Airbnb (ABNB) is a great business, boasting amazing gross margins of 82.6% over the past 12 months. However, it’s starting to look expensive at 33.3x forward earnings, especially in light of some headwinds. Some of the world’s top tourist cities are moving against short-term lettings due to widespread protests. With an expected earnings growth rate of 12.7% over the medium term, the stock is overvalued. That’s why I’m bearish.
What’s Good about Airbnb?
Before I dive into my concerns, let’s first highlight the positives about Airbnb. First of all, the San Fransisco-based company has excellent margins. With low operational costs, because of its tech-based business model, the company boasts incredible gross margins in excess of 80%. That’s very hard to find elsewhere and it makes the business resilient to economic shocks that may represent existential threats to other companies in the travel space.
The company’s business model has also contributed to strong fundamentals and an impressive cash position. Airbnb is currently sitting on $11 billion in cash and has just $2.3 billion in debt. Moreover, the firm holds another $6 billion in funds on behalf of those booking accommodation through the app or website. That’s because Airbnb takes payment from guests when they book, but doesn’t distribute that money to hosts until the time of the stay.
In other words, Airbnb has a period whereby it can put customers’ money to use. This differs depending on the macroeconomic circumstances and the rate environment, but in the first half of 2024, the business generated $428 million in interest income. That’s a significant amount of money and a large proportion of overall income.
Airbnb Faces Interest Income Pressure in 2024
During the first half of 2024, Airbnb reported $819 million in net income and $4.9 billion in revenue, inferring that interest income is actually an important part of the overall business picture. However, even under a Trump presidency, interest rates are expected to fall over the medium term, potentially meaning that Airbnb will struggle to generate significant interest income.
Of course, it’s worth considering that falling interest rates globally will likely provide a boost for travel demand as disposable incomes increase. However, as noted, this should be tempered against the likelihood that falling rates will negatively impact net interest income.
Airbnb Is Facing a Backlash
In many parts of the world, Airbnb has been great for local people and communities. It has provided thousands of families and individuals with the opportunity to generate additional revenue or create a business.
However, opposition to Airbnb has been building. In some of the most touristic towns and cities around the world, family dwellings have been converted into short-term lets advertised on Airbnb. The result is the ever-reducing availability of homes for local people.
As a result, local governments are taking action against short-term rentals. Barcelona will implement a ban on such lets in 2028, following similar moves in Spain and New York. Cities like Berlin, London, Santa Monica, Lisbon, Paris, and Florence have imposed restrictions, and partial bans, or are considering stricter regulations.
It’s hard to see how new regulations or stricter enforcement of existing rules wouldn’t negatively impact Airbnb’s growth trajectory. I’d suggest this could be the tip of the iceberg, and that more cities could follow as part of a wider effort to ensure local people have access to affordable housing.
Airbnb’s Unimpressive Growth Trajectory
The aforementioned factors likely contribute to a forecasted earnings trajectory that isn’t overly impressive given the stock’s multiples. According to the current consensus, Airbnb’s earnings are set to rise by 12.7% annually over the medium term (the next three to five years). In turn, this contributes to a price-to-earnings-to-growth (PEG) ratio of 2.63 — a 67.1% premium to the consumer discretionary average.
Despite the company’s strong cash position, this PEG ratio suggests the stock is expensive, especially when we consider that the company doesn’t pay a dividend. This means it could be particularly volatile when it reports its third-quarter earnings on November 7, with all analysts — 28 of them — ominously making downward revisions to their expectations in the last 90 days.
The Q3 forecast is for GAAP earnings per share (EPS) of $2.15 and revenue of $3.72 billion. This would represent 9.4% year-over-year revenue growth, reflecting slowing bookings growth — but a 9.2% fall in EPS.
Is Airbnb Stock a Buy?
On TipRanks, ABNB comes in as a Hold based on eight Buys, 23 Holds, and six Sell ratings assigned by analysts in the past three months. The average ABNB stock price target is $125.83, implying about 8.7% downside potential.
The Bottom Line on Airbnb
The average share price target underlines my concerns about this stock. Growth expectations appear to be more than priced in as indicated by the PEG ratio of 2.63, and it’s worth remembering that there may be some headwinds that will slow growth potential moving forward. In the near term, it’s also concerning to see all analysts making downward revisions to their forecasts. While near-term fortunes can be reversed, momentum is an important factor when investing. For me, it’s not a stock I’d consider investing in.
