Airbnb (ABNB) shows why investors need to consider the social and political effects of technology.
To explain, critics allege Airbnb’s short-term rentals have serious effects on communities. Airbnb Inc. (NASDAQ: ABNB) admitted this by permanently banning parties at its listings in June 2022. News articles about destructive parties at Airbnb listings drove the company to ban parties, TechCrunch reports.
However, parties are only one of many complaints against Airbnb. Greater charges include allegations the platform increases homelessness and drives up rents.
The Airbnb Effect
Critics charge there is an Airbnb Effect, in which landlords convert long-term housing into short-term rentals.
The Airbnb Effect increases rents by shrinking the rental housing supply. Airbnb could have raised average New York City rents by $400 a year or $33.33 a month, the Economic Policy Institute claimed in 2019.
In contrast, Sophie Calder-Wang estimates Airbnb increased median rents in New York City by $125 annually. Interestingly, the Airbnb Effect is worse for New York whites whose rent rose by $152 annually because of short-term rentals, Calder-Wang claims.
Calder-Wang is an Assistant Professor of Real Estate and Business Economics and Public Policy at the Wharton School. The Airbnb Effect may not be as great as people think because just 1% of New York homeowners were Airbnb hosts, Calder-Wang estimates. Calder-Wang bases her claims on 2014-2018 data.
Does Airbnb hurt cities?
However, Calder-Wang claims Airbnb (ABNB) increased New York rents by $201 million and caused NYC renters to lose $178 million in 2014-2018. I think Calder-Wang’s claims make an excellent case for banning Airbnb. However, Calder-Wang made her calculations before the 2020 COVID-19 pandemic.
Airbnb could increase homelessness by squeezing lower-income people out of the rental market and reducing the number of rentals.
Another effect of Airbnb is to lower sales tax revenue. To explain, many cities rely on lodging taxes (taxes on hotel rooms) for revenues. Airbnb hosts do not pay the lodging tax. City revenues fall, but the city still bears the costs of Airbnb. For example, police, streets, garbage pickup, etc.
The benefits of Airbnb to cities are questionable. The Economic Policy Institute estimates only 2% of 4% of travelers say they chose destinations because of Airbnb availability.
Can they Ban Airbnb?
Some data makes a case for banning Airbnb (ABNB). However, banning Airbnb is tough for cities.
Municipal governments have to search out individual hosts and punish them. To explain, police or inspectors will have to go out and knock on doors to see which apartments are Airbnb units. That will be expensive and it raises serious questions about privacy.
I think a better solution is to remove Airbnb from Google Play and the App Store and block it. However, only national governments can take such actions.
For example, in the United States, the President and the Federal Trade Commission (FTC) theoretically have the power to ban or regulate apps. Yet there is no federal agency that regulates tech or studies technology’s effects.
America needs to Regulate Digital Technology
Notably, former US Speaker of the House New Gingrich (R-Georgia) abolished the last such agency, the US Office of Technology Assessment (OTA). Similarly, most politicians ignored Andrew Yang’s suggestion to create a US Department of Technology and a Secretary of Technology.
I think America needs a Department of Technology or a new OTA because we lack data about technology’s effects. For example, there is little data about Airbnb’s effects on rents and housing supply available.
One suggestion I have is a Federal Digital Technology Commission (FDTC) with the power to examine, study, regulate, and ban apps, social media, and other digital technologies. Such an agency could ban Airbnb (ABNB) if necessary.
I think we need such an agency because of Airbnb’s explosive growth. For example, the number of US Airbnb users grew from 29 million in 2016 to 45.6 million in 2022, Statista estimates. We need to study apps and platforms such as Airbnb because of their potential effects.
Is Airbnb (ABNB) making money?
Some people could excuse Airbnb (ABNB) if it made money. Currently, Airbnb makes money and grows.
For instance, Airbnb reported a quarterly operating income of $368.82 million on 30 June 2022 and a quarterly gross profit of $1.456 billion on 30 June 2022. Similarly, Airbnb’s quarterly revenues grew from $913 million on 31 March 2022 to $1.456 billion on 30 June 2022.
Stockrow estimates Airbnb’s revenues grew by an incredible 57.60% in the quarter ending on 30 June 2022. Shockingly, quarterly revenue growth was down from an astronomical 298.78% in the quarter ending on 30 June 2021.
Consequently, Airbnb’s quarterly revenues grew from $1.335 billion on 30 June 2021 to $1.509 billion on 31 March 2022 to $2.104 billion on 30 June 2022. In contrast, Airbnb’s quarterly operating income grew from -$5.13 million on 31 March 2022 and -$51.28 million on 30 June 2021. Similarly, the quarterly gross profit grew from $833 million on 30 June 2021 and $913 million on 31 March 2022.
Hence, Airbnb sometimes makes money, which creates a questionable investment.
How Much Cash does Airbnb generate?
operating cash flow of $814 million on 30 June 2022. The quarterly operating cash flow fell from $1.215 billion on 31 March 2022 and rose from $807 million on 30 June 2021.
Yet Airbnb can generate enormous amounts of cash. Airbnb reported a quarterly ending cash flow of $12.939 billion on 31 March 2022. The quarterly ending cash flow fell to $2.302 billion on 30 June 2022.
Unfortunately, that cash comes from borrowing. Airbnb reported a quarterly financing cash flow of $2.191 billion on 31 March 2022 that fell to $1.432 billion on 30 June 2022. Hence, I calculate Airbnb borrowed $3.621 billion in two months.
Curiously, Airbnb’s total debt fell from $2.444 billion on 30 June 2021 to $2.382 billion on 30 June 2022. Thus, Airbnb survives by borrowing, which means rising interest rates could hurt the company.
However, Airbnb is still a cash-rich company. Airbnb had $7.443 billion in cash and short-term investments on 30 June 2021 to $9.91 billion on 30 June 2022. Hence, Airbnb is accumulating more cash, but that cash could come from borrowing.
What Value Doe Airbnb Have?
Airbnb (ABNB) is adding value. For instance, the total assets grew from $15.485 billion on 30 June 2021 to $19.059 billion on 30 June 2022. Yet much of that value comes from borrowing.
Interestingly, Mr. Market thinks Airbnb has less value. Airbnb’s share price fell from $164.50 on 4 October 2021 to $110.81 on 4 October 2022. I think the share price shows Mr. Market is skeptical of Airbnb.
Conversely, I believe Mr. Market overpays for Airbnb at $110.81. I consider Airbnb an overpriced stock investors need to avoid.
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