Airbnb’s Stock Joined the S&P 500 Index. Should You Buy?

Despite all its regulatory problems, Airbnb’s stock just joined the S&P 500 index. But it’s not really time to buy this slightly overvalued stock, Morningstar believes.

Yan Barcelo 31 October, 2023 | 1:08AM
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Airbnb

When Airbnb (ABNB) stock’s listing on the S&P 500 was announced in early September, “the stock jumped by 8%,” says Dan Wasiolek, Senior equity analyst at Morningstar. This is because adding a stock to a major index gets more attention on it since ETFs and mutual funds that follow the index are required to buy shares, explains the analyst, who also warns: “Much of the buying has already occurred.”

Business is Still Thriving for Airbnb

Compared to the second quarter of 2019, nights booked on the app have increased by 37% in the second quarter of 2023, Wasiolek reports. Of course, in the period between 2019 and today, bookings cratered. During the COVID pandemic, bookings fell by 41%, but rose again by 56% in 2021, and again by 31% in 2022. “Year-over-year, bookings are up by 11%,” the analyst adds, noting that numbers indicate a deceleration of growth.

In Q2 2023, the average daily rate has increased by142% over 2019. During that same period, the average daily rate of a hotel room has increased by 118%. Result: Airbnb’s average price stands slightly above hotels’: US$ 166 compared to US$ 160.

That’s quite surprising, given Airbnb’s image. “Historically, it was supposed to be the cheaper option, a communal platform, Wasiolek recalls. It’s not as much the case anymore.” Indeed, any search on Airbnb’s web site will now present luxury condos and manors at $1,000 a night alongside humbler dwellings at $100 a night.

Will Airbnb Become a One-Stop-Shop of Leisure Travel?

“The model is evolving,” agrees Daneshvar Rohinton, portfolio manager of the Global Dividend fund at IA Global Asset Management. “Airbnb came out of the sharing economy, where dwellings were swapped between travelers. Like Uber and Instacart, Airbnb is a broker that facilitates those exchanges.” And the model is definitely successful: the company “is on track to make US$ 10 billion in revenue in 2023 with profits in the US$ 2.8 billion range. It’s a very profitable business for what they do.”

Airbnb seems eager to reconnect with its roots, Rohinton notes. It is highlighting on its site a “Rooms” menu where travelers can look for single rooms at modest prices around $80. But that category is also in direct competition with hotels and Rohinton is convinced that “in the next five years, Airbnb will increasingly penetrate the hotel business”.

Its current competition is Expedia (EXPE) and Booking Holdings (BKNG). Rohinton thinks Airbnb is set to overtake them to become a one-stop-shop of leisure travel, booking flights, hotels, and “experiences,” all on “one itinerary and one big bill.”

Jacques Nantel, emeritus professor of marketing at HEC Montreal, does not agree with Rohinton. “Airbnb could become a sort of Amazon of leisure travel, but I’d be surprised if they absorbed Expedia and others, he says. These are two very different models. Expedia and Trivago manage structured offers from a relatively small number of actors; Airbnb’s market is scattered among millions of players.”

More a Consumer Than a Tech Stock

Because of its online presence, Airbnb has been associated with the technology sector, Rohinton notes and that partly explains why the stock was punished in 2022. But it is more a consumer discretionary stock – though the distinction did not much help it. “Consumer and tech stocks have tended to move together because Tesla and Amazon make up 50% of the consumer index,” Rohinton explains. 

On the one hand, rising rates hit the tech sector because of its high valuations, but at the same time, those rate increases signaled that central banks wanted to weaken the economy, which would eventually hurt travel and leisure. “While tech stocks fell by 34% and consumer discretionary stocks, by 38%, Airbnb’s plummeted by 52%,” Rohinton says.

Airbnb and The Housing Issue

Airbnb is facing regulatory headwinds where cities and governments deal with housing inventory pressures. In Canada, for example, this summer, the Quebec and British Columbia governments issued new laws and regulations restricting short term rentals. In America, New York City has cracked down on the sector and caused listings to fall from 40 000 dwellings down to about 10 000. “That has cut Airbnb’s supply by 75%,” Wasiolek points out in a market that represents 1% of Airbnb’s revenues, the company claims.

At a time when Canada and many other countries suffer from excessive housing shortages, many claim that Airbnb is contributing to the problem by taking away housing capacity. By how much?

Inside Airbnb presents itself as a “data activist project” that analyses Airbnb listings in light of the housing crisis. Its president, Murray Cox, told us via email that dwellings reserved for short term rentals at Airbnb total 139,547 units Canada-wide, excluding rooms and shared rooms.

On the other hand, in 2021, Jean-Francois Perrault, chief economist and 1st vice-president at National Bank of Canada who did a study of the housing crisis in Canada, estimated that the country was lacking about 1.8 million units. Bringing both numbers together indicates that Airbnb probably locks up  about 7.7% of the total number of houses and apartments needed in Canada. That’s not an insignificant number.

However, if we link Inside Airbnb’s reading to the Canada Mortgage & Housing Corporation’s estimate of a 3.52 million shortage of homes, then Airbnb’s share dwindles down to 3.96%.

Should You Buy Airbnb Stock Right Now?

For the time being, the regulatory push doesn’t seem to be slowing down Airbnb. In an email exchange with the company, Airbnb boasted that “in Q2 2023, active listings grew 19% year-over-year, with strong growth across all regions, market types and price points. In fact, we added more net active listings than in any previous quarter in Airbnb’s history.”

Murray Cox thinks that increasing regulation “is a long term trend that will in time impact Airbnb.” Wasiolek thinks that Airbnb is safe: “We think that regulation is not a renewed global issue,” he says.

Meanwhile, the company is riding high, and its stock at US$ 126 is probably a nice opportunity, considering that Wasiolek, by mid-September, established its fair value at US$ 132. But note that at that moment the stock stood at US$ 143.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Airbnb Inc Ordinary Shares - Class A146.65 USD-0.24Rating
Booking Holdings Inc3,741.18 USD-1.29Rating
Expedia Group Inc110.28 USD0.15Rating

About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, Yan writes for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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