Is this the 1 thing the biggest risk to Airbnb stock?

Despite being around for less than two decades, Airbnb (NASDAQ: ABNB) has certainly experienced monster success throughout its history. The alternative accommodation platform has truly changed the hospitality industry. And its scale is unmatched, with $21 billion in gross bookings in the last quarter alone, as well as 5 million hosts on the site.

With growth technology stock trading 46% below its all-time high, investors may want to buy the dip with Airbnb. Before doing so, it’s worth taking the time to understand what your company’s biggest risk might be.

Ongoing headaches

Airbnb has been wildly successful, but to be clear, it still operates in a competitive sector of the economy. There is competition from global hotel chains, boutique properties and other booking platforms.

However, I think the biggest headache has been the regulatory landscape. There are different rules that Airbnb must follow at the local, state and federal level. It can be a challenge to navigate through it all. The advent of the Internet and these platform business models makes it difficult for lawmakers to keep up. So there was definitely some uncertainty for Airbnb.

The business gets a lot of attention because of how it can have a profound impact on the markets in which it operates, which can cause local residents to push back. For example, a higher number of listed properties could lead to a constant influx of travelers, making a neighborhood feel more like a tourist destination than an actual community. There could also be safety issues.

Potential impacts on the cost of living cannot be ignored either. Buyers may be drawn to a market because of attractive demographics, leading to higher home values. Moreover, these properties become a financial asset, as opposed to a place for the owner to actually live. This could exacerbate the US housing affordability problem.

For what it’s worth, there are already regulations in place in 80 percent of the company’s top 200 markets, which reduces uncertainty somewhat. However, that doesn’t mean Airbnb is out of the woods. About a year ago, New York City banned rentals of less than 30 days. Any other unfavorable legislative measures taken in key markets could have a negative impact on the business.

Founder and CEO Brian Chesky and his team disagree with the move. They say hosts pay their taxes and bring in tourism and spending that can improve an economy. And a valid argument can be made that if Airbnb charged higher fees or fines, the experience for both hosts and guests could be diminished.

The story continues

Of the more than 100,000 cities and towns where Airbnb has active listings, none account for more than 2% of the company’s revenue. That geographic diversity helps mitigate regulatory risk at least locally.

Should you buy Airbnb stock?

Investors looking to buy Airbnb stock need to understand that regulatory action poses a threat to the company’s trajectory. Still, I think the stock is a worthy investment candidate.

Airbnb’s growth is still healthy, even if it’s slowing. Sales rose 11% from under $2.5 billion in the second quarter of last year to over $2.7 billion in the second quarter of this year.

Airbnb generates robust profitability. Free cash flow totaled $4.3 billion over the last 12 months, which accounted for 41% of the business’s total revenue.

And the company’s two-sided market creates network effects. The bigger the platform gets, with more hosts and guests, the more valuable it becomes for everyone.

All of these positive attributes should mean the stock is worth a closer look.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb. The Motley Fool has a disclosure policy.

Is this the 1 thing the biggest risk to Airbnb stock? was originally published by The Motley Fool