With the COVID-19 crisis fading into the rearview mirror, Airbnb (NASDAQ:ABNB) should blossom. However, as social normalization trends accelerate, the home-rental platform may encounter significant competition. As safety concerns flash across headlines, ABNB stock may tumble as it may no longer symbolize a viable lodging alternative, making me bearish on the underlying enterprise.
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A Background on the Potential and Pitfall of ABNB Stock
Fundamentally, the pessimistic view on ABNB stock does not negate the brilliance that emanates from Airbnb. Much like Uber Technologies (NYSE:UBER), Airbnb empowers property owners to make economic use of “dead” space. On the other end of the equation, property renters can get a great deal on lodging services. Again, just like Uber, the sharing economy enables two parties to meet each other’s needs by cutting out the middlemen.
In some ways, then, ABNB stock symbolizes the decentralization of travel. Rather than submitting to the hegemony of centralized authorities (i.e. established hoteliers), travelers can directly conduct business with individual lodging providers. Like any decentralized protocol, it’s all fun and games until something goes awry.
Unfortunately, too many people learn the hard way that decentralization’s boomerang effect is deregulation – and thus, a lack of recourse when trouble hits the proverbial fan. Therefore, it’s the eventual regulation (and the competition that this engenders) that makes ABNB stock questionable.
The Trade-Down Effect May Soon Not Benefit Airbnb
Logically, most consumer-oriented businesses that compete on price understand the trade-down effect. Basically, this concept states that when faced with financial pressures (or a motivation to curb spending), consumers will trade down to alternative products or services until they reach an acceptable equilibrium between cost and quality. For years, ABNB stock benefited from the trade-down effect, with Airbnb allowing patrons to get more for less.
However, the trade-off for this arrangement sometimes resulted in less-than-professional experiences. For example, various publications cited users’ complaints about bedbugs, property being stolen, and lack of toilet etiquette. To be fair, shoddy hotels can have the same problem as well.
However, the worrisome point for ABNB stock is this: for Airbnb customers to enjoy a more professional experience, they usually must pay more. However, as society normalizes from the COVID-19 pandemic, the price point between a reputable hotel and an Airbnb-facilitated unit may steadily get closer to parity.
In addition, ABNB stock may suffer from the extremes of its services’ nightmare stays. Without getting into too many details, The Guardian reported on a story where a woman was assaulted in an Airbnb-advertised apartment. Essentially, the attacker gained entry via duplicate keys – a clear vulnerability and safety protocol risk.
To be clear, most Airbnb experiences suffer no criminal activities. However, various jurisdictions may see severe issues with largely unregulated home rental services, especially if more such incidents arise. Therefore, regulated, professional competition will be coming for ABNB stock, whether the underlying company likes it or not.
Airbnb May be More Overvalued Than You Think
Financially, ABNB stock has benefited from a robust balance sheet. Notably, its cash-to-debt ratio stands at 4.11 times, outpacing 77.21% of companies listed in the travel and leisure industry. Also, Airbnb enjoys strong operational stats, such as a three-year revenue growth rate of 20.5% and an excellent trailing-year net margin of 22.5%.
However, a glaring challenge for ABNB stock centers on its valuation. Presently, the market prices shares at a trailing earnings multiple of 40.2, which ranks higher than 76.5% of its peers. Further, ABNB trades at a forward earnings multiple of 31.3, ranking higher than 80.6% of sector rivals.
Frankly, ABNB stock could be even more overvalued because its projected earnings might not be including the regulatory challenges that it might face. Thankfully, horror stories are few and far between. Still, as violent road rage and air rage incidents attest, many people apparently suffered mental health challenges during the pandemic. Therefore, unsavory incidents may increase, putting Airbnb further at risk.
Is ABNB Stock a Buy, According to Analysts?
Turning to Wall Street, ABNB stock has a Moderate Buy consensus rating based on 15 Buys, 14 Holds, and three Sell ratings. The average ABNB stock price target is $142.07, implying 26.4% upside potential.
The Takeaway: ABNB Stock Has Become Too Successful
To summarize the narrative for ABNB stock, the underlying business may have become too successful. With more people on the platform comes a mathematically higher risk of problems arising. As the most macabre of these issues become headline news, customers may think twice about using Airbnb.
