AIRBNB: Behind Headlines
A famous brand and a controversial company. What makes this $80B travel giant tick, and what lies beneath the noisy waters?
Deceiving cleaning fees, disruptive guests, impact on local housing markets and lack of customer service, are just some common themes regarding Airbnb in the news. However, behind the catchy headlines, lies a company enabling a flywheel of value creation - between people sharing (hosts) & experiencing (guests), by serving as the network owner. A business looking more like Mastercard or VISA, than your regular hotel.
First, what is a network?
People often complain about Facebook, but we keep using it because the more people on it, the better it gets (that's network effects1). It's strong because once a network is big, it's tough to change. Think about trying to replace VISA or Mastercard—they own the network that helps banks worldwide transfer money. In the internet economy, however, the barriers to entry are low, so people can (and will) try to replicate ABNB 0.00%↑ booking platform. However, what will be harder to copy is the network of guests & hosts - This serves as Airbnb´s MOAT2.
Travel & sharing economy - A secular tailwind
Before we explore what makes ABNB 0.00%↑ tick, let's dissect some research34 showcasing the long-term tailwind which supports the travel/experience industry, and Airbnb in particular.
Nowadays, consumers all over the world are opting for having leisure experiences over owning material possessions. One group in particular is said to be primarily responsible for driving this consumer shift - the millennial generation. As millennials become the generation with the highest global spending power, the experience economy continues to rise (Costa, 2020).
Kenton (2019) describes the sharing economy as an economic model based of acquiring, providing or sharing access to goods and services that are facilitated by a community based online platform. A major reason for the rise of this economy is the Internet and the use of big data that makes it easier for owners of goods and those seeking to use them to find each other.
Airbnb sits at the sweet-spot behind both the experience & sharing economy referenced above. For every additional guest or host who participates in the network, the network strengthens. Distortion or imbalance between the number of hosts or guests, are solved (over time) by simple supply/demand dynamics.
To many guests / to few hosts → Raise prices → More hosts come = Balance
To few guests / to many hosts → Lower prices → More guests come = Balance
Comparing Airbnb´s average price per night to an average hotel room is not particularly relevant, since you can book a castle for 40 people, or a 70cm bed inside a family home - its all up to you (and your wallet).
AIRBNB & ANTIFRAGILITY UNPACKED
Let's unravel the dynamics of Airbnb's antifragility in the ever-changing world of travel.
Airbnb, unlike hotels, operates more like the ultimate matchmaker for accommodations. The unique approach of Airbnb (matchmaker) turns out to give them some interesting benefits. When the travel scene hits a rough patch, Airbnb doesn't take a significant hit, because they aren't burdened by property ownership. Also, increased competition on their network benefit Airbnb, while downturns may improve the quality of listings - with only “superhosts5” surviving. In contrast, think of hotels as delicate dancers on a tightrope. They depend heavily on a steady flow of visitors, and any disruption, whether it's a dip in travellers or the emergence of new competitors nearby, can throw off their graceful balance.
Further, hosts are incentivised to offer high-quality listings and service in the long run - as receiving good customer reviews, increases the trust for new guest (with the willingness to pay a premium). On the other hand, guests (especially the bad ones) can simply use different profiles to book new places, if they have poor host reviews. This is one (of many) painpoint ABNB 0.00%↑ needs to solve over time. Maybe, Brian Chesky (CEO) & Co, will follow the retailer Costco, in deploying a membership-type model. Nevertheless, trust and integrity, serves as ABNB 0.00%↑ most vital assets.
Now, consider the difference between an individual and professional host on Airbnb. Professionals may potentially offer more reliable and consistent service, resembling hotels more than individual hosts. However, there's a twist in their tale. Since hosting is their primary income source, they can be more vulnerable to competition and periods of low demand - with the highly leveraged nature of most real estate businesses. And here's the unexpected plot twist: imagine regular folks hosting on Airbnb just for some extra income. Surprisingly, they might navigate slower times better than the full-time hosts, since hosting may only be a secondary source of income. But, as with any intriguing story, it's not a simple tale. There are myriad details to explore when comparing Airbnb with hotels or delving into the distinctions between regular and full-time hosts. Some angles are favourable, some add more complexity to the narrative. One of particular interest, is that Airbnb´s primary competitor, BKNG 0.00%↑, gain more market share among professional hosts.
A hotels view on Airbnb
CEO of Hilton Group, C. Nassetta, had this to say of Airbnb during a recent podcast interview6: “Airbnb is a good business, but it's different. We coexist with them, and they do their thing well. But it's a different kind of travel experience... No offense to Airbnb, but they don't offer the same consistency, quality, loyalty, and service as we do."
Further in the interview, he also highlighted that the two solve different travel needs, and therefore - don´t directly compete with each other. To exemplify this, lets imagine two different travel groups.
A group of young friends traveling to the mountains for cycling a week.
An old couple going to Copenhagen for a weekend.
The first group, may prefer a large house close to the nature, with amenities for cooking, space for themselves and low cost of living per person. In contrast, the second group, may prefer a hotel, since the short stay, make it much more convenient to check in at a hotel. Also, they know this hotel brand can offer both the location and quality of service they want/are used to. The advantage for Airbnb compared to hotels, is that their hosts can offer unique experiences at small scale. This gives Airbnb some type of counter-positioning advantage7, since hotels need scale to thrive.
Cashflow-dynamics printing Billions
There are few better examples showcasing the importance of cashflow timing, than the retail giant, COST 0.00%↑. What looks like a capital intensive business from the outside, is rather the opposite, due to them being able to sell goods prior to paying their suppliers. They literally don´t need own capital to run the business. ABNB 0.00%↑ is in a similar position, where guests pay prior to stays, but the hosts doesn’t receive it until later. This makes sense from both parties standpoint, but Airbnb benefits tremendously from this, by earning interest income from this. Let´s take a look at their balance sheet to understand how. Also, notice the large cash-pile compared to long-term debt below, resulting in a rock solid balance sheet.
The unsurprising outcome of the favourable cash flow timing (and some stock-based compensation), is best-in-class cash conversion (>100% FCF/EBIT), providing ample liquidity for managerial allocation. Then, the question arises: where should all this surplus cash be directed?
Capital Allocation & Valuation
While many businesses invest in factories or ramp up R&D efforts, Airbnb have minimal reinvestment needs. While capital allocation may be a risk factor in the future, with B.Chesky multiple times hinting at future expansion projects, potentially yielding low returns, things look favourably today. Management have recently decided to start buying back it´s own shares, which many investors appreciates. At a FCF yield of ~4.5% (-SBC) today, and with the solid balance sheet, Airbnb could possibly give shareholders an addition of ~4% shareholder returns yearly, just from buying back stock each year (given same valuation). If Airbnb is able to successfully grow another 10%+ a year while sustaining margins, you may look at 15%+ shareholder returns over multiple years. However, multiple contraction can also stop this, with ABNB 0.00%↑ today trading ~20x EV/EBIT, a multiple I would call fair, but that depends who you ask.
For now, that's all on Airbnb. The next article I will write on Airbnb, will cover it from the perspective of Booking Holdings. Perhaps these two will evolve into the VISA and Mastercard of travel? Who knows. Let's conclude with a quote from the CEO himself, Brian Chesky:
'Again, we're in like 100,000 cities around the world, and for every headline you read, there are cities with very workable solutions. There's not a lot of activity. We're actually seeing growth in supply across all types of markets, not just big cities featured in headlines. In two-thirds of the markets where Airbnb exists, there isn't even a hotel. Those cities in the headlines represent a very small percentage of the overall market concentration we have.' (B. Chesky, Q3 23 earnings call)
Disclosure: I own shares of ABNB, and none of this is investment advice.
Network Effects = The value of a product or service increases as more people use it. In other words, the more users a network has, the more valuable it becomes to each user.
MOAT = A key term in finance, highlighting a company's competitive advantage that shields it from external threats (like competitors). The rule is simple: where there are big profits, competitors will inevitably try to challenge and disrupt your success.
Kenton, Will. (2019). Sharing Economy. https://www.investopedia.com/terms/s/sharing-economy.asp
Costa, A. (2020). Experiences over possessions: Millennials and the experience economy. https://repositorio.iscte-iul.pt/handle/10071/21419
Superhosts = A phrase from Airbnb, for hosts with excellent guest reviews - A quality sign.
Tangen, N. (2023). Podcast: In Good Company: Hilton Group CEO.
Counter-positioning = Counter-positioning means that the product offered by a new business cannot easily be copied by an existing competitor with deep pockets because it would either go totally against their existing strategy or would be extremely expensive for them to copy.
Other sources: Company SEC filings, sharholder letters & earnings calls.