Is Airbnb’s stock price today’s ‘canal mania’?

• Date: 19 December 2020
• Published date: 19 December 2020
• Author: David McWilliams

Earlier this year, as travel stopped, people in the know suggested that the company should trade below $30 a share. Today this company, which has yet to make a profit, is valued at $85 billion. Remember that behind all the hype, Airbnb can't make a profit, so how can it have such a huge valuation?

It's not just Airbnb. Consider Tesla. This company is now valued at $600 billion. This means that Tesla, a battery company with a car chassis dropped on top of it, is now worth six times more that General Motors and Ford combined.

Maybe Tesla will hoover up the electric car market in the future but it's more likely that these valuations are more a reflection of stock market frenzy, where companies that can't make money are benefiting from "hope" value rather than real value. It may be the case that Airbnb will continue to expand its revenues by 30 per cent a year (as it was doing pre-Covid-19) and eventually make the sort of profits that $140 a share require, but it's still a punt, not an investment.

However, as the great economist Joseph Schumpeter noted "innovation is the outstanding fact in the economic history of the capitalist society". And Airbnb is an innovator.

Its innovation is not some wonderful piece of technology, like Tesla's batteries, but the understanding that property is expensive and underused, so people will rent out their places to those who fancy a cheaper option than a hotel. Hardly rocket science, but innovation is not about invention; it is about joining existing things that people never put together before. Critically, it is also about making these new products commercially viable.

Innovations have always excited speculators as distinct from investors. Speculators are always first. They are the pioneers of capitalism; investors are the settlers. Speculators want to capture the gains that derive from disruption. They are interested in the spectacular.

The investor, on the other hand, is concerned with the return on capital and a steady income stream thereafter. The investor doesn't like the disruptive moment, preferring the state of the world as it returns to normality or equilibrium, allowing stable returns to accrue. The speculator is interested in the change itself, while the investor is interested in the world after the change. This is why the speculator loves what's new, exciting, innovative.

Canal mania Down the ages, the speculator has loved technology. In the Ireland of the 18th century, Dublin's coffee houses became hotbeds for...