The online vacation rental marketplace Airbnb, Inc. (ABNB) does not have much upside remaining  after doubling since its IPO on December 10. The company has gained 22.9% year-to-date and is currently trading 17.1% below its 52-week high of $216.0.

Given the huge damper the pandemic has placed  on the travel industry, stagnating growth and weaker fundamentals could cause the stock to slump further this year unless the company invests more aggressively in customer acquisition.

We think the following factors might cause the stock to underperform in the near term:

Weak Growth Prospects

The coronavirus pandemic has placed unprecedented circumstances before the travel and hospitality industry. In fact, fears surrounding a second strain of the virus could thwart the industry still further and raise serious questions regarding the current  and future survival of many industry participants. Although ABNB has a resilient business model that could help it navigate the pandemic better than its rivals in the industry, its future growth  remains highly uncertain. With a devastating collapse in bookings and rental cancellations, the stock could take a hit in the coming months.

Google’s Entry Presents a Challenge

In its S-1 filing prospectus, ABNB claimed that its SEO results have been adversely affected by the launch of Google Travel and Google Vacation Rental Ads, which have significantly reduced the prominence of the company’s inorganic search results for travel-related terms and placement on Google. This has led to a reduction in visitors to ABNB’s website, thereby preventing it from reaping the full benefits of internet traffic. This could be an important  challenge for the company in the near future.

Weakening Financials

ABNB’s revenue declined 18% year-over-year to $1.34 billion for the third quarter ended September 30, 2020. The company reported a net loss of $696.87 million and free cash outflow of $520.1 million for the nine-months ended September 30, 2020. Moreover, it reported an adjusted EBITDA of negative $230.2 million over this period. This can be attributed to   COVID-19 headwinds and its impact on the travel industry. ABNB’s lower-than-anticipated revenue, higher-than-anticipated operating expenses, and unfavorable changes in working capital could hinder the company’s ability to reverse the recent negative trend in its adjusted EBITDA and free cash flow.

Weak Fundamentals

Even though ABNB has generated significant profit from its operations, as indicated by its gross margin of 73.5%, the company’s negative EBIT margin and net income margin compare unfavorably with respective industry averages. In fact, ABNB’s cash from operations in the trailing 12 months is much lower than the sector average of $188.73 million.

Unfavorable Analyst Sentiment

Analysts expect ABNB to hit $156.31 soon, indicating a potential downside of 13.4%. The stock has an average broker rating of 1.8. Of 26 Wall Street analysts that cover the stock, only five  rated it a Strong Buy.

POWR Ratings Indicate Potential Downside

ABNB has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different elements . Of these elements , ABNB has a Growth Grade of C. This is consistent with its weak earnings growth potential.

In addition, ABNB has a grade of D for Value and Momentum, reflecting the stock’s relative overvaluation and weak price performance. ABNB’s forward price-to-book of 17.68x is 401% higher than the industry average of 3.53x.

In the 23-stock Travel – Hotels/Resorts industry, it is ranked #15.

To see additional POWR Ratings for Stability, Sentiment, and Quality for ABNB, Click here.

If you are looking for a better stock in the Travel – Hotels/Resorts industry, with an Overall POWR Rating of Buy, you can access it here.

Bottom Line

While ABNB has made some key strategic decisions that have helped  it fare better than its competitors, some notable headwinds, such as the coronavirus pandemic, plummeting rental bookings, and losses in revenue and earnings, may  heavily influence its future growth potential. However, we believe the company’s resilient and capital-efficient business model could help it increase its market share in the long run.

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ABNB shares were trading at $185.58 per share on Wednesday afternoon, up $6.41 (+3.58%). Year-to-date, ABNB has gained 26.42%, versus a 2.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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