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

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

Ongoing headaches

Airbnb has found tremendous success, but to be clear, it still operates in a competitive sector of the economy. There’s competition from global hotel chains, boutique properties, and other booking platforms.

However, I think its biggest headache has been the regulatory landscape. There are varying rules that Airbnb must follow on a local, state, and federal level. It can be challenging to navigate all of this. The advent of the internet and these platform business models is making it difficult for lawmakers to keep up. So, there has definitely been some uncertainty for Airbnb.

The business has a big bullseye on its back because of how it can have a profound impact on the markets that it operates in, which can cause local residents to push back. For example, a higher number of listed properties could result in the constant influx of travelers, making a neighborhood feel more like a tourist destination than a real community. There could also be safety concerns.

Potential impacts to the cost of living can’t be ignored, either. Buyers could be drawn to a market due to attractive demographics, leading to home values going up. Moreover, these properties become a financial asset as opposed to a place for the owner to actually live in. This could exacerbate the problem of housing affordability in the U.S.

For what it’s worth, there are already regulations in place in 80% of the company’s top 200 markets, which does reduce the 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 adverse legislative actions taken in key markets could negatively impact the business.

Founder and CEO Brian Chesky and his team don’t agree with the move. They say that hosts pay their taxes and bring in tourism and spending that can enhance an economy. And a valid argument can be made that if Airbnb were charged higher fees or fines were imposed, the experience for both hosts and guests could be diminished.

Story continues

Of the more than 100,000 cities and towns Airbnb has active listings in, not a single one accounts for more than 2% of the company’s revenue. That geographic diversity helps to mitigate regulatory risk at least at the local level.

Should you buy Airbnb stock?

Investors looking to buy Airbnb stock need to understand that regulatory actions pose a threat to the company’s trajectory. I still believe the shares are a worthy investment candidate, though.

Airbnb’s growth is still healthy, even though it is slowing down. Sales increased 11% from under $2.5 billion in the second quarter last year to over $2.7 billion in Q2 this year.

Airbnb generates robust profitability. Free cash flow totaled $4.3 billion in the last 12 months, which represented 41% of overall business revenue.

And the company’s two-sided marketplace creates network effects. The larger the platform becomes, with more hosts and guests, the more valuable it becomes to everyone.

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

Should you invest $1,000 in Airbnb right now?

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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 1 Thing the Biggest Risk for Airbnb Stock? was originally published by The Motley Fool