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Key takeaways
- Experienced management team with a proven track record of success.
- Business model resembles that of a financial services firm as the company acts as an intermediary between hosts and guests.
- The global travel and tourism market is expected to reach $1.7 trillion by 2027.
- Vacation rental market is a subset of the travel and tourism market and is expected to grow rapidly in the coming years.
- Investing in new areas, such as experiences and trips, which could further drive growth in the coming years.
The hospitality and travel industry
The hospitality and travel industry has experienced significant growth over the last decade. According to the World Travel and Tourism Council (WTTC), the industry’s global economic impact grew at an average annual rate of 5.5% between 2013 and 2019. In 2019, the industry contributed 10.3% of global GDP and supported 330 million jobs worldwide.
However, the COVID-19 pandemic had a devastating impact on the global tourism industry in 2020, with international tourist arrivals declining by 73%. The industry began to recover in 2021, with international tourist arrivals increasing by 61%. However, the recovery was uneven, with some regions and destinations faring better than others.
The WTTC expects the global tourism industry to continue to recover in 2023 (see Figure 1), with international tourist arrivals projected to increase by 63%. The industry is expected to reach pre-pandemic levels by 2025.
Here are some specific growth numbers for the hospitality and travel industry in the last decade:
- Global tourism grew from US$1.3 trillion in 2013 to US$2.9 trillion in 2019, representing a CAGR of 11.3%.
- Global international tourist arrivals grew from 1.1 billion in 2013 to 1.5 billion in 2019, representing a CAGR of 3.6%.
- Global tourism employment grew from 277 million in 2013 to 330 million in 2019, representing a CAGR of 1.9%.
The growth of the hospitality and travel industry has been driven by a number of factors, including:
- Rising disposable incomes
- Increasing urbanization
- Growing middle class in emerging markets
- Technological advancements that have made travel more accessible and affordable
As one can see, the United States and China are the two largest tourism markets in the world, and they are also projected to be the two largest tourism markets in 2023. France, Spain, and Germany are also major tourism markets, and they are expected to continue to grow in the coming years, driven by factors such as the increasing popularity of experiential travel and the growing demand for sustainable tourism.
The story so far
In 2008, Airbnb emerged from a simple idea when its founders, Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, rented out air mattresses in their San Francisco apartment to attendees of a design conference. This entrepreneurial spark led to the creation of Airbnb, an online platform connecting travelers with unique and affordable accommodations. The name “Airbnb” originated from “air mattress bed and breakfast.”
The company’s journey accelerated when it secured funding from Y Combinator in 2009. Airbnb rapidly evolved from its air mattress roots into a global hospitality powerhouse, offering diverse lodging options, including entire homes, apartments, and unconventional spaces.
Despite facing formidable challenges during the COVID-19 pandemic, Airbnb adapted by promoting domestic and extended stays. In December 2020, Airbnb’s IPO marked a historic moment. Today, Airbnb is a leading short-term rental platform with a unique business model that resembles that of a financial services firm.
A bank in disguise?
Airbnb’s business model resembles that of a financial services firm in several ways.
First, Airbnb acts as an intermediary, connecting hosts and guests on its platform. This is similar to how banks act as intermediaries between depositors and borrowers.
Second, Airbnb generates revenue from a cut of the gross booking value (GBV) of transactions on its platform. This is similar to how banks generate revenue from interest on loans and other financial products.
Third, Airbnb holds a significant amount of cash and cash equivalents on its balance sheet. This is similar to how banks hold a significant amount of deposits on their balance sheets.
One key difference between Airbnb and traditional financial services firms is that Airbnb does not have the same regulatory burden. For example, Airbnb is not required to comply with the same capital requirements as banks. This gives Airbnb a competitive advantage, as it allows the company to invest its cash reserves more aggressively.
Or is it a hedge fund?
Warren Buffett’s critique of Wall Street and hedge funds, emphasizing their focus on accumulating assets through salesmanship rather than investment performance, finds a curious parallel in Airbnb’s business model.
Similar to how hedge funds charge fees regardless of performance, Airbnb collects a standard fee along with additional charges ranging from 11% to 15%. Moreover, Airbnb leverages its assets to generate income, such as net interest income from guest funds held for future payouts. This practice resembles Berkshire Hathaway’s float dynamics, where the company holds large sums (float) that can be invested for its benefit.
Airbnb’s ability to manage and grow its float, much like Berkshire Hathaway’s, can provide a financial advantage over the long term. Unlike traditional insurance businesses, Airbnb can mitigate catastrophic risks through its booking data and matching funds to appropriate maturities.
In summary, while not a hedge fund, Airbnb’s asset accumulation and cash management strategy draw intriguing parallels to Buffett’s critique of Wall Street, potentially positioning Airbnb’s financial dynamics as an asset for long-term investors.
Growth over the years
Airbnb has experienced significant growth in terms of listings (see Figure 2), countries and regions, revenue, and EBITDA over the past decade. The company’s revenue has increased by over 20x since 2013, and its EBITDA has turned positive in recent years.
It is important to note that Airbnb’s growth was impacted by the COVID-19 pandemic in 2020. However, the company has rebounded strongly in recent quarters, and is now on track to exceed its pre-pandemic levels of growth (See Figure 3).
Competition
Airbnb’s top 10 competitors are all well-established companies with a strong track record in the travel industry. These companies offer a wide range of accommodation options and travel services, which makes them a direct competitor to Airbnb.
| 1 | Vrbo | Vrbo is a vacation rental marketplace that is owned by Expedia Group. Vrbo offers a wide range of vacation rental properties, including houses, apartments, condos, and cabins. |
| 2 | Booking.com | Booking.com is a travel booking website that offers a wide range of accommodation options, including hotels, apartments, vacation rentals, and hostels. Booking.com also offers flights, car rentals, and other travel services. |
| 3 | TripAdvisor | TripAdvisor is a travel website that offers reviews and information on hotels, restaurants, and attractions. TripAdvisor also offers a vacation rental marketplace called FlipKey. |
| 4 | Expedia | Expedia is a travel website that offers a wide range of travel products and services, including flights, hotels, car rentals, and vacation rentals. Expedia also owns a number of other travel websites, including Hotels.com, Orbitz, and Travelocity. |
| 5 | TUI Villas | TUI Villas is a vacation rental marketplace that is owned by TUI Group. TUI Villas offers a wide range of vacation rental properties in many popular tourist destinations around the world. |
| 6 | TravelStaytion | TravelStaytion is a vacation rental marketplace that is focused on offering budget-friendly accommodation. TravelStaytion offers a wide range of vacation rental properties, including apartments, houses, and hostels. |
| 7 | HomeToGo | HomeToGo is a vacation rental metasearch engine that allows users to compare prices and book vacation rentals from a variety of different websites. |
| 8 | Plum Guide | Plum Guide is a vacation rental marketplace that focuses on offering high-quality accommodation. Plum Guide has a team of experts who review each property before it is listed on the website. |
| 9 | Outdoorsy | Outdoorsy is a marketplace for renting and sharing recreational vehicles, such as RVs, campers, and trailers. Outdoorsy also offers insurance and roadside assistance for renters. |
| 10 | Marriott Homes and Villas | Marriott Homes and Villas is a vacation rental marketplace that is owned by Marriott International. Marriott Homes and Villas offers a wide range of vacation rental properties, including houses, apartments, and villas. |
Airbnb has the largest TAM and market footprint of its competitors (see Figure 4). However, Booking Holdings and Expedia Group generate more revenue than Airbnb. This is likely due to the fact that Booking Holdings and Expedia Group offer a wider range of travel products and services, including flights, car rentals, and other travel services.
Vrbo is the closest competitor to Airbnb in terms of TAM and market footprint. Vrbo is a vacation rental marketplace that is owned by Expedia Group. Vrbo offers a wide range of vacation rental properties, including houses, apartments, condos, and cabins.
TUI Villas and Marriott Homes and Villas are also significant competitors to Airbnb. These companies are both owned by large travel companies, TUI Group and Marriott International, respectively. TUI Villas and Marriott Homes and Villas offer a wide range of vacation rental properties in popular tourist destinations around the world.
HomeToGo, Plum Guide, and Outdoorsy are smaller competitors to Airbnb. These companies focus on specific niches in the vacation rental market. HomeToGo is a metasearch engine for vacation rentals, Plum Guide offers high-quality vacation rentals, and Outdoorsy offers recreational vehicles for rent.
Airbnb’s competitive advantages
Airbnb enjoys distinct advantages in the travel industry, differentiating it from both traditional hotels and online travel agencies (OTAs) like Booking and Expedia.
- Lower marginal costs: Airbnb does not have to own or maintain physical properties, which gives it a significant cost advantage over hotels.
- Wider range of choices: Airbnb offers a wider range of accommodation choices than hotels, from budget-friendly rooms to luxury homes. Airbnb’s listings are located in over 220 countries and territories, compared to 220 for Booking.com and 191 for Vrbo.
- Direct relationship with customers: Airbnb has a direct relationship with its customers, which gives it an easier avenue for acquiring new users and marketing its services.
- Stronger profit margins: Airbnb has stronger profit margins than most other travel companies, which gives it more flexibility to invest in growth and compete on price.
OTAs have tried to enter Airbnb’s territory by offering private rooms and homes, but they struggle to match its unique strengths. Airbnb’s direct customer relationships give it a more efficient path to acquiring users, whereas OTAs like Expedia spend a substantial portion of revenue on marketing. Airbnb’s customer acquisition costs stood at 19.5% of revenue, considerably lower than Expedia’s 52% in a recent quarter. Airbnb has a lower marginal cost (~10%) and higher profit margin (>20%) than its competitors, Booking.com (~12%, ~18%) and Vrbo (~15%, ~16%).
Airbnb’s competitive edge is built on diverse accommodations, global accessibility, and community trust. The platform offers unique lodging options worldwide, appealing to travelers seeking distinctive experiences. With a vast global presence, Airbnb ensures access to accommodations in both popular and remote destinations. Its emphasis on community and trust, facilitated by host and guest reviews and secure payments, fosters reliability. Additionally, Airbnb empowers hosts to monetize their spaces, promoting entrepreneurship. Amid the COVID-19 pandemic, Airbnb adapted by highlighting domestic and extended stays. These advantages, coupled with strong branding and innovation, position Airbnb as a leader in personalized and trusted travel experiences.
Risks
Despite its competitive advantages, Airbnb faces a number of risks.
- Expansion into new verticals: If Airbnb expands into new verticals of travel that are not as advantaged as its current business, it could erode its profitability and competitive edge.
- Major accidents: A major accident in an Airbnb listing could damage the company’s brand and reputation.
- Regulatory changes: Airbnb could be subject to new regulations in the future, which could increase its costs and reduce its profitability.
Airbnb faces several risks in its operations. Regulatory challenges and legal disputes are persistent threats, with local authorities imposing restrictions and taxes on short-term rentals. The platform is also susceptible to economic downturns, as travel demand can decline during recessions. Maintaining trust among users is crucial, and any security breaches or safety incidents can tarnish Airbnb’s reputation. Additionally, competition from other accommodation providers and evolving traveler preferences pose ongoing challenges. The COVID-19 pandemic demonstrated the vulnerability of the travel industry, causing a significant drop in bookings. Airbnb’s growth and profitability depend on its ability to navigate these risks effectively and adapt to changing market dynamics.
Tailwinds
Here are some of the specific tailwinds that Airbnb is benefiting from:
- Pent-up travel demand: After two years of COVID-19 restrictions, people are eager to travel again. This is driving strong demand for Airbnb rentals.
- Rise of digital nomadism: With more and more people working remotely, there is a growing trend of digital nomadism. This is creating new opportunities for Airbnb to attract guests who are staying for longer periods of time.
- Expansion into new markets: Airbnb is expanding its presence into new markets, such as Brazil and Germany. This is opening up new opportunities for growth.
- New product offerings: Airbnb is introducing new product offerings, such as Airbnb Rooms and Airbnb Experiences. This is helping to differentiate the company from competitors and appeal to a wider range of customers.
The rise of experiential travel and the desire for unique, personalized stays align with Airbnb’s diverse offerings. As remote work gains popularity, longer-term stays in non-traditional accommodations become more attractive, benefiting the platform. Sustainable and eco-conscious travel trends also favor Airbnb, which allows travelers to choose eco-friendly lodging options. Moreover, Airbnb’s established brand recognition and global reach provide a competitive advantage. As the travel industry recovers from the impact of the COVID-19 pandemic, Airbnb is well-positioned to benefit from the growing demand for flexible, memorable, and locally immersive travel experiences.
Bottom line
Overall, Airbnb is a well-positioned company with a strong track record and a number of growth opportunities ahead. The company’s unique business model, strong competitive advantages, and healthy balance sheet make it an attractive investment opportunity for long-term investors.
Portfolio fit
Might be for
- Investors who believe in the long-term growth of the travel industry. The travel industry is expected to continue to grow in the coming years, and Airbnb is well-positioned to benefit from this growth.
- Investors who are comfortable with investing in a company with a unique business model. Airbnb’s business model is different from that of traditional travel companies, which could give it a competitive advantage.
- Investors who are willing to invest in a company with some risks. Airbnb faces some risks, such as the potential for regulatory changes and the impact of major accidents in Airbnb listings. However, the company is well-managed and is taking steps to mitigate these risks.
Might not be for
- Investors who are looking for a company with a more traditional business model. Airbnb’s business model is different from that of traditional travel companies, which may not be suitable for all investors.
- Investors who are not comfortable with investing in a company with risks. Airbnb faces risks, such as the potential for regulatory changes and the impact of major accidents in Airbnb listings. Investors should carefully consider their own risk tolerance before investing in Airbnb.
- Investors who are looking for a company with a higher dividend yield. Airbnb does not pay a dividend, so investors should consider investing in other companies if they are looking for a company with a high dividend yield.
Ultimately, whether or not AirBNB is a good fit for a particular investor depends on the individual investor’s investment goals and risk tolerance. Investors should carefully consider AirBNB’s risks and rewards before making an investment decision.
