Short-term rental platform Airbnb (ABNB -0.97%) enjoyed a record-breaking year in 2022, reaching high-water marks for full-year revenue at $8.4 billion and net income at $1.9 billion. And underpinning these strong results was a 900,000 increase in listings on the platform.

Airbnb's management is emphasizing supply growth like this but it may leave some investors to wonder whether the market can support this increased supply. However, for those wondering, there's one encouraging metric that suggests the number of listings on Airbnb is just right.

A key metric for Airbnb

As a refresher on the business model, Airbnb's listings are supplied by independent hosts -- anyone can put a space up on the platform and set their price. When travelers book through Airbnb, the company takes a percentage as its revenue.

Airbnb tracks a metric called average daily rate (ADR), or the average cost to stay a night at a property. In the fourth quarter of 2022, Airbnb's ADR was $153, which was down just 1% year over year. However, the drop was due to fluctuations in foreign exchange rates.

Consider that only 50% of Airbnb's revenue came from North America in 2022, down from 54% in 2021. Therefore, foreign exchange is playing a bigger role in this travel-and-tourism company's financial results as it expands internationally.

Adjusted for currency fluctuations, Airbnb's ADR was up 5% year over year in Q4. Now, whether you want to adjust these numbers or leave them as is, the end result is the same: Airbnb's ADR changed little in Q4.

ADR is a good barometer for the balance of supply and demand on Airbnb's platform. Operating a short-term rental property has high fixed costs, such as the loan repayment schedule. Therefore, if listings don't receive bookings, many hosts would prefer to lower prices as necessary to generate enough revenue to cover fixed expenses. 

Airbnb ended 2022 with 6.6 million active global listings. And yet, its ADR changed little in Q4 despite the addition of 900,000 listings. This suggests that supply is going up in line with demand from travelers.

The tailwind no one talks about

In the fourth quarter of 2020, Airbnb's ADR was $128. Now consider that there were nearly 400 million nights and experiences booked on the platform during 2022. An ADR difference of just $25 over two years may look insignificant. But extrapolated over hundreds of millions of bookings, this ADR increase has been an enormous tailwind to Airbnb's business since going public.

If Airbnb's platform were to become oversaturated with properties, this tailwind could become a headwind. If hosts were forced to lower their prices to stimulate demand, Airbnb's revenue could drop -- not good for a growth stock like this. That's why ADR is such a big deal. You want to see supply growth. But you want it to follow growth in overall demand.

In 2023, Airbnb's management is expecting ADR to fall a little. But as CFO David Stephenson said, "We're not anticipating a significant decrease."

Airbnb is rolling out new tools that will increase price visibility for guests and allow hosts to make sure they're competitive on price. For management, it's important to make sure the value proposition of the platform is still there for travelers. This will naturally be a headwind for ADR. However, it's encouraging to note that it's not expected to drop much.

The stability of Airbnb's ADR as it scales is encouraging. It suggests that the number of listings on the platform is just about right. That's a strong foundation to stand on as it continues to grow, which should be encouraging for shareholders.