What happened
Shares of Airbnb (ABNB +2.71%) dropped 16.3% in December, according to data provided by S&P Global Market Intelligence. The decline steadily followed the 6% drop of the S&P 500 with one glaring exception: The stock dropped more when a prominent analyst issued a rare sell recommendation. Let's focus on that.
So what
On Dec. 6, Morgan Stanley analyst Brian Nowak downgraded the outlook for Airbnb stock to underperform from equal weight, according to The Fly -- these terms are akin to sell and hold, respectively.
To fully appreciate how counter this is to the narrative, consider that TipRanks is tracking 24 analysts when it comes to Airbnb. Of these 24, only two recommend selling Airbnb stock, of which Nowak is one.
NASDAQ: ABNB
Key Data Points
Nowak's bearishness stems from the supply of spaces on the Airbnb platform. Third-party data shows there are 6.2 million active listings on the platform, which is a big number. Therefore, the analyst believes it will be hard to grow future supply as quickly as it's grown in the past. And that will lead to lower bookings growth -- at least that's the reasoning for the underperform rating.
To Nowak's point, nearly everything Airbnb management has done in recent years is focused on growing supply, highlighting the importance of this issue. Here are some examples: Consider that about 90% of people who stay at an Airbnb make the decision without seeing an ad. That's why when Airbnb launched its first ad campaign in five years in 2021, it was geared at recruiting new hosts, not guests.
Other recent moves from Airbnb include partnering with apartment complex landlords to pre-approve spaces for hosting on Airbnb. And it's also just released updates -- like it does a couple of times every year -- to give hosts more tools to stand out, in hopes of improving recruitment and retention.
Clearly, growing its host community is a priority for Airbnb's business. So Nowak's concern isn't without merit.
Now what
I'd argue that Airbnb stock is trading at levels that adequately account for risk. As of this writing, its market capitalization is $54 billion. And it's generated $3.3 billion in free cash flow over the past 12 months, thanks to the operating leverage inherent in its business model. This price-to-free-cash-flow ratio is reasonable and the cheapest the stock has ever been.
ABNB Price to Free Cash Flow data by YCharts
Moreover, I'd be hesitant to draw any rash conclusions regarding future supply on Airbnb's platform because these things can adjust in hard-to-predict ways. For example, constrained supply could send the average daily rate (the price you pay per night) soaring, boosting profits for hosts. And more profitable hosts could reaccelerate interest in hosting.
All businesses are prone to ups and downs and Airbnb is no exception. No one knows exactly what 2023 holds. However, now is a great time to consider a position in Airbnb stock, in my opinion.
