As retail investing continues to gain momentum, thanks in large part to meme stocks, social media, and no-fee brokerages, more people are participating in the markets. While this is a good thing overall, novice investors should be aware of the risks that come with different strategies.
One of the riskier things you can do is short a stock. In simple terms, shorting means that you have a bearish outlook on a particular company and want to profit off any decline in the stock price. While Wall Street is full of institutional funds that use short-selling as part of a broader strategy, these investors are working with loads of data and models to help mitigate risk.
One financial influencer who specializes in short-selling is blogger Edwin Dorsey, who publishes a report called The Bear Cave. This report focuses on companies he believes are troubled. Unlike large hedge funds or money managers that have entire teams dedicated to research, Dorsey is a small operator posting on the publishing platform Substack.
Earlier this year, The Bear Cave released a short report on travel and lodging company Airbnb (ABNB +2.71%). Let's look at Dorsey's short thesis and consider the company's results since the report was published. Although Airbnb certainly faces some cyclical headwinds, my long-term secular thesis for the stock is still bullish.
NASDAQ: ABNB
Key Data Points
What did the report say?
Dorsey's short report focuses on two areas in particular. The first is social media. His report is littered with snapshots and images of posts from X (formerly Twitter) in which people complain about their experiences with Airbnb.
The inclusion of these images as part of the research is misleading. At best, it's anecdotal evidence that a portion of Airbnb's user base is not content with the platform. Moreover, it is reminiscent of another short-seller, Hindenburg Research, which quoted lyrics from rap music as evidence in its report on Block. At the end of the day, these examples make for weak evidence that doesn't tie into the fundamentals of the business.
For the second part, it's important to understand Airbnb's operation is built on two types of hosts: professionals and individuals. The former are essentially full-time businesses that specialize in rentals. The latter are hosts who might rent out an extra bedroom from time to time to supplement their income.
Dorsey argues that because some professional hosts do not list exclusively on Airbnb -- they also have listings on their own platforms and websites -- they could, in theory, undercut Airbnb. I'll give credit where it's due: Dorsey definitely has a point here. But with that said, investors should be careful not to fall for the illusion of a house of cards.
Image Source: Getty Images
What has the company reported?
The Bear Cave posted its Airbnb short report on April 6, so I'll focus on results for the quarter ended June 30.
During this second quarter, Airbnb grew active listings on the platform 19% year over year and added a record number of net new listings, ending the quarter with over 7 million. What's even more impressive is that the platform has accelerated growth for its active listings in every quarter since its initial public offering (IPO) in 2020.
In addition to these metrics above, I'd like to refer to fellow Motley Fool contributor Jeremy Bowman's Airbnb article as it relates to The Bear Cave report. He correctly points out that just because a host has a listing on Airbnb as well as on another site, it does not necessarily mean the company's business could be cannibalized.
This dynamic is similar to a vendor selling goods and services across a variety of platforms such as Instagram or Etsy. For some professional hosts, Airbnb is just one source of lead generation.
During the company's second-quarter earnings call, chief financial officer Dave Stephenson said:
We're not built on the backs of professional hosts. We're glad they're there. We're glad they're part of the ecosystem, but it's even more important that we support our individual host community.
Management further added that about 90% of hosts on Airbnb are individuals.
Given the record number of active listings, combined with the large majority of the company's platform comprised of individual hosts, Dorsey's argument comes off as rather unconvincing.
Should you buy the stock?
Data by YCharts.
As you can see above, Airbnb stock has continued to climb since the release of the April 6 short report. Given the option to enjoy a nearly 25% return on a stock in five months, I'd take that just about every time. But I'm not trying to persuade investors to go look for short-term winners. As a long-term investor, there's more to consider here, specifically its valuation.
Despite Airbnb's 70% gain year to date, its price-to-sales (P/S) ratio is hovering near its lowest level at 10.8. Moreover, its price-to-earnings (P/E) ratio has plummeted in the past year as the company steadily grows its earnings and free cash flow.
Data by YCharts.
The second quarter served as another reminder that the company has a lot of potential and is able to navigate short-term cyclical trends such as inflation and its impact on consumer spending. Airbnb offers a high-demand product and can do so profitably. Now is a great time to tap into the long-term secular story in Airbnb and begin dollar-cost averaging into the stock.
