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Shares of Airbnb (ABNB -3.94%) finished lower today as Morgan Stanley downgraded the stock and due to a broader sell-off on fears of a recession.
The stock closed down 5.5%.
Morgan Stanley analyst Brian Nowak lowered his rating from equal weight to underweight on the home-sharing stock as he foresaw constrained supply growth for the company.
Nowak noted that supply growth, or available listings, are a key driver of Airbnb’s business as it needs both new supply and demand to grow revenue.
He estimates the company currently has 6.2 million listings and 1.1 billion annual available room nights and noted that listings have grown by 12% annually over the last four years. Over the next three years, he expects that growth rate to slow to just 7% due to the “law of large numbers,” which makes it harder for a company to maintain the same growth rate as it gets bigger.
Nowak chopped his price target on Airbnb from $110 to $80.
Nowak makes a good point in that Airbnb needs adequate supply growth in order to grow bookings, which have an annual capacity of $150 billion to $200 billion based on his estimate of total available room nights, but Airbnb also benefits from a feedback loop. If supply lags demand growth, prices are likely to increase, which will encourage new supply to come onto the market.
At the same time, the company also seems to be looking for new ways to beef up its room supply. The company announced a new service where it helps renters find an apartment they can use to make money by hosting. It’s partnered with a number of apartment landlords that own more than 175 buildings in over 25 cities to help renters host and bring on new supply.
Investors should keep an eye on the growth of available listings, but even with those headwinds, Airbnb stock looks cheap right now at a price-to-earnings ratio of just 40. Considering its growth potential, that looks like a great entry price.
Jeremy Bowman has positions in Airbnb. The Motley Fool has positions in and recommends Airbnb. The Motley Fool has a disclosure policy.
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