The market does not seem to have been as overjoyed by the recent results from Airbnb Inc (NASDAQ:ABNB) as you might have thought. The post-IPO glow seems to be wearing off with many investors.
Airbnb stock dropped 9% yesterday in US trading. After hours it was testing the $180 level and was at $182 approaching the open in the US. You might be forgiven for thinking Airbnb might be looking forwards with shiny confidence to the end of the pandemic and the reopening of global tourism, but there are some other clouds on the horizon for the stock.
Airbnb results beat expectations
Yesterday’s results beat expectations and showed that the vacation rentals segment can be resilient, even with a global pandemic raging. Investors are also expecting that home rentals will power any broader recovery in lodgings in 2021. Analysts are anticipating more competition for Airbnb however, as companies like Expedia and Booking Holdings get in on the game.
“The strength of Airbnb’s brand means the platform can acquire more customers directly, rather than through expensive channels like Google’s paid ads,” notes Dan Thomas, an analyst with Third Bridge. “This gives Airbnb a competitive advantage over Booking and Expedia, both of whom use paid ads to a much higher degree. How that mix of direct vs paid traffic evolves as Airbnb scales will be incredibly important to their overall gross margin story.”
Thomas says that vacation rentals will be the first part of the hotel and lodgings category to recover in 2021 and the full home vacation rental space is already warming up.
A date for your diary
On the 21st of October, Stuart Fieldhouse will be joining Sarah Lowther and Mark Watson-Mitchell to discuss which small cap investments they like the look of and, perhaps, which ones they do not. It promises to be a lively and insightful discussion. If you are interested in investing in small cap stocks then this could be a profitable use of your time. We hope you can make it! Sign up now
Airbnb looks well positioned in this respect, which is why the market is still trying to make its mind up. However, there is another potential threat to the whole business model which is going to eat into profit margins and that is regulation.
Regulatory threat is potent risk for Airbnb
It has become increasingly evident to us that many commercial providers including many new hotel start ups are using Airbnb to slip through the regulatory and licensing lines that are put there to regulate the leisure sector in many European countries. Politicians are also becoming concerned that too much property is now being used by landlords for lucrative Airbnb lettings while thousands are still sleeping on the streets. Beyond this, local municipalities are also becoming concerned that a bigger slice of the leisure accommodation sector is not subject to their taxes.
It all adds up to a heady cocktail of new hoops landlords will have to jump through as the market opens up. We are already seeing this in the UK, where the Scottish government has withdrawn a scheme that would have given local councils the power to require anyone advertising their home on Airbnb to apply for a license. This would have brought with it planning permission and health and safety requirements and inspections.
This has not gone away and we are sure the Scottish government, like authorities elsewhere, will be back for more. It will be tough for Airbnb to lobby its way out of this morass, as these initiatives are taking place at a local level. Another good example is New Zealand, which is currently free of the virus, and where hotels, which are regulated, are calling on local authorities to bring in regulations that will cover Airbnb lettings.
“Regulation is a key risk for Airbnb, and any move to limit the availability of vacation rentals could significantly curtail the earning power of each listing,” observes Thomas at Third Bridge.
Airbnb has been a global phenomenon, and the market has supported it since its IPO, with the stock on a good run up to a high of $219, but now the momentum seems to be downwards.