Airbnb (ABNB 0.76%) was one of the hottest IPOs in the 2020 to 2021 bull market bonanza. Its valuation roared past $100 billion following its public debut in late 2020 as investors couldn't wait to get their hands on newly minted shares of the famous Silicon Valley start-up.

But now, two years later, the company has sunk along with the rest of the technology sector with shares down 46% year to date. Investors are pessimistic about its growth potential with weakening work-from-anywhere tailwinds and a slumping housing market.

However, for long-term investors, this short-term pessimism could provide a buying opportunity. Should you buy or sell Airbnb in 2023? Let's take a look. 

The good: Strong growth, competitive position

After emerging from the pandemic lockdowns intact, Airbnb has done nothing but grow over the past two years. Last quarter, the service grew nights and experiences booked on its platform 25% year over year to 99.7 million. Revenue grew even faster in the quarter, up 29% year over year to $2.9 billion (or 36% when excluding foreign-exchange headwinds).

With high incremental margins, this has led to fantastic profits for the company. Last quarter, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins were 51%. Over the last 12 months, Airbnb generated net income of $1.6 billion. Clearly, things are humming along just fine in the short-term rental market right now.

Airbnb has done well for a few reasons. But one that might be the most important is how little competition the platform has. Yes, there are hotels in every city around the world and smaller rental platforms like VRBO (owned by Expedia), but the majority of the new "live anywhere" and home-sharing market is run through Airbnb.

With such a strong, competitive position, it's no wonder that the company is able to grow at solid double-digit rates while also generating extremely high profit margins.

The bad: A flood of supply could impact daily rates

Things looked great for Airbnb in 2022, but there are some looming concerns that the short-term rental market may be headed for a downturn. For one, there have been numerous anecdotes that demand has dried up on the platform in certain U.S. markets, which is driving down what hosts can charge guests.

With extremely low mortgage rates in 2020 and 2021, many people took out cheap loans to buy properties to rent out on Airbnb. Now, with interest rates soaring and housing prices dropping, this flood of supply is finding it hard to book guests without offering huge discounts.

If this becomes a widespread issue, Airbnb's average daily rate on its nights booked could decline in 2023. This number was $156 last quarter, up significantly from $128 in the fourth quarter of 2020.

I have no doubt Airbnb can grow the nights and experiences booked through its platform in 2023 and 2024, but if average daily rates fall due to an oversupply and rising mortgage rates, revenue growth will suffer. For example, if nights and experiences booked were flat in 2023, revenue would decline 18% for the year if average daily rates went back to where they were two years ago.

As of this writing, Airbnb trades at a market cap of $57 billion. Compared to its trailing net income, that gives the stock a price-to-earnings ratio (P/E) of 38, which is well above the market average. If this bear case materializes and earnings stagnate or go down in 2023 and 2024, this P/E ratio could look even worse a few quarters from now.

Airbnb is a high-quality business. But at an elevated earnings ratio and with potential headwinds developing over the next few years, I think investors should avoid the stock in 2023 unless the price drops significantly lower than where it is today.