This week we’re taking a look at Airbnb, a well-known travel company that’s strongly positioned to benefit from the potential surge in international travel as the pandemic begins to ease and the world reopens.
- Airbnb is a two-sided marketplace, connecting property owners (hosts) with people looking for accommodation (guests). Airbnb offers customers a differentiated experience in comparison to hotels, and lists 7M properties in over 220 countries.
- Travel and tourism are estimated to account for up to 10% of global GDP, but Airbnb are also a prime beneficiary of the shift towards remote work – the pandemic has untethered tens of millions of people from the need to go into an office, and Airbnb makes it easier to work from anywhere.
- Very high insider ownership, with co-founders including Brian Chesky (CEO & Chairman) retaining nearly 22% of issued share capital.
- Wide total addressable market, made up of short-term stays ($1.2T), long-term stays ($200B), experiences ($300B), plus non-tourist recreational spend ($1.1T) – albeit this last sector has been largely untapped by Airbnb to date.
- Strong brand power, with more than 90% of traffic to the website being free or unpaid in the most recent quarter, however, the brand is also regularly impacted by media reports related to harassment of renters, and it is estimated that Airbnb pays out $50M a year in legal settlements and to cover property damage.
- Very asset-light business model, with costs and expenses relative to revenue reaching an all-time low of 62% in comparison to 69% in 2020 and 86% in 2019.
- The closest competitor is Booking.com, which lists over 6M individual properties alongside hotels to give a total of 28M listings. However, while Airbnb has now fully recovered to pre-pandemic revenue levels, Booking.com remains at around 60%.
- Latest earnings show revenue of $2.2B in Q3 of this year, representing a 67% increase YoY and a 36% increase relative to Q3 2019.
- Although Airbnb are free cash flow positive, they are making significant reinvestments into the business, including two major upgrades to the booking system and user experience in May and November 2021.
- Even with recent multiple contraction in growth stocks, Airbnb remains richly valued with a market cap of $113B and P/S of 21 (vs. a market cap of $92B and a P/S of 10 for Booking.com).
- Airbnb is being added to the Nasdaq-100 index on 20th Dec. This is likely to drive significant levels of institutional buying, albeit the stock is still likely to prove volatile in the short term given current market conditions.
And special thanks to MT Capital Research for his excellent analysis of Airbnb.
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Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Monday the 13th of December.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: Pura vida, Albert!
Albert: What are you talking about, Luke? What does pura vida mean?
Luke: Pura vida. I’m joining the show today from beautiful Costa Rica and pura vida is a traditional Costa Rican greeting. I think it means pure life or simple life. Everyone you ask has got a different definition, but it’s basically a way of saying hello and expressing the fantastic relaxed Costa Rican culture.
Albert: Oh, fantastic! When did you arrive there?
Luke: We got in quite late yesterday and then met up with a buddy for drinks and dinner. And I’ve managed to keep Katrina’s eyes open till about 10:00 PM, but she’s gone running this morning and I’ve got the hotel room to myself to record today’s podcast.
Albert: Excellent. I haven’t been to Costa Rica myself. What’s it like?
Luke: It’s beautiful. We haven’t really seen it yet cause we’d literally just arrived yesterday, but we spent two weeks here in 2019 and we’ve got a three and a half week vacation lined up now. And actually, this afternoon, we’re heading to our first stay, which is a beautiful Airbnb in an area called La Fortuna and that ties in very much to today’s topic.
We’re going to deep dive Airbnb and I think it’s fair to say this is definitely a contender for the travel stock in our 2022 model portfolio. So we’re trying to come to that conclusion at the end of today’s episode.
Albert: Yeah, I’m quite interested in this. I’m not an Airbnb shareholder at the moment and I actually completely exited the travel sector when I sold TripAdvisor earlier this year, and to be honest, I hadn’t considered Airbnb until you brought it up as a candidate for the model portfolio.
Luke: I think I remember we were discussing it briefly as a sidebar in the conversation with Jonathan Rowland, the founder of Mode, and post that episode, I picked up a 2% position for my own portfolio. So that was August and that’s currently doing pretty nicely versus the S&P and certainly versus the rest of my growth portfolio, but I’m thinking about adding to that so that’s why I wanted to do a deep dive today.
We should say, while we were prepping for the episode, MT Capital Research on Twitter dropped a really nice Substack posting and he pulled out some really great financial and company analysis. So we’ve pretty heavily dipped into his thoughts for today’s show, so definite credit to MT Capital Research, and we’ll drop a link to him in the show notes.
Background
Albert: So let’s give some background. Airbnb got its start in 2007 when two roommates, Joe Gebbia and Brian Chesky, needed to make some cash and they decided to buy some air mattresses and rent them out to people in San Francisco where accommodation is particularly expensive. So they started a website called airbedandbreakfast.com and charged guests $80 per night to sleep on these air mattresses. And I’m really glad they changed that name to Airbnb because airbedandbreakfast is a bit of a mouthful.
Luke: Absolutely. Well, the company’s matured significantly since then and I think this is a brand known the world over. But for anyone who’s been living under a rock or perhaps in a hotel room rather than an Airbnb, if you didn’t know already, Airbnb is a two-sided marketplace connecting property owners, who are hosts, with people looking for accommodation, guests. Basically, you go stay in someone else’s house.
Albert: Does Airbnb list rocks to live under?
Luke: I’m sure there’s some rocks on there. They definitely offer a differentiated experience in comparison to hotels and I saw a couple of recent articles calling out some of the really interesting unique Airbnb vacation rentals, including, and I know you’re a big Avengers fan, Albert, Tony Stark’s cabin as seen in Avengers: End Game. You and five friends can rent Iron Man’s three-bedroom cabin for only 800 US dollars.
Albert: Oh, wow. Does it come with that 3d hologram table where he invented time travel?
Luke: If you take enough drugs, I’m sure that will happen for you.
Albert: Well, from their website, Airbnb says their mission is to create a world where anyone can belong anywhere, which is a bit pie in the sky and isn’t really saying anything, but they go on to say that they are focused on creating an end-to-end travel platform that will handle every part of your trip, which is a lot more descriptive
Luke: And actually Airbnb are in the news right now, I guess somewhat coincidentally that we chose them. We just saw a few days ago, it’s been announced they’re going to be added to the NASDAQ 100 in December and the NASDAQ 100 are the 100 largest non-financial companies on the NASDAQ stock exchange.
Albert: Yeah, I saw that, and two other stocks that caught my eye were Datadog and Zscaler. We did a deep dive into Datadog last year, but neither of us invested, but I am a shareholder of Zscaler, so I’m quite pleased about that.
Luke: Yeah, I feel like I’ve missed out on both of those. A good play buying Zscaler. And then maybe just to contextualize our discussion today, cause I think you and I come at Airbnb from slightly different directions. I use it quite often. I had a dig through my Airbnb history. It looks like I’ve personally booked 12 stays, actually 13 now cause of tomorrow, in five different countries. And I’ve probably stayed in places rented by friends maybe another 30 plus times. And I’ve got to say, Airbnb is now my first port of call whenever I’m researching a vacation.
Albert: Yeah, and in contrast, I haven’t really used Airbnb myself, except when vacationing with friends, such as yourself, who are much more familiar with Airbnb. I guess I’m old school and I still first consider hotels when looking for accommodation for my vacations, because I think I prefer the reliability and also the consistency of a hotel. But I may start using Airbnb more for that, as you say, differentiated experience.
Luke: So you and I are coming at this with different personal perspectives, and it’d be interesting to see where we end up. I’m definitely a fan. You’re quite new to the platform. So maybe you’ve got a clearer mind when it comes to analyzing the company.
Albert: Well, maybe a less informed mind.
Tailwinds
Luke: Well, let’s see. Well, let’s get stuck into tailwinds and that’s where we always begin a Telescope Investing deep dive. What are the macro forces and events that are driving Airbnb to success? And maybe the first one is simply travel and tourism, and particularly the rebound in travel post the coronavirus pandemic. Travel’s been in a bit of a slump. People haven’t been able to go anywhere. They’ve been in national or international lockdowns. But we’re coming out of that now and even though Omicron might be a bump in the road, people are looking forward to travelling and they are travelling.
Albert: Personal travel may surge for a few years after the world fully reopens before settling down to its pre-pandemic growth trajectory. And to give you a sense of how big the travel and tourism sector is, it is estimated that it accounts for around 10% of global GDP.
Luke: Yeah, this sector got crushed during early 2020, and I guess, unfortunately, the Omicron variant does pose a bit of a worry. Is that going to cause countries to go back into lockdowns? And markets are currently in turmoil trying to assess this threat, but I think people are just desperate to go on vacation and so all that pent up demand, even if it gets postponed by another few months, is still going to be there and it’s still going to be big for all travel companies once the world fully reopens.
Albert: It may be more than a few months, could be a few years, but I agree, I think people are desperate to travel. I haven’t travelled outside of Hong Kong since the beginning of 2020, and we’re really looking forward to when we can travel easily again.
Luke: But Airbnb isn’t just about vacationing and travel, it’s also about enabling remote work and the ability to do your job from anywhere. A Gartner study in July this year highlighted that remote workers are expected to represent 32% of all employees worldwide by the end of 2021, up from 17% two years ago. 32% is a massive number. It’s hard to get your head around that being true, but this is how I live my life now, so perhaps that is the case.
Albert: I’m actually surprised that it was 17% in 2019 before the pandemic and the study believes the trend towards remote work is secular and not transitory, so they’re saying it’s here to stay.
Luke: And Airbnb CEO, Brian Chesky, totally recognizes that. From their recent earnings report, Brian says “The world is undergoing a revolution in how we live and work. The pandemic has suddenly untethered tens of millions of people from the need to go into an office. Airbnb makes it possible to work from any home and we believe this trend towards more flexibility will only accelerate.”
Albert: Another tailwind is the gig economy as Airbnb makes it easier to earn income from renting out your property. And it’s a very popular side hustle and around 90% of the hosts are actually individuals.
Luke: Yeah, absolutely. Companies like Airbnb, Uber and DoorDash are helping people monetize their spare time and monetize their assets in ways that really weren’t conceivable 10 years ago.
Leadership
Albert: And let’s have a look at leadership and there were three co-founders of the company, Brian Chesky, Joseph Gebbia and Nathan Blecharczyk. All three co-founders are still with the company and Brian Chesky now serves as CEO and chairman of the board. Joseph Gebbia is a director and Nathan Blecharczyk is the chief strategy officer and also chairman of Airbnb China.
Luke: Since our episode with Renee, we’ve taken to looking at both Glassdoor and Comparably, and Brian Chesky rates pretty well on both platforms. On Glassdoor, he’s got a 92% approval rating and 4.2 stars out of five. And on Comparably, he’s got a 78% CEO score and four stars out of five. So again, those are pretty good, but not mind-blowing ratings.
Albert: And looking at the insider ownership, all three co-founders have a significant stake in the company. Brian Chesky has around 11% of the company’s shares with a current value of around $12.4 billion and Nathan Blecharczyk has 9.3% of the shares. And Joseph Gebbia has around 1.2% of the shares. So it’s good to see that all the co-founders are still with the company and are all highly incentivized to make the company a success, but I’m not sure why Gebbia has a much lower ownership than either Chesky or Blecharczyk. Maybe he sold his stake early, but hopefully, they didn’t do an “Eduardo Saverin” on him.
Luke: Yeah, hopefully not, maybe it just had a very messy divorce or something. God, I’ve got no idea. We definitely didn’t research that. But I do think it is fascinating that there’s such enormous insider ownership. Like in total, those insiders add up to nearly 22% of the company. That’s quite unusual for a hundred billion-dollar company. Often you see founders with an enormous voting power, but not necessarily such a big ownership stake, so that’s really encouraging.
Albert: But I guess it’s quite a young company having only been founded around 14 years ago, but I guess it’s grown very, very quickly.
Total addressable market
Luke: Let’s turn our minds now to total addressable market. Let’s look ahead to where they could grow to over the next 14 years.
Albert: Yeah. And as mentioned before, the travel and tourism market is huge, and according to McKinsey, it accounted for around 10% of GDP in 2019 or about $9 trillion.
Luke: Before we get into total addressable market, though, let’s just quickly talk about how Airbnb actually make money. And they do this by collecting a service fee from both guests and hosts. They make 3% of every booking made from the hosts and they get 14% from the guests. So in total, that’s about 17%. I think it can go up to about 20% in some cases. And that’s broadly comparable to companies like Uber who take about 25% in fees or Booking.com who collect around 15% on commissions.
Albert: Breaking down this addressable market by their business lines. We start with short-term stays, which is defined as a trip with a duration under 28 days and according to Airbnb, this has an addressable market of around $1.2 trillion.
Luke: Airbnb also offers experiences. So kind of activities that you attach to a trip and their experiences and attractions segment is estimated to have approximately a $300 billion serviceable addressable market,
Albert: But it’s not just about short-term stays for vacations. The company is experimenting with long-term stays where people are potentially staying at these properties for months, possibly half a year to a year, and this is entering the residential rental market and the company believes they can access around 10% of this, which is worth around $200 billion. I think that’s quite a low estimate.
Luke: Agree and I totally buy this idea. In the UK, a traditional rental is generally six months plus, and it’s quite a complex process with deposits, agent fees, tenant background checks, inventories. It’s a pretty creaky old-style business model and it’s definitely ripe for modernization. And Airbnb are definitely well-positioned to take a chunk out of that market. And actually, personally, I’m also expecting to spend the next few years Airbnbing it round the world. So I’ll be looking to use this part of the business model increasingly myself. Hey, that’s interesting. Like I definitely use that phrase, Airbnb it round the world when I try and sum up the lifestyle I’m looking for. Airbnb really is now a verb.
Albert: Yeah, similar to Uber and also Zoom. These company names have become verbs, synonymous with the activities they represent.
Luke: It’s a very powerful hidden part of the brand when the company name really is buried in your consciousness to that degree.
Albert: And finally, the company estimates that for non-tourist recreational spend, that has a TAM of around $1.1 trillion. So all combined, the company estimates their total addressable market to be around $3.4 trillion, which is massive.
Cost of production
Luke: Let’s talk about another Telescope lens though, cost of production, and this is an area where Airbnb’s business model has a real advantage, I think. It’s a really asset-light business and I think they demonstrated that during the pandemic when they had to basically shut down operations and unfortunately, they had to exit a large number of their staff. But they’re able to do that really quickly. It’s not like they had this huge legacy of properties that they had to continue to fund. They’re literally just the middleman.
Albert: I guess that’s their business model, right? They are the middleman between hosts and guests and they don’t own the properties themselves. And their cost of revenues are literally just the cost associated with processing the payment and also hosting the website.
Luke: And if you look at how they do spend their money, investment in things like marketing is going down relative to revenue. And it’s really proving the strength of the brand and also the business model. I think overall now cost and expenses relative to revenue are at an all-time low of just 62% in comparison to 86% a year and a half ago.
Albert: But it’s interesting that you compare Airbnb’s asset-light business model to hotels. I think that’s a common misconception because businesses such as the Marriott and the Hilton have become asset-light businesses or relatively more asset-light over the past few years, as most of their properties are now franchises.
Luke: Yeah, that was a smart business move by the big hotel chains and it’s helped them also weather the pandemic in a much more effective way. I guess, at the end of the day, someone has to own those hotel rooms and they’re eating the lost cost, but maybe that’s the franchisees.
Mid-ep promo
Luke: Well, we’ve talked about brand, and that’s a really interesting lens to get stuck into, but before we talk brand, let’s talk our own brand, just very briefly, Albert, and I’d like to jump in with a quick mid-episode promo. If you’re enjoying the Telescope Investing podcast, we’d love it if you’d send a link to a friend or a relative who you think would also get benefit from some of our weekly finance wisdom.
Albert: And you can also support the show by submitting a review on Apple Podcasts, or subscribe to the podcast on your podcast platform of choice.
Luke: We also publish one-pagers from time to time. We’ve been a bit slack and actually, I’m probably not going to get a chance to do the Disney one-pager that I promised you I do last week, cause I’m now vacationing. But we do publish one-pager summaries with our key green and red flags to the website at telescopeinvesting.com, so swing by and check them out.
Albert: That’s alright, Luke. I hope our listeners understand that it is Christmas, so we do have other things to do than write one-pagers.
Luke: Yeah, absolutely. I’m certainly busy and Katrina frowns at me whenever I get buried in a six-hour podcast editing session. So writing a whole bunch of documents as well, probably isn’t going to go down well on our Costa Rica vacation.
Albert: Yeah, and I just got back from a staycation in Hong Kong myself, so I didn’t travel as far as you did for my vacation. My hotel was literally a 10-minute drive from my home.
Brand
Luke: Well, that’s a good place to jump back into Airbnb. I guess just again, right, you’ve stayed in a traditional hotel and I’m about to go and stay in some random little lodge on a resort using Airbnb tonight, and I’m not trying to say I’m a modern guy and you’re this old fogey but I definitely
Albert: But you are.
Luke: But I definitely think there is a, there’s something happening in the way… Okay, put it this way. Let’s compare it to say Starbucks and a little neighbourhood coffee shop. And if you think about that as being like the Marriott hotel versus the Airbnb property, no one is going to Instagram, their Starbucks venti latte, right, unless perhaps it’s covered in $20 worth of marshmallows and crap, but people are going to share the social experience of a fancy coffee made by some barista with a giant twirly moustache. And I think this shows the potential strength of the Airbnb brand because they’re such interesting, unique stays, they’re the kind of things you do want to share and talk about, and so that social sharing is a key part of the brand and reputation that Airbnb’s built up. It’s a real strength that I think a traditional hotel chain will find it impossible to compete with.
Albert: Wow. That was a massive slam against all those Instagrammers posting pictures of their unicorn. frappuccinos!
Luke: What is a unicorn frappuccino?
Albert: What you just said, a coffee with a bunch of crap over it.
Luke: Okay, I get it. All right, got like a giant horn. Okay.
Albert: More like is multicoloured and covered in marshmallows.
Luke: Well, eat healthily and stay healthfully too.
Albert: Airbnb’s brand is one of his key strengths and in the latest earnings call CEO, Brian Chesky, highlighted the brand’s power by saying, ” Airbnb is a really well-known brand that’s a noun and a verb used all over the world, and because of this, more than 90% of our traffic was free or unpaid in Q3.” They’re just getting free advertising from word of mouth.
Luke: Yeah, exactly. And they’re spending less on marketing because of that. That’s great. The world’s greatest companies have a $0 marketing budget. If Airbnb can get to that place, well done.
Albert: I think that was a reference to Tesla, wasn’t it?
Luke: It was, well spotted. But there are some brand concerns that we should highlight having been so glowing about the brand. I think it’s becoming more and more strictly enforced that short-term rentals are prohibited or limited in a number of cities, particularly I think, New York, Las Vegas, and San Francisco, and hosts have to pay penalties if they violate their city ordinances and offer their property for more than a fixed number of days per year.
And Airbnb are currently involved in a number of legal battles where they’re being fined by a number of jurisdictions. And actually a personal experience but many years ago, I booked an Airbnb for myself and a buddy in Hong Kong. And, I don’t know if Airbnb was banned or it’s just frowned upon in Hong Kong at that point, maybe it was 2017, 2018, but I remember the host telling us that we should say if we were challenged by the concierge of her building, that we were friends of the family. I guess it’s been a bit of a gray zone in some markets, but definitely, some cities are trying to clamp down.
Albert: Well, it’s possible that that person hosting that Airbnb was not the owner of the property, but a renter and they were kind of subletting that apartment on Airbnb, and they didn’t want that to be known to other people.
Luke: Yeah, possibly.
Albert: And another problem with Airbnb that has been there pretty much from the start, have been stories relating to harassment of renters. While the number of cases is relatively low to the total number of bookings, there have been some very distressing stories and there was a very unfortunate case in Mexico where a renter was actually killed.
Luke: It’s somewhat concerning to note that Airbnb apparently pay out up to $50 million a year in legal settlements and to cover property damage. And I guess the assumption there is Airbnb are paying to try and keep some of these incidents quiet, keep them out of the newspapers.
Albert: They do have a crisis management team and also a safety team to handle these kinds of cases, but it’s a sad fact of life that they need one in the first place.
Luke: And I guess these things must happen with traditional hotel chains as well. I know, one of my buddies, Jody, has on more than one occasion got locked out of his hotel room stark naked, and had to wander down to reception in the buff. I’m sure if they have shocked other guests, they might have to pay them some sort of recompense for seeing Jody’s breakfast sausage.
Customers
Albert: Okay. Luke, how many hosts do you think Airbnb has worldwide?
Luke: I suppose I did the research so I saw the number, but it surprised me that it’s so many, apparently 4 million hosts on the platform today.
Albert: Yeah, that surprised me as well and from those 4 million hosts, there are over 7 million listings, and I read that 14,000 new hosts are joining the platform each month.
Luke: Yeah, that’s massive and I guess you can see it when you go to a new location and you browse Airbnb and you zoom in and you zoom in, and you keep seeing more and more properties popping up on the map. They are literally everywhere and I think there are apparently now a hundred thousand cities with an active Airbnb listing and they have properties in 220 countries and regions.
Albert: But I think it’s important to provide some context to these numbers. So we said that Airbnb has over 7 million listings on its platform, but Booking.com has more than 28 million listings, including over 6 million homes, apartments and other unique places to stay according to their website, and they cover more than 148,000 destinations in over 220 countries as well.
Luke: Yeah, there’s certainly comparable offerings. You did the research on Booking.com, so what’s their brand when it comes to these unique places? I’ve only really seen hotels on Booking.com.
Albert: Yeah, I don’t use Booking.com myself, but they do offer these homes and apartments that are very similar to what Airbnb offer, but I guess they don’t have the image for that market yet.
Luke: If you go to a Hotels.com or a Booking.com or an Expedia, it just feels like a different experience. Feels to me, like you’re looking for something much more traditional as opposed to unique.
Albert: Expedia have a similar business, but they put it on the different brand of Vrbo, V R B O, which I believe originally stood for vacation rental by owner, and that business was started in, I believe, 1995 and it was acquired by HomeAway in 2006, which was itself acquired by Expedia in 2016. But it’s interesting that Vrbo started so early and yet hasn’t grown in the way that Airbnb has, and I think part of this is because of this terrible name, Vrbo. It doesn’t tell you anything.
Luke: Maybe, maybe! I’m going to put some of it down to leadership. I think Brian Chesky is definitely got the right idea. It’s not just about being the airbed and breakfast.
Albert: And especially that most of the listings do not offer breakfast, so I think that name is a misnomer.
Network effects
Albert: Airbnb has customers on both sides of the transaction, guests and hosts, and they have a review system that is applied to both of them, which is a common theme for these two-sided marketplaces, such as Uber and Fiverr.
Luke: Yeah, it creates a clear network effect. The more travellers you have on the platform, increasingly it’s attractive for hosts because they’re going to get a better fill rate for their property, and then the more properties, the more attractive it is for guests because they got much more range to choose from.
Albert: And I think throughout his history, Airbnb has always had more people looking for accommodation than hosts providing accommodations, so one of Airbnb’s focuses has been to attract more hosts to the platform, and they’ve done this by making it very easy to add listings and also offering suggestions to improve the performance of these listings. And hosts are incentivized to provide a good service so their ranking increases, as the higher their ranking, the higher they appear in search results. And eventually, given enough good ratings, they can reach a status of SuperHost, which is a kind of seal of approval by Airbnb and comes with a number of additional benefits.
Luke: Yeah, I think as a SuperHost, you can actually earn credits on the platform so you can spend on vacations yourself, but also you get better rates. And the key thing, I suppose, is guests are attracted to SuperHosts because they know they’re just going to get a great experience. I certainly look for that. It’s a differentiator if I see two or three places I’m trying to choose between.
Well, we mentioned earlier that increasingly, Airbnb bookings are pushing into the long-term stay category. And I think the company classify long-term stays as anything over 28 days. And that’s certainly their fastest-growing trip category. It’s currently 20% of total nights booked.
Albert: Yeah, it does seem that Airbnb has built a niche in long-term stays, but I’ve seen that many hotels are offering long-term stays now. And I mentioned earlier that we went on a staycation last week and the hotel where we stayed offered, what I thought was, quite a reasonable rate for long-term stays. And that could appeal the those who don’t want to lease an apartment. And there’s also the option of a serviced apartment, which you had in your six six-month sabbatical in Hong Kong a few years ago.
Luke: Yeah, but I think Airbnb are definitely serving a useful part of the market, creating flexibility and the ease of booking a long-term stay overseas where perhaps you don’t have all those IDs and bank accounts and maybe histories from other apartments you’ve rented to show to your new landlord. They’re just making it much easier with their social-proof model.
Albert: I guess the social aspect also applies to things they call wishlists where customers can bring in other customers through social sharing and group trips.
Luke: Yeah, I suppose actually the social sharing reminds me of a bit of a daft anecdote from a couple of years ago. One of my friends, Lukas, was trying to get a booking for us in an Airbnb, and we were really struggling and we had like three hosts decline us. And then Lukas finally realized his profile photo on Airbnb was him in Gene Simmons Halloween makeup with like a Kiss crazy face and it looked like a complete Halloween monster. And that’s why no one was accepting him for the booking. As soon as he fixed that profile photo, we got placed and booked.
Albert: That’s hilarious. So your profile on Airbnb is like your dating profile on Tinder.
Luke: Yeah, absolutely. And actually this, I suppose, is quite important piece of stickiness for Airbnb because you build up that profile. Like I’ve got a bunch of really great reviews of hosts saying, oh, Luke is a nice guy, he really looked after my property, they were very courteous and conscientious. And so if I went to a different platform, I’ve lost all of that evidence that I’m not going to wreck your place. And I guess the same thing for hosts, they must build up hundreds of reviews. And if you’ve got a nice place, it’s quite hard to port that social proof outside of the Airbnb platform.
Albert: Well, my concern is that I haven’t used Airbnb myself much so I don’t have any reviews under my account. So will I find it difficult to book a place on Airbnb?
Luke: Well, maybe not necessarily, but you have an interesting point there because maybe there’s an opportunity for Airbnb. If you do have a group travelling to your apartment and it was booked by one guy, but five guys stayed there. Well, I guess all five of those guys were responsible for making sure the place was well looked after. Maybe that social proof should extend across all the guests somehow?
Albert: Well, that’d be an interesting feature, but do wonder in the same way that Amazon has a lot of fake reviews, does Airbnb suffer from the same problem where a lot of the reviews and ratings are actually fake or bought?
Luke: You got to think that’s gotta be harder surely, cause it’s just a bigger, more expensive, more onerous product. It’s not like buying some gadget and then giving a fake review. Airbnb know if that booking took place, right? It’s not like you can leave a review without having had a booking, it’s all tightly integrated into the end of the booking process.
Albert: Yeah, I’m just wondering if someone has worked out a way around that and are selling reviews on Airbnb. And that could be a major problem for them if that is the case.
Luke: I think it would be hard to do that at scale in any meaningful way. And one thing I suppose, that Airbnb does incentivize, just like your Uber rating, it encourages you to be a nice guy. Because you don’t want your guest rating dinged by perhaps making a mess in someone’s apartment.
Optionality
Albert: For optionality, the company has been experimenting with experiences for several years now, and these experiences could appeal to not only tourists but also local residents.
Luke: Airbnb are definitely starting to branch out beyond just offering a bed for the night, and no breakfast, to offering an experience. And I think hosts can offer experiences now and sell them on the platform alongside their stay. Personally, I’ve not booked an Airbnb experience yet, but it’s definitely a category they’re investing in.
Albert: But that experiences product must be a very crowded market because I remember when I went to San Francisco several years ago, I used a website called Viator to book a few day trips around the area. So I’m wondering, does Airbnb offer a differentiated experience from these other sites?
Luke: Yeah, fair challenge, probably not. And you’re right, it’s a very crowded market and it’s easy for other companies to get into, much more so than renting homes. But I do think it’s a natural add-on to their own platform, and they do see it as being a small but important part of their total addressable market.
Albert: And as we said, sites such as Booking.com and Expedia have moved into the private rental market, the same market as Airbnb, so I was wondering, could Airbnb expand into hotels and in effect become another Booking.com or Expedia. And I really think this is where my scepticism comes from. Does Airbnb really have a durable advantage over these other travel sites?
Competition
Luke: Yeah, I think that’s a very fair challenge. Let’s drill into competition a little bit and you’re right, the big hotel chains pivoting to an asset-light model makes them agile in the same way as Airbnb. And if Booking.com and Expedia’s Vrbo are also competing in terms of the unique stays, then that’s real competition for the company.
Albert: Yeah, I think that was a real surprise when we did the research that how asset-light companies such as the Hilton and the Marriott have become, and we found out that 98% of the rooms branded under Hilton were actually managed by franchisees and independent operators, and the Hyatt, they have 93% of their properties franchised as of 2020.
Luke: So having established that these are very similar companies, run in the same way, I think it is interesting to look at how they’ve all recovered from coronavirus. Airbnb at the end of 2021 are expected to be back to almost 100% of their pre-COVID revenues. Whereas Booking.com and Expedia are still forecasting to be barely over half of their pre-COVID revenue.
Albert: And this is interesting because the number of nights and experiences booked on Airbnb is actually lower than it was in 2019. And I think one reason why their revenues have gone up as well as they have is because they’re getting more value from each of their stays. And one reason for that is that for these longer-term stays, renting a whole apartment or a property in a non-urban area, they offer higher rates.
Luke: But I think we have to be fair and compare Airbnb based on market cap as well, or enterprise value against some of these other companies and this is where, perhaps, the financials start to strain a little bit. Airbnb’s market cap at the time of recording is around $113 billion and that’s higher than every other company we’ve mentioned. Marriott and Hilton are kind of 40 to $50 billion, Expedia $25 billion. The largest competitor is Booking.com and they have a market cap of just $92 billion. So arguably, Airbnb’s valuation is pretty punchy.
Albert: Another aspect of competition that worries me is that it’s becoming easier to have listings on multiple platforms with services such as Syncbnb, which helps you synchronize availability across these different platforms. And I guess this is similar to drivers being on multiple ride-hailing services, such as Uber and Lyft.
Luke: I got to be honest, I hadn’t heard of Syncbnb, I’m going to check it out. It’s such a nice experience using the native Airbnb website, but it will be interesting to see how their properties are reflected on some of these other aggregators.
Albert: But if some of these other sites offer better rates that are more profitable for the hosts, they may get the traffic on Airbnb, but if some other site offers them a higher rate, they may take that.
Financials
Luke: Yeah, no doubt. We started talking about valuation there. Let’s just get into financials before we wrap up with some conclusions. So let’s pick out some headlines from their Q3 earnings, which were published just a month ago on the 4th of November.
They took 80 million bookings for nights and experiences, which is up 29% year over year and that delivered revenues of approximately two and a quarter billion dollars for the quarter, which was also a 67% increase year over year. However, 2020 was the pandemic year so probably a better comparison is 2019, but even there, they’re up and their increase compared to Q3 and 2019 was 36%. So very healthy recovery and really shows how quickly they’ve come back.
Albert: And Q3 is usually the strongest quarter for Airbnb, so that’s a good quarter to compare year over year. And looking at their income, their net income came in at $834 million for the quarter, which is an increase of 280% year over year and 213% since 2019. So that’s a massive improvement.
Luke: Their total assets are 10 and a half billion dollars against total liabilities of $7.6 billion, so the company has a healthy balance sheet, one whose liquidity aligns well with their cash burn rate needed to fund growth going forward.
Albert: But the company is not yet profitable and one reason for this is that they are continuing to reinvest heavily back into the business and in the first nine months of 2021, Airbnb reinvested $1.1 billion back into product development and really improving the experience for its users.
Luke: Yeah, but they’re free cash flow positive, so they’ve got plenty of money they can spend, but as you say, they’re reinvesting it, which is the right thing to do as a platform that has such a long runway ahead of it still.
Albert: And looking at the guidance for Q4, they’re expecting revenue between 1.4 billion and $1.5 billion and the market does expect them to deliver a positive EPS of 3 cents in Q4 of 2021. And Airbnb’s annual revenue for 2021 is expected to reach $6 billion, which is a 76% increase year over year, and also an increase from 2019 of 28%. So they really have recovered from the pandemic.
Luke: But let’s not forget that valuation concern. Market cap of over a hundred billion dollars and a price to sales ratio of about 21. And in comparison, Booking.com has a price to sales ratio of 10, and Marriott has a price to sales of four and a half.
Albert: But bear in mind that both Booking.com and Marriott are both profitable as well.
Luke: So really a quite different proposition thinking about investing in Airbnb versus some of these other competitors, but you’ve got to go into it with your eyes open.
Conclusions
Luke: Well, let’s bring it round to key takeaways. Like what do we really think having looked through all the lenses? I’m already an investor. Are you going to jump in and join me?
Albert: I’m not sure, Luke. I do agree with some of the tailwinds as I suspect that there will be a rebound in travel post-pandemic, and it does look like Airbnb is not entirely dependent on travel either and has carved out a niche in long-term stays and is also benefiting from the trend in remote work.
But I am concerned about the high valuation, as we’ve seen multiple contraction in many growth stocks over the last year or so. And I do see increasing competition from both established players like Booking.com and new players such as Vacasa. But I agree, Airbnb does seem to have the brand and the mindshare, at least for now.
Luke: I think you’ve summed it up really well and you’ve definitely given me through the thought with the competition from some of these other firms that I really considered to be legacy firms, as opposed to Airbnb being the only guys doing the local neighbourhood coffee shop compared to their Starbucks frappuccino.
But I love the company and I love the product. It’s still always going to be, I think, my first point of reference when I’m planning a vacation. Having done the deep dive, I think I might pause on adding to this position. You’re right, the valuation is high and price to sales ratio of over 20 is a bit of a concern, particularly because, as you say, growth stocks are seeing multiple contraction right now, and that could continue particularly if interest rates do start to rise as quantitative easing backs off in most countries. But I’m certainly not backing away from my current two and a bit percent Airbnb position. I do like the company and I’m planning to stay invested for the long term.
Albert: But as you said, Luke, I’m not really a user of Airbnb so I don’t really know the benefits of using this platform, but from our research, I have to say that I’m not really enamoured by the company or the business. And I got out of the travel sector earlier this year and I wasn’t planning on getting back into it, but if we make it a stock in our model portfolio, I’m up for initiating a starter position in Airbnb.
Luke: Good, good, and maybe Hong Kong lockdown currently isn’t going to help you become a user of the platform, but as soon as travel restrictions ease, maybe you need to book an Airbnb. Hey, maybe book one for us. I’ll come join you somewhere in the world.
Albert: Or maybe for our next staycation, instead of a hotel we’ll book an Airbnb.
Luke: Just remember to tell the concierge that you’re a friend of the family.
Albert: I will remember that, Luke. And do you have a quote for us, Luke, to round out the episode?
Quote
Luke: Yeah, we pulled a bunch of quotes from Brian Chesky, CEO and founder of Airbnb, and you picked out your favourite. And the one you went with was “The stuff that matters in life is no longer stuff. It’s other people, it’s relationships, it’s experience.”
Albert: Yeah, even though this would probably devastate the global economy, I tend to agree. I’ve followed a relatively minimalist lifestyle for a while now, so I definitely agree with Brian Chesky here.
Luke: And I think that’s good advice you gave me years ago, spend your money on experiences, don’t spend your money on stuff. I like that and I’m trying to stick to it as best I can, albeit I’m sat in front of quite an expensive new laptop.
Albert: With the caveat of not spending all your money on experiences.
Wrap
Luke: We’ve had a bit of a longer episode this week, so I really think we should wrap it up. Thanks for listening.
Albert: And if there’s a topic you’d like us to cover, you can message us on Twitter. I’m @AlbertTelescope.
Luke: And I’m @LukeTelescope, or you can email us, and do please email us, at feedback@telescopeinvesting.com.
Albert: And one of the best ways you can show support for the podcast is to leave us a review on Apple Podcasts.
Luke: And if you’ve got a friend who you think would get value from Telescope Investing, we’d love it if you’d take a quick moment now to spread the word and send them a link.
Albert: Thanks, Luke.
Luke: Thanks, Albert. And I’m off to my Airbnb this afternoon so I’m looking forward to that.
