What happened
Shares of Airbnb (ABNB 1.91%) finished lower today than Morgan Stanley downgraded the stock and due to a sell-off for fear of a recession.
The stock closed down 5.5%.
So what
Morgan Stanley analyst Brian Nowak lowered his rating from an equal weighting to an underweight in home-sharing stocks as he expected limited supply growth for the company.
Nowak noted that supply growth, or available listings, is a key driver of Airbnb’s business, as it needs both new supply and new demand to grow revenue. .
He estimates that the company currently has 6.2 million listings and 1.1 billion available room nights per year and noted that listings have grown 12% per year over the past four years. Over the next three years, he expects that growth rate to slow to just 7% due to the “law of large numbers,” making it harder for a company to maintain the same growth rate at as it grows.
Nowak reduced his price target on Airbnb from $110 to $80.
Now what
Nowak argues that Airbnb needs adequate supply growth to increase bookings, which have an annual capacity of $150 billion to $200 billion based on its estimate of the total number of room nights available, but Airbnb benefits also a feedback loop. If supply lags behind demand growth, prices are likely to rise, which will encourage new supply to come to market.
At the same time, the company also appears to be looking for new ways to expand its room offering. The company has announced a new service that helps renters find an apartment they can use to earn money hosting. It has partnered with a number of apartment owners who own more than 175 buildings in more than 25 cities to help tenants with housing and bring new offers.
Investors should keep an eye on the growth in available listings, but even with these headwinds, Airbnb shares are looking cheap right now at a price/earnings ratio ratio of only 40. Considering its growth potential, this looks like an excellent entry price.
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