Down 49% in this bear market, can Airbnb bounce back in 2023?

What happened

Actions of the 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. S&P 500 released in the same time period, making 2022 a painful year for Airbnb shareholders.

The company has made a strong recovery from the slow end of the global COVID-19 pandemic, posting strong financial results throughout 2022. However, there are some concerns that could spook investors as we move through 2023.

So what

Global pandemics are not the optimal operating environment for travel platforms like Airbnb. 2020 and early 2021 were difficult periods for the company, when demand for rental properties on its platform stopped worldwide. Fortunately for the company, executives were able to secure financing during the onset of the pandemic and eventually take advantage of the bull market in late 2020, raising money in a record initial public offering (IPO).

Now, Airbnb has close to $10 billion in cash on its balance sheet, and its business is firing on all cylinders. In the latest quarter, revenue rose 36% year-over-year in constant currency to $2.9 billion, above growth of 64% a year earlier. Any headwinds from the pandemic have now died down, and with the rise of remote work around the world, Airbnb may have become a long-term beneficiary of the cultural changes resulting from the COVID-19 shutdowns.

With this strong revenue recovery, net income also jumped. Over the past 12 months, Airbnb’s net income was $1.63 billion, giving the stock a price-to-earnings (P/E) ratio 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 might happen in the future.

I think Airbnb could run into some trouble in 2023 if its average daily rates (ADRs) drop to pre-pandemic levels. ADR is a metric that measures how much an average night on Airbnb costs worldwide. Before the pandemic, ADRs were stable for Airbnb in the range of around $120. But by the third quarter of 2021, ADR rose 33% from 2019 to $149 and reached $155 in the last quarter. If ADRs return to their long-term average in 2023 as inflation moves in, rising interest rates and a potential global recession, Airbnb’s revenue growth could also slow. This may not be a big deal for long-term investors, but it could affect stocks in 2023.

Brett Shafer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Airbnb. The Motley Fool has a disclosure policy.

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