Despite Expectations for a Pullback in Leisure Travel, Airbnb's Stock Slumps After a Downgrade From Keybanc

KeyBanc, on Tuesday, lowered its rating on Airbnb Inc.'s stock, citing expectations of a slowdown in leisure travel following a robust recovery from the peak pandemic period. This is expected to put pressure on two vital performance metrics for the vacation rental platform.

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The downgrade led to a premarket decline of 2.8% in Airbnb's stock (ABNB).

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Analysts, led by Justin Patterson, downgraded the stock from "overweight" (equivalent to a buy) to "sector weight." They expressed concerns about two key metrics: room nights and experiences (RNE) and average daily rates (ADR).

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The analysts noted that Airbnb had enjoyed a prolonged period of ADR strength, mainly due to delayed recoveries in various regions and urban markets. However, they anticipate a reversal of this trend, as consumer spending on services is surpassing that on goods.

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KeyBanc expects Airbnb's near-term earnings to fall below Street expectations, particularly starting in the fourth quarter. Consensus estimates suggest an approximately 11% decline in RNE from the third quarter, compared to pre-COVID norms of 12% to 13%. Additionally, they highlighted the impact of restrictions in New York City, which implemented Local Law 18 on September 5, imposing strict regulations on short-term rentals.

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Under this law, Airbnb hosts are only allowed to rent homes if the owner is present, and no more than two guests are permitted at a time. The city argued that Airbnb listings were exacerbating housing shortages and increasing rents, while Airbnb contended that the city was bowing to hotel industry lobbyists and limiting affordable accommodation options for visitors.

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KeyBanc believes that Airbnb may experience a deceleration in RNE growth towards the end of the year, making the Street's forecasts for 14% annual growth through 2025 appear too optimistic.

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The bank also suggested that Airbnb's profit margins have likely peaked after significant expansion over the past three years. Given new investment requirements, it's more likely that Airbnb's margins will remain flat or slightly lower in 2024 rather than trending upward.

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As a result of these concerns, KeyBanc reduced its EBITDA (earnings before interest, taxes, depreciation, and amortization) forecasts for 2023, 2024, and 2025 by 1%, 8%, and 5%, respectively, to account for more modest booking growth. They now expect EBITDA of $3.5 billion for 2023, $3.8 billion for 2024, and $4.4 billion for 2025, corresponding to RNE growth rates of 14%, 13%, and 12%, respectively.

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The analysts indicated a fair value of $138 for Airbnb based on their lowered EBITDA forecast, while the stock closed at $136.56 on Monday.

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However, KeyBanc noted that its downgrade could be proven wrong if Airbnb demonstrates countercyclical behavior, if ADRs remain resilient, if new services gain traction more quickly than anticipated, or if Airbnb implements more aggressive cost-cutting measures.

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As of the year-to-date, Airbnb's stock has gained 60%, while the S&P 500 index has seen an 11.7% increase.

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