The Federal Reserve is the central bank of the U.S. The institution is tasked with a twin mandate: Keep unemployment low and keep inflation under control. Progress on the first goal of lowering unemployment is going well. Businesses report they have too many jobs open and not enough people to fill them.
Keeping inflation under control is the more pressing issue. Supply chain disruptions worldwide caused by the pandemic raise prices on everything from fuel to wages. To contain price increases from getting out of control, the Federal Reserve is expected to raise interest rates.
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How will that limit inflation? When interest rates rise, it is more expensive for people to buy items that require financing, like homes and cars. As financing becomes more costly, people buy fewer cars and houses than they otherwise would at lower interest rates. The decrease in demand causes firms to offer competitive prices to secure sales. The ensuing ripple effects go to tame inflation in the economy. That said, a rise in interest rates has the potential to increase profits at Airbnb (ABNB 2.77%). Here's how.
Airbnb has billions in cash on hand
Airbnb is a worldwide travel facilitator with an asset-light business model. The company does not own or operate any travel destinations listed on its platform. Instead, it merely brings together a host and a traveler and takes a percentage of each transaction. Notably, that means it does not need to borrow money to build expensive hotels and resorts to support revenue growth. So it will not be negatively affected by rising rates.
On the contrary, because it stands as a middleman between host and guest, it often holds cash for several months on behalf of hosts when a guest makes a reservation. Indeed, as of Dec. 31, it had $3.7 billion in funds held on behalf of customers. The figure was as high as $6.3 billion during the peak travel booking season. With rising interest rates, Airbnb can earn more on that money deposited in a secure short-term investment like a certificate of deposit or commercial paper.
Moreover, as of Dec. 31, Airbnb had $8.3 billion in cash on its balance sheet. As interest rates rise, Airbnb can earn more on these funds. In contrast, Airbnb had $2 billion in long-term debt at that same time.
In the fourth quarter ended Dec. 31, Airbnb earned an interest income of $3.8 million and incurred an interest expense of $2.5 million. The higher rates could boost Airbnb's interest income in 2022. It could be a meaningful effect on a company that earned $54.5 million in net income in Q4.
What this could mean for Airbnb investors
The potential boost in profits resulting from higher rates is not reason enough to buy Airbnb stock. That said, Airbnb is trading at near its lowest price to free cash flow in its brief history as a public company. And with worldwide travel recovering, it has excellent prospects in the future. For all of those reasons, it's an ideal time to consider adding Airbnb stock to your portfolio.
