shares but leave room for air.
The unusually high CBOE Volatility Index (VIX) makes selling puts to enter stocks more viable. Fear on Wall Street is much higher than it’s lifetime average of 16. Thus all options are more expensive than normal. Selling them now makes sense as long as we don’t have a market crash. The worst that can happen with this particular situation is that I would own shares of ABNB stock at $175. My break even in that case would be at $168 per share. Someone who buys stock outright today in that scenario would already be down 25% on their investment.
There are no magic bullets for investing. Everything has to start with a solid thesis. In this case, Airbnb has a very successful business and is growing rapidly. Profits will come with time as the company matures and streamlines its processes.
Moreover, there’s going to be tremendous improvements as soon as we work ourselves out of this virus mess. To short the company with conviction now is lunacy. I bet that ABNB stock will be higher in the future, albeit I’d like to start from lower levels than now.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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