The decision to buy, hold, or sell a stock can prove difficult. No one has a crystal ball, and taking losses or missing out on further gains isn't pleasant. But it's important to have a process in place, which involves periodically examining a company.
Airbnb's (ABNB 1.17%) stock made quite a splash when it debuted in December 2020. But those who have held on have lost money. With that in mind, it's a good time to delve into Aribnb's fundamentals and assess its future.
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Strong results
Airbnb remains a popular site, continuing to post strong growth. In the most recent quarter, its nights and experience booked and booking value rose by 19% versus a year ago.
That led to strong revenue growth. First-quarter revenue increased to $1.8 billion, a 24% rise after excluding foreign currency effects.
Travel demand remained strong, although prices were flat to up slightly. The overall average daily rate (ADR) rose by 3% on a constant-currency basis.
Potential economic headwinds
Amid this good news, potential issues are lurking. Foremost is a potential recession on the horizon.
The Federal Reserve has sharply increased interest rates, and many economists expect this will lead to an economic slowdown by the end of this year.
With certain banks already having trouble, lenders have tightened borrowing standards, and curtailed lending could exacerbate the economic situation.
What does this mean for Airbnb? If a recession occurs, people will likely curb discretionary spending, including on travel. That will probably translate into lower revenue for the platform. Granted, the start of the pandemic was an extraordinary event, but its 2020 top line fell by about 30%.
There has already been some customer pushback on prices. Management plans to take steps to counter this, and it has launched Airbnb Rooms (rentals of spare rooms in a host's home rather than the entire dwelling), lowered fees on longer-term stays, and increased price transparency.
Airbnb's high valuation
Airbnb's stock still sells at a high valuation, which means investors still expect its lofty growth to continue.
Its trailing price-to-earnings (P/E) ratio is over 35. While below the P/E of 50 from earlier this year, it remains high when compared to the overall market. For example, the S&P 500 has a P/E of 24.
If Airbnb maintains its growth, it may justify the higher earnings multiple. But with a potential economic slowdown on the near horizon, that seems like a risky bet. That's especially true since no one really knows what the length or severity of the slump might be.
Remember that the market can hit growth stocks hard when expectations aren't met. For instance, in 2022, the Russell 3000 Growth Index lost 29.6%, nearly three times the 10% drop in the Russell 3000 Value Index.
I would sell Airbnb shares to take advantage of the high prices before the economy gets worse and other investors unload their shares.
