Down 49% in This Bear Market, Can Airbnb Recover in 2023?

What happened

Shares of short-term-rental platform Airbnb (ABNB 0.92%) have fallen approximately 49% since the start of the bear market last January, according to data from S&P Global Market Intelligence. That’s more than double the 17.5% loss the S&P 500 posted over that same time period, making 2022 a painful year for Airbnb shareholders. 

The company has put in a strong recovery since the slow end of the COVID-19 pandemic around the world, posting strong financial results throughout 2022. However, there are some looming concerns that might have investors spooked as we move through 2023.

So what

Global pandemics are not optimal operating environments for travel platforms like Airbnb. 2020 and early 2021 were tough periods for the company, when demand for rental properties on its platform ground to a halt around the world. Luckily for the company, executives were able to secure financing during the beginning of the pandemic and eventually take advantage of the late 2020 bull market, raising money in a record-setting initial public offering (IPO).

Now, Airbnb has close to $10 billion in cash on its balance sheet, with its business firing on all cylinders. Last quarter, revenue grew 36% year over year in constant currency to $2.9 billion, which was on top of 64% growth a year prior. Any headwinds from the pandemic have now subsided, and with the rise of remote work around the globe, Airbnb may actually have become a long-term beneficiary from the cultural changes that arose from the COVID-19 lockdowns.

With this strong recovery in revenue, net income has soared as well. Over the past 12 months, Airbnb’s net income was $1.63 billion, giving the stock a price-to-earnings ratio (P/E) of 34 at current prices. 

Now what

So why are investors selling their shares in Airbnb if the business is doing so well? Because smart investors don’t focus on the past, but on what could happen in the future. 

I think Airbnb could run into some headwinds in 2023 if its average daily rates (ADRs) decline back to pre-pandemic levels. The ADR is a metric that measures what the average night on Airbnb costs around the globe. Before the pandemic, ADRs had been stable for Airbnb at around the $120 range, give or take. But by Q3 2021, the ADR was up 33% from 2019 to $149 and hit $155 last quarter. If ADRs revert back to their long-term average in 2023 with inflation rolling over, rising interest rates, and a potential global recession, Airbnb’s revenue growth could slow down as well. This might not be a big deal for long-term investors, but it could affect the stock in 2023.