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Airbnb (ABNB) Stock | NASDAQ: ABNB

Covered by Stratosphere

The Experience Marketplace

Airbnb, Inc. ("Airbnb") is an online marketplace for overnight accommodations. Founded in 2007, Airbnb is now a vacation and short-term rental staple with 4 million hosts who have seen over 1 billion guest arrivals in 100,000 municipalities around the world.

Airbnb is advancing the sharing economy - a peer-to-peer ("P2P") based construct based around the idea of sharing resources. In the case of Airbnb, individuals and investors share their homes and short-term rental properties with countless guests each year looking for unique vacation stays and an alternative to traditional lodging.

Stratosphere Score

7

Growth

8

Valuation

4

Quality

8

Margins

8

Dividend

0

Balance Sheet

9
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  • Airbnb is in the business providing a marketplace for the buyers and sellers of experiences. Airbnb found itself in the middle of an ever-expanding market, one that appears will grow for decades to come with the growing global middle class.

  • Airbnb scaled globally quickly, giving it a unique competitive advantage. Without this scale, Airbnb would have likely not had the level of network effects that the platform sees today. Airbnb is often top of mind for consumers booking accommodations nearly anywhere in the world given the wide selection (over 4 million hosts worldwide in over 100,000 cities and towns), unique listings, and flexibility vs. traditional options.

  • Airbnb should be able to provide shareholders with lush returns once it is sustainably profitable. While this still may take years, the company sports a strong balance sheet with little debt.

  • To continue succeeding, Airbnb must take steps to ensure guest and host experiences are consistent across the board, upholding a high level of standard and security. Additionally, Airbnb must constantly differentiate itself to avoid losing business to other platforms as switching costs for both hosts and guests are low.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Unique User Experience

Unlike traditional accommodations providers, Airbnb enables its hosts to sell experiences. People and groups book on Airbnb for various reasons. However, it is usually the unique features of an Airbnb listing that prospective guests find more attractive versus a hotel or motel in the same region.

It is widely known that Airbnb listings are often somebody's home. Such listings may also come equipped with a kitchen and plenty of space to host families or allow for remote work. These features make Airbnbs far more convenient than hotels on many occasions, particularly longer-term stays. For stays above seven days, laundry machines, workspace, and a kitchen become a necessity rather than a luxury. Airbnb fills this gap that many traditional lodging providers do not offer.

Additionally, one will often find Airbnb listings in rural and remote locations that hotels would rather avoid. While hotels have great breadth around the world, oftentimes they lack depth. Airbnbs will typically be found on every corner and rural setting across the globe.

Moreover, Airbnb has a vast array of ultra-unique and mega-luxury listings in almost every country one can imagine. From treehouses to luxury beachfront properties, a guest will be able to find exactly what they are looking for on Airbnb.

Most recently, Airbnb launched Airbnb Experiences. Airbnb Experiences are excursions and local experiences that local hosts sell via Airbnb. This comes back to Airbnb's goal of providing a marketplace in which people can buy and sell experiences.

Network Effects

Airbnb has taken the vacation rental market by storm, now controlling about 20% of the market according to some sources. The sheer size of Airbnb is a major advantage over smaller and emerging players, and earned the company the right to having the most powerful brand name in the vacation rental industry today.

Like any marketplace, there is only value in engaging with one if there are two sides - a buyer and a seller - who are willing to sell to each other. But not every one individual will want to transact with everybody else.

Think about a farmer's market or Facebook Marketplace - while there may be a lot of appetizing produce for sale in the former and many furniture pieces to buy in the latter, one is not there to purchase every single good.

Instead, the value in marketplaces like the farmer's market or Facebook Marketplace is that there are thousands, even millions of options that a buyer can choose from. If a buyer feels he or she has plenty of compelling options, sellers will also find this marketplace to be a great liquid market where he or she can sell a good or service quickly.

Airbnb's marketplace is one that inherently holds tons of power. By having grown so large, it is often the first place buyers look to book a vacation rental - whether that is a standard rental or a unique or luxury property - as opposed to traditional lodging.

The Airbnb platform has connected over 1 billion unique guests or guest groups with around 4 million hosts that exist today. No matter where a vacation or short-term rental is required, Airbnb likely has a listing there. The thousands of connections that occur between guests and hosts each day are what spurred a powerful network effect that should continue to propel Airbnb towards greater prosperity.

Capital Light

Instead of owning the real estate itself, Airbnb leverages the global network of 4 million individual and professional hosts to generate revenue. Airbnb's hosts are not employees of the company, nor are they contracted. The company simply provides the marketplace for its two major customer groups - hosts and guests.

This model allows Airbnb to maintain a capital-light business model, relying on guests and hosts transacting with each other to generate cash. The pricing structure is typically as follows: 3% fee charged to the host and about 14% charged to the guest. The guest charge may seem steep, but Airbnb is also known for the plethora of affordable listings anywhere in the world on its marketplace.

By facilitating and constantly improving the user experience between these two groups transacting, Airbnb grows as both customer groups fulfill their interests. Guests find the stays they need for a vacation or short-term rental, and hosts make extra cash by welcoming guests into their homes or rental properties.

While Airbnb has not yet reached a state of sustainable profitability, it is inching closer towards that goal with its model. Airbnb properties are in high demand due to the number of choices and flexibility guests have with choosing and renting stays.

Over time, the company should be better able to capture secular trends within travel and work-from-anywhere than other accommodations providers, like hotels and resorts. While providers in those industries must worry about asset positioning, Airbnb will automatically pivot and reap the benefits from evolving tastes and preferences of travelers.

Airbnb would not have to sell off any assets if an area or type of rental property becomes more undesirable nor would the company need to place bids in a frothy real estate market that has suddenly become a hotspot for travel. These advantages will allow Airbnb to index itself more closely to what the global market is doing as opposed to relying on expensive, fixed assets to do the heavy lifting.

Opportunities Ahead

  • One thing is now for certain - travel is here to stay. Early in the pandemic, there were concerns around travel volumes never returning to pre-pandemic highs. Over the last several months, there has been tons of travel happening all around the world. In the US, TSA checkpoint travel numbers are now consistently around 2019 levels even with some COVID restrictions still in place. Nonetheless, Airbnb will benefit from this trend. As the global middle class continues to urbanize and grow its collective disposable income, travel will increasingly become a staple for many individuals. Airbnb is well-diversified and well-positioned to ride the wave.

  • Airbnb has plenty of room to grow into a multi-trillion-dollar total addressable market ("TAM"). The company identified a TAM of over $3 trillion, including $1.8 trillion in short-term stays, $210 billion in long-term stays, and another $1.4 trillion in experiences. The emergence of work-from-home and work-from-anywhere should help Airbnb capture more long-term stays. While we think Airbnb will capture a mere fraction of this market, the company is a leader in the alternative accommodation / lodging space with a powerful network effect. A large TAM is beneficial for the company in that there will be no overhead "macro" resistance. However, it is note-worthy that there are plenty of competitors and the size of the market will likely attract more over time.

  • Selling experiences is a lucrative business, and Airbnb is positioned with tons of optionality in this field. The company is known for advancing the sharing economy with listings that are not its known. However, Airbnb's platform also inherently holds large optionality. Airbnb today has the most basic to the most luxurious and exotic listings. It now also has "intangible" experience, like wine tastings, tours, and plenty more one can book on the site. What started out as only one booking turned into an experiential marketplace. Airbnb can continue to explore new ways to help people buy and sell experiences. If Airbnb does this well, we believe the company could be known as an entirely different company than today.

Risks

Inconsistency of Experiences

Airbnb is a marketplace with millions of individuals using the platform each year. As such, there may be many poor experiences faced by both the host and the guest that could tarnish the reputation and brand name of Airbnb.

Home safety, severe property damages, security, privacy, high fees, and last-minute host cancellations are some of the concerns guests and hosts face with listings that are not directly listed by the company itself. Like Uber, there are countless stories of poor experiences faced by customers that likely would have prevented by using traditional services.

The sharing economy presents robust opportunities for companies like Airbnb and the consumers that engage with such services, but it certainly comes with many risks. To sustain its competitive advantages, Airbnb must keep these concerns at bay.

Otherwise, it may lose control of its own reputation and fate if one poor experience leads to another, and word spreads between friends and family before its global brand name becomes impaired.

Low Switching Costs

Both customer groups - guests and hosts - face low switching costs when it comes to alternatives to Airbnb or any lodging provider for that matter.

Guests can simply compare prices between numerous options instantaneously and choose the best one for his or her needs. While Airbnb offers some great listings, many of them are out-of-reach to the typical price-conscious consumer looking for value (i.e., a great stay for a reasonable price).

Airbnb faces stiff competition from other marketplaces and booking sites, like VRBO, Expedia, and TripAdvisor. Some of these services even offer comprehensive travel packages, reducing friction for customers looking to get a full travel package (i.e., flight, car rental, and accommodations).

Hosts also face low switching costs and Airbnb can exercise little control over the millions of small hosts that power its platform. Each host is looking for the best marketplace to list on to fill their vacant rental properties at the highest possible price with the greatest amount of take-home dollars.

If another platform, like VRBO, could provide a similar marketplace for a lower price and / or with the potential to list the listing for more, the host is free to leave Airbnb at any point. Just as it is easy to sign up to be an Airbnb host, it is also easy to leave.

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