Airbnb – a discretionary stock that may be further pressured by the worsening macroeconomic conditions

13.04.2023 13:09|Investment Advice Department, Conotoxia Ltd.

Airbnb is a company whose IPO was one of the most anticipated in 2020. Since then, its share price has gradually fallen, and a list of factors reviewed in this article will explain why further depreciation may be expected this year. 

Summary

  • The interest rate environment has changed dramatically over the last year, which may affect Airbnb user activity and the number of properties listed. 
  • According to the company's management, average daily and occupancy rates are expected to drop in 2023 due to inflationary pressure and worsening economic conditions.
  • Despite the company finishing its first-ever profitable year, Airbnb's valuation multiples indicate that the stock at its current market price may be overvalued compared to its industry peers and the broader market.   
  • A growing dissatisfaction among Airbnb users may be seen online due to various additional fees charged and chores to be done while staying at the Airbnb properties. 
  • The Airbnb stock has been moving in a downward-facing channel since soon after its IPO. An increased insider selling activity, among other factors reviewed in this article, may indicate that its price may continue lowering in value in the upcoming months.

Macroeconomic conditions

Historically low mortgage rates over the past few decades have enabled many people to buy one or more properties and rent them out for extra income. For those who prefer short-term rather than traditional long-term rentals, Airbnb has been one of the leading providers. As a result, the number of listings on the Airbnb platform has grown from 0.3 million in 2013 to over 7 million in 2022. 

The Federal Reserve, along with most of the world's central banks, moved away from virtually non-existent interest rates in 2002. Since then, key interest rates in the US have risen by almost 5%, leading to a significant increase in monthly mortgage payments. To give you an idea, for a mortgage with a current balance of 500,000 USD, a remaining term of 20 years, and an initial mortgage rate of 2%, a 4% increase in mortgage rate would increase the monthly payment by around 1,000 USD. While this is a theoretical figure, any increase in the monthly mortgage payment translates into an increase in the monthly cost of owning and maintaining a property to rent on the Airbnb platform.

If property owners cannot cover these increased costs by raising average daily rates or occupancy rates, more may be forced to sell their properties. Alternatively, some owners may list their unused property on the Airbnb platform to generate additional income. Let us now review the average daily rates and occupancy rates mentioned above.

In 2022, the average daily rate (ADR) for properties listed on Airbnb was 153 USD (currency-adjusted), a decrease of 1% compared to the previous year. Furthermore, as Airbnb's management stated in its earnings presentation, a further decline could be expected in the first quarter and full fiscal year 2023. This may be related to lower tourist activity, which leads to lower demand for short-term rentals due to inflation-induced lower purchasing power and potential fears of recession.

Similarly, according to AirDNA, occupancy rates are forecast to fall to 56.4% in 2023, down from 58.3% in 2022 and 60.3% in 2021. It should be noted that the pent-up demand for Airbnb properties in 2021 may have been due to the revival of the tourism industry following the Covid-19 lockdowns and restrictions around the world. Since then, occupancy rates have stabilised and started to reflect macroeconomic uncertainties in the US and abroad.

The fall in ADRs and occupancy rates is probably the result of a combination of high inflation, which has left consumers with less money to spend on leisure and other discretionary items, rising interest rates, which affect not only property owners but also consumers and their spending habits, and finally the general uncertainty surrounding financial and economic stability and a possible recession.

Valuation multiples and other financial data

Financially, the post-pandemic environment has been favourable to Airbnb. 2022 was the first financial year for the company to finish with a positive bottom line. As a result, the company managed to increase its cash reserves and other current assets while keeping its long-term debt unchanged. Airbnb's net income in 2022 was 1.89 billion USD – an impressive growth compared to the net loss of 0.35 billion USD a year earlier. Its revenues grew from 5.99 billion USD in 2021 to 8.39 billion USD in 2022, an increase of 40%. 

Meanwhile, it is already apparent that the outstanding growth of the last two years may not be sustainable in the future. The 4Q2022 EPS of 0.48, while beating the forecast of 0.25, was a significant drop from the 3Q2022 EPS of 1.79 and even a relatively small drop from the 2Q2022 EPS of 0.56. The uncertain future may be the reason why the positive reaction to Airbnb's first profitable year was relatively short-lived, as reflected in the share price. As seen in the Airbnb stock price graph later in the article, the stock jumped from 120.87 USD on 14th February to 130 USD on 15th February and reached a nearly 145 USD price level the next day, but since then has returned all of its gains – as of writing this article, the Airbnb stock trades around 119 USD.

As per valuation data, Airbnb's share price looks overvalued relative to its sector, despite the company's outstanding 2022. Based on the current stock price of 119 USD, Airbnb's P/E ratio is 42.65, more than twice that of its key competitor Booking.com's industry average and the S&P500 average. Similarly, Price-to-Book value and Enterprise value-to-EBITDA ratios indicate that Airbnb stock may be overvalued compared to its peers.

While not a valuation ratio, a Sales-to-Assets ratio has been included in the table above to show that Airbnb may not be as efficient in utilising its assets as its industry peers.

Growing dissatisfaction with extra charges

Another interesting point to consider when evaluating Airbnb's future performance may be the growing dissatisfaction among its users regarding various extra charges on its platform. When browsing for an accommodation, the platform shows the price per night for the particular accommodation. However, once you proceed with a booking, additional charges, such as a cleaning fee, Airbnb service fee, and taxes, are added to the final cost. As a result, your 2-night stay in a condo in Nashville, US, turns from 700 USD (350 USD per night) to 1,059 USD.

In addition, while paying substantial cleaning fees, Airbnb customers have found that the list of chores during an Airbnb stay is often longer than at home. Many users online have pointed out that they have been requested to do such tasks as taking out the trash, washing the dishes and sheets, and even mowing the lawn. Another user wrote that she had been asked to look after the owner's cat while she was in the flat. As a result, a growing number of people are saying online that the next time they travel, they would prefer to stay in a hotel with no chore lists and no extra charges.

Booking.com is one of the alternatives mentioned by dissatisfied customers, and it should come as no surprise. Booking.com currently has the largest market share (see graph below) and, unlike Airbnb, offers its customers hotels, hostels and resorts, among other types of properties. Furthermore, not only does Booking.com not charge extra fees (such as cleaning and service fees on Airbnb), but it also often offers various discounts and rewards to its customers.  

Source: businessofapps.com

Airbnb stock 

Despite being in operation since 2008, Airbnb only went public at the end of 2020. The timing of its IPO may indicate that the company needed cash and chose to raise additional funds by selling some of its shares to the public. At the time, the ongoing Covid-19 pandemic was putting massive pressure on the tourism industry, and the company may have felt a cash squeeze as a result.

It may be interesting to point out that the Airbnb stock at the moment of IPO was originally 68 USD, but once the market opened on the first trading day, it showed a massive 114% jump to 146 USD per share. Although impressive, the management team was not able to qualitatively predict a more precise value of its stock. As a result, Airbnb raised only around 3.5 billion USD via its IPO instead of twice as much in case its IPO price was 136 USD – although considerably higher than the initial IPO price, and it is still 10 USD lower than its price once the stock was available for public trading.  

After hitting an all-time high of nearly 220 USD in February 2020, Airbnb's share price has been in a downtrend, with the potential to reach the 90 USD price level from its current level of around 120 USD per share.

Source: Tradingview

Insider selling activity

Another worrying aspect to consider is the amount of insider trading of Airbnb shares that has taken place in recent quarters. While in 2022, net insider share trading was around 1.5 million shares sold per quarter, this number has more than doubled in the first quarter of 2023. In general, it is believed that company insiders (key management, owners and other closely related persons) may have important and as yet undisclosed information about the company. Therefore, insider trading may indicate possible developments not known to the public yet. In this case – insider selling may suggest that there may be some information known to insiders that may negatively impact the stock price once it becomes public.

Source: Quiverquant.com

Conclusion

As a discretionary stock at its core, Airbnb is heavily dependent on consumer spending, which is already under pressure from rising inflation, higher debt costs and further uncertainty around financial and economic stability. This has weighed on the company's share price, preventing it from making further progress and taking advantage of Airbnb's first profitable year. Furthermore, valuation multiples and technical analysis may indicate that the company's share price could fall further in the coming months if there is no significant improvement in economic stability and other factors.

 

Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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Santa Zvaigzne-Sproģe, CFA

Santa Zvaigzne-Sproģe, CFA

Head of Investment Advice Department

A certified financial analyst with a broad experience in financial markets obtained working as a broker and securities specialist in various financial institutions across the Baltics.

In addition to obtaining the prestigious CFA license from CFA Institute and Advanced Certificate from CySEC in 2022 as well as Investment Advisor’s license from Baltic Financial Advisor’s Association in 2019, Santa holds MBA from Swiss Business School in Switzerland and master’s degree in finance from BA School of Business and Finance in Latvia.


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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.23% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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