Airbnb Deep Dive: The verb for authentic travel, and maybe a new lifestyle

In early 2020 Airbnb faced a perfect storm. Coming off a significant ramp in spending, news of a deadly virus was emerging that would go to lock down the world. With plans for a public IPO, Airbnb was in for its most difficult period since the early days of its founding. What probably felt like a disaster for CEO Brian Chesky at the time turned out to be a transformational period for Airbnb. The category defining travel company would emerge in a much better position to capitalize on a revolution underway in the travel industry.

By the eighth week after Covid-19 had been declared a global pandemic Airbnb lost 80% of its business. The press was having a field day at Airbnb's expense with click bait headlines such as "Is This the End of Airbnb?".

Airbnb was forced to delayed its IPO, cut 25% of its workforce, and shutter non-core businesses such as movie production.

People were isolating and working from home for months on end, cancelling travel plans, and certainly were not crossing any borders. But a funny thing happened. People got bored living, working and playing from home and wanted a change of scenery. Millions took to Airbnb to find a place to stay in nearby towns and cities that typically did not see a lot of Airbnb traffic as part of a new "work from anywhere" trend that blurs the lines between travel and living. People were also extending the length of their Airbnb stays by weeks, months or even entire seasons at a time.

Since pandemic worry has waned, and borders have opened, Airbnb has risen like a Phoenix, stronger than ever and ready to profit from the hardening permanence of new lifestyles that were formed during the pandemic.

In their most recent quarter (Q2 2022) Airbnb shared that Nights and Experience bookings reached a new all time high, exceeding 103 million. Revenue of $2.1 billion, up 58% year-over-year, demonstrated travel had rebounded.

Airbnb is in a stronger position than their pre-pandemic levels after the falling off a cliff drop in their business forced them to get lean and return to their roots of product innovation.

So, if you are intrigued about the work from anywhere revolution, Airbnb offers a good opportunity to invest in a platform with some of the strongest network effects in all of tech. In this article I use my framework for evaluating technology related stocks to review Airbnb in the context of the six characteristics below to see if it's worthy of consideration by growth investors:

1. Riding a megatrend

2. Market opportunity

3. Better mouse trap

4. Optionality

5. Reasonable valuation and strong fundamentals

6. Strong leadership

The tailwinds Airbnb enjoys from the new thematic of more flexible living, enabled by remote work, has me bullish about Airbnb's future.

The office as we know it is over. It is an anachronistic form factor from a pre-digital age

- Brian Chesky, CEO, Airbnb, May 2022

After two years of working from home, knowledge workers (and some enlightened employers) are resisting the return to the office. In fact, post pandemic hybrid work is up seven points year-over-year, as compared to 2021, to 38% in 2022 (Source: Microsoft Workplace index - Great Expectations: Making Hybrid Work Work). And, in the same 2022 Microsoft survey over half of respondents (52%) say they are likely to consider shifting to hybrid (working in the office only some of the time) or remote work in the year ahead.

According to an Accenture survey, 83% of workers prefer a hybrid work model and that 63% of high-growth companies have already adopted a “productivity anywhere” workforce model.

There are plenty of reasons that the remote work habits formed over the last two+ years have taken hold:

• A recent study from the University of Chicago found that 60% of workers felt like they were more productive when working from home.

• A report by Owl labs in 2021 found that 55% of respondents say they work more hours remotely than at the physical office.

• A nine-month-long Stanford study found that remote workers took fewer sick days and breaks and were 13% more productive than their in-office counterparts.

• Remote employees save an average of 40 minutes daily from commuting (Source: Owl labs).

• People saved on average close to $500 per month being at home during COVID-19, resulting in savings close to $6,000 per year (Source: Owl labs).

• 53% of employees are more likely to prioritize health and well-being over work than before the pandemic (Source: Microsoft Workplace index)

Despite the overwhelming evidence, some employers are still digging in their heels on the great work debate of our time. Tesla CEO Elon Musk recently emailed employees with the dispiriting subject line "Remote work is no longer acceptable". Musk told employees wishing to do remote work "must be in the office for a minimum (and I mean *minimum*) of 40 hours per week". Apple tried to bring people back into the office for three days a week. They had to postpone their plans when 1,000 plus current and former employees signed an open letter calling the plan "inefficient, inflexible and a waste of time".

Not all employers are resisting the remote work trend. And, it's not just smaller companies looking to attract talent they wouldn't otherwise have access to. Adobe, American Express, Amazon, AT&T, BP, Citigroup, Intel, Meta, 3M, Microsoft, Nike, Shopify, and SAP are just some examples of large companies that have adopted a hybrid or fully remote work model.

One of the greatest benefactors from the remote work trend itself Airbnb is putting it's money where its mouth is with the gutsiest policy yet - a full-time remote work policy and some key perks.

Employees are allowed to work from anywhere in the US without a change in their pay. Airbnb employees can also work in more than 170 countries for up to 90 days in each location. To help more people take trips to work abroad, Airbnb is working with about 20 countries to remove some of the red tape around securing a temporary work visa.

The rise in remote work has led many to change their travel habits:

• 42% of employees would want to use their company’s remote working policy to work from abroad (Source: HQ Hubble, 2021).

• A third (37%) of survey respondents said they were looking into long-stay travel since work can now be completed from areas outside their normal in-office space and with more flexible hours (Source: Airbnb survey, https://news.airbnb.com/travel-revolution-in-data/).

• 55% of survey respondents said they were hoping to travel more during off-peak times from work (Source: Airbnb survey, https://news.airbnb.com/travel-revolution-in-data/).

• 53% of survey respondents indicated that they were now more open to spontaneous travel as compared to before the pandemic (Source: Airbnb survey, https://news.airbnb.com/travel-revolution-in-data/).

Great investment opportunities are often found by identifying megatrends that will benefit certain companies. With more people having the flexibility to live and work from anywhere, Airbnb is evolving from just a travel company into a platform for travelling and living. For investors this means an expanding total addressable market.

Airbnb has a massive total addressable market they've estimated to be $3.4 trillion, consisting of short-term stays, long-term stays and experiences.

Short term stays

Defined as less than 28 days paid accommodation for leisure or business travel, the $1.8 trillion short term stay market is where Airbnb has done its most disruption to date. Since its founding days Airbnb was able to tap into the fundamental need of human beings to connect. It created an entirely new category of travel that allowed tourists to have authentic experiences. Rather than cookie cutter vacations where tourists would stay in a standardized hotel located in a central district and follow the beaten down path to the frequently visited landmarks and attractions, Airbnb allows tourists to live like locals in over 100,000 cities and towns around the world. Airbnb has perfected hosting so much it has become both a verb and noun for this new form of travel.

Airbnb's online marketplace for lodging allows people to book everything from a private room in someone's home to a luxury villa. Competitors include all of the major hotel chains, boutique hotel brands, independent hotels, bed & breakfast, plus direct P2P (person-to-person) vacation rental platform competitors such as VBRO. Airbnb not only competes with these supply side players, but also the major online travel aggregators such as Booking.com, Kayak, Priceline, Expedia and more. With so much choice, the short term stay market is fiercely competitive. Guests often choose based on brand, differentiation, price and availability; all variables Airbnb does well with.

With Booking.com focused on aggregating Hotel and short-term accommodations, Airbnb is the clear leader in the vacation rental platform sub sector. It's closest competitor VRBO has captured only 5.26% of the short term stay market, while Airbnb has a dominant 25.97% share position. Expect Expedia (through it's full ownership of VRBO) and Booking to intensify their investments in the vacation rental platform business in the coming months and years.

Online travel market share breakdown

Let's dive deeper into the vacation rental sub sector to better understand who uses it, whether it's stealing share from other short term stay offerings and what this could mean for Airbnb's future.

Only 9.2% of global travelers (referred to by Statista as users) have used vacation rental offerings such as Airbnb and VRBO, as of 2022 (Source: Statista). Statista is forecasting user penetration to grow to 11.3% by 2026. That leaves 89% of global travelers for Airbnb to try and convert to vacation rental customers. Of course Airbnb will not get 100% of global travelers to use Airbnb, let alone any vacation rental property. Airbnb recently pulled out of the China market and are less penetrated outside of North America. However, we are still in the early innings of the market with 91% of travelers having still not tried a vacation rental.

The low penetration of the vacation rental market it is not surprising when you consider the profile of Airbnb customers today. 74% of Airbnb customers were between the ages of 18 and 44 in 2017 (Source: 2022 Airbnb Statistics: Usage, Demographics, and Revenue Growth, stratosjets.com). The older and wealthier traveler has stuck with with their well engrained travel habits. As millennials and Gen Z'ers grow their disposable income I expect vacation rentals to capture more share of the global travel dollars spent.

While Statista is forecasting increased penetration of vacation rentals as a traveler option, they are forecasting it's share of global travel spend to drop to 11.3% by 2026 (Source: Statista), from 13.8% levels in 2021. So, while more travelers will use vacation rentals in the future, they will spend less on them relative to competing offerings such as hotels or cruises. I am skeptical of Statista's outlook here.

Source: Statista

Should we not expect the increased use of vacation rentals (15.6% market share) achieved at the peak of the pandemic in 2020 to sustain more? In a 2022 survey by Evolve travel trends, an overwhelming 86 percent of respondents said they plan to book a vacation rental next year with another 14 percent citing "maybe." Only 0.3 percent of respondents said they did not plan to use a vacation rental in 2022. We should be skeptical as we are comparing data from different sources and intent doesn't always convert into a transaction. However, travel habits have been steadily changing over the last decade as vacation rentals, thanks to the rise of Airbnb, are becoming more mainstream. In fact, vacation rentals in the US have reached record demand levels, according to AirDNA’s new mid-year short-term rental outlook report.

Also, with four million listings, Airbnb is larger than the top five hotel brands combined. Their scale may allow them to gain share if demand for hotels were to outstrip capacity.

Beyond the potential for more travelers to adopt vacation rentals into their travel budgets, there is more upside to be had by increasing the average revenue per user (ARPU). ARPU for vacation rental is expected to be only US$116.40 in 2022 (Source: Statista). Provided guests have a good experience, we should expect them to spend more than one night per year in a vacation rental. In fact, Airbnb's own sales data is showing that people are booking for longer durations on the platform.

Long term stays

A big part of my investment thesis is the potential of the long term stay market, defined as stays longer than 28 days, and Airbnb's ability to capture it. In their S-1, Airbnb estimated the long term stay total addressable market (TAM) to be $210 billion based on the portion of the global real estate rental market they felt well positioned to serve.

The desire of information workers, where location does not affect one's ability to do their job, to work from abroad is materializing in Airbnb's business results. In 2018, 13% of nights booked on Airbnb were for stays 28 days or longer. In 2019, 14% of nights booked on Airbnb were for stays 28 days or longer, reaching 21% in Q1 2022. While 28 day+ stays percentage of total Airbnb bookings dropped to 19% for Q2 2022, long-term stays remain Airbnb's fastest-growing category by trip length as the way people travel and live continues to change. The growth of the long term stay market is an important metric to regularly monitor in terms of ensuring the investment thesis for Airbnb remains intact.

The long term stay market it still in its infancy. There is a lot to learn and for Airbnb to optimize. Airbnb has ramped up its recruiting for hosts that offer long term stays and they've launched a Live and Work Anywhere initiative to help support destinations such as Baja, Buenos Aires, the Caribbean and Lisbon to become the most desirable and remote-worker-friendly locations around the world. As part of this program and to support the commitments governments are making to become a "Live and Work Anywhere" destination Airbnb will invest in developing infrastructure in these areas and building long term stay demand for the destinations.

This is not just a movement that Airbnb is pushing. The demand is real and more and more governments around the world such as Bali, Bermuda, Costa Rica, Cayman Islands, Croatia, Dubai, and Iceland, have launched digital nomad visas that allow remote workers to stay tax free.

Time will tell how large a market this becomes for Airbnb but thanks to the new norms the Covid-19 pandemic developed it looks promising for the company.

Experiences

Airbnb launched its experiences business in 2016, as an "activities designed by locals" companion to its core vacation rental business. It competes in the $1.4 trillion attractions market, which includes tourist and resident spend on tours, attractions and restaurants.

Airbnb Experiences is for a growing demographic that don't want to go on large group tours. These experiential travelers want very different, unique experience that tens of thousands of hosts around the world hand craft using their unique skills and passions. Whether its learning how to make handmade pasta in Rome, studying music history in Havana, or a piano meditation concert from Paris hosted online; there is something for everyone and every group.

Airbnb experiences compete with lesser known platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.

While Airbnb does not currently break out the size and volume of its experiences business, presumably because its embarrassingly small, Morningstar analyst Dan Wasiolek estimated that Airbnb likely did $250 million in Experiences’ bookings in 2019. On a service addressable market (SAM) for the experiences business of $239 billion, that's a drop in the bucket for Airbnb with lots of potential.

One of the challenges Airbnb's Experiences faces is its refusal to offer tickets to popular, and institution operated, attractions on its platform. They have opted to remain true to their identity of authenticity and loyal to hosts who curate unique experiences for Airbnb users. People wanting to book Disneyland or buy tickets for the Eiffel tower are out of luck on Airbnb.

“They just do not have a lot of product that people want,” said Douglas Quinby co-founder and CEO of Arival, speaking about Airbnb Experiences.

My investment thesis does not count on Airbnb's ability to capture more of the experiences market alone, so any major gains here will be a nice bonus. Encouraging signs for the future include high average ratings for Airbnb experiences (higher than accommodations on average) and recent public statements that they will be prioritizing the experiences business in the years ahead.

They say that imitation is the greatest form of flattery. In the case of Airbnb there have plenty of admirers over the years. We see the pattern play out over and over again. Innovative start-up upends old industry, forcing incumbents to throw together a copycat product or service. The major music labels all failed with their water downed facsimiles of iTunes and Spotify. Automakers with 100+ years of history and experience manufacturing cars, and decades worth of time to reverse engineer the Tesla Roadster, have yet to come close to matching the quality and performance level of Tesla electric vehicles (EVs) with their own EV models. In the case of Airbnb, they have reached a level of disruption to the hotel industry that has spanned copy cat moves made by established players such as Marriot and Wyndham Hotels. They don't come close.

To create a comparable offering to Airbnb, with the breadth and density of unique and alternative accommodations, would be very difficult for any competitor at this stage. Airbnb is the undisputed product leader in authentic travel. Airbnb offers millions of accommodations in over 100,000 towns and cities around the world on its platform, across 55 truly unique and differentiated categories. All backed with comprehensive travel protection.

Airbnb Categories

How has Airbnb to been able to build an industry leading person to person travel platform? It starts with one of the strongest networks in all of tech, not just online travel platforms. Then, add a brand that has achieved verb level status, and a trust and protection program that is the envy of the vacation rental platform industry.

The world's most locked in hosting network

In a platform market like the one Airbnb helped create, it is the best platform that wins, not the best product necessarily. Airbnb's platform dominance is due to strong network effects achieved through a dynamic ecosystem of hosts and guests that have created barriers to entry for would be competitors.

With over 4 million hosts and a cumulative 1 billion+ guest arrivals since its inception, Airbnb has one of the top five networks in all of tech. As more hosts and guest use Airbnb, the value for everyone increases. As more hosts add their rooms or houses to Airbnb, more unique accommodations are available in more places, which in turn attracts more guests to Airbnb. As more guests use the Airbnb platform, more hosts are compelled to list on Airbnb to serve the growing demand on the platform and optimize their earnings. A virtuous cycle was long ago established that increases value for both new and existing users (hosts and guests) as the network grows.

Airbnb is completely dependent on third party hosts to offer a vast range of unique and differentiated listings, at sufficient supply levels and competitively priced in the geographic locations guests want. Airbnb doesn't own any of the inventory on its site, acting as a double edge sword. While this asset light business model provides significant margin advantages, Airbnb gives up control over how its inventory meets (or doesn't meet) customer expectations.

If hosts leave Airbnb in droves for competitors or intensify cross listing with competitors, Airbnb will face major issues meeting customer demand. The health of both sides of the marketplaces is paramount to Airbnb's long term success. Today, Airbnb currently serves hosts very well, offering the greatest customer demand available, host protections and powerful tools. While it's always very difficult to dislodge a platform that's reached the levels of dominance Airbnb has, it's a death spiral if Airbnb slips with either side of its marketplace. Currently Airbnb (6 million active listings) has 3 times the number of active listings as its next closest director competitor for hosts, VRBO (2 million listings). This leaves me optimistic about Airbnb's position as hosts will favor the platform that makes them the most money and today that is Airbnb.

Hosting is core to the Airbnb product experience. They determine if there is sufficient supply and whether a guest has a good experience with Airbnb. Airbnb has built a vast ecosystem of diverse hosts that provide guests access to a vast world of unique homes and experiences that would not be discoverable or accessible otherwise. Great hosts enable guests to establish a deeper connection to the places they visit.

So, if hosting is critical to the Airbnb experience, who are hosts? Hosts generally fall into two categories, individual or professionals. An emerging category of hosts worth monitoring are both traditional investment firms that have been buying up vacation homes and retail investors who use platforms like Arrived Homes to become fractional investors in short term rental properties and list on Airbnb. It's no wonder both institutional and retail investors are pouncing on the short term rental market powered by Airbnb. According to real estate investment platform Here, vacation rentals generate up to 160% more revenue on average than traditional long-term rentals.

Individual hosts are the schoolteachers or artists who want to earn some extra income and share their passions. Professional hosts run property management or hospitality businesses and use Airbnb to list their properties and extend their reach. As of December 31, 2019, 72% of the nights booked were with individual hosts. Individual hosts are the lifeblood of Airbnb and are critical to retain.

While Airbnb has done a good job keeping switching costs high for hosts thru its strong network effects and a suite of tools to help automate aspects of hosting, I'd like to see them invest more in keeping switching costs high for guests. If I can't find the lodging I'm looking for at the price I can afford, it's very easy for me to type booking.com or Expedia into my browser. To avoid losing customers because they aren't able meet their requirements, Airbnb could open their platform to traditional hotel chains for listing and increase the supply radically. Another way to make it less compelling for guests to book alternatives in the insanely competitive short term stay market would be for Airbnb to create a guest loyalty program.

Airbnb is a branded verb

Source: Net Promoter Score

Airbnb has reached the rarified air of a select group of companies, such as Google and Uber, where their brand has become so strong it is synonymous with the product or service they provide. Airbnb ranks first in Net Promoter Score (NPS), which is the standard for measuring likelihood to recommend and brand reputation, for the online travel market.

Airbnb has been very effective at turning their brand goodwill into unpaid marketing. Roughly 80%-90% of traffic that visits Airbnb is earned through organic search and is therefore, unlike their competitors, not a marketing expense they must incur.

Airbnb is a business that is built to last because of its network effects and brand. Lets talk about a time when Airbnb's network was tested by a more, well funded competitor.

In 2011 Airbnb faced its first real direct competition, a Berlin based startup called Wimdu. The battleground was Europe, but there was more at stake. There was already precedent in the industry, with Booking.com, for a European competitor to grow into a dominant, global player.

Wimdu was started by the infamous Samwer brothers, who had earned a reputation for cloning US Internet businesses. They built and sold a Euro auction site to ebay for $50M, as well as their second company Citydeal, which was inspired and acquired by Groupon for $170M. Not surprisingly, Wimdu launched with a similar look and set of taglines to Airbnb.

Armed by a fresh round of $90M and 400 employees at launch, as compared to Airbnb's $7M round and 40 employees at the same time; Wimdu was 10X larger than Airbnb.

The problem with Wimdu's war chest was that it did not translate into strong network effects. To increase their supply, Wimdu tried deploying bots to scrape Airbnb listings and present on their own site. They also recruited slumlord property managers who oversaw shitty hostels. They burned through a lot of their VC funding on paid marketing campaigns to temporarily boost demand.

At the same time Airbnb was focused on handcrafting their product experience to exceed the expectations of both hosts and guest. Amazing product experiences led to word of mouth, search engine optimization earned marketing and PR. Airbnb ran an amazing ground game to win over the hard side of the network - hosts. Rather than trying to buy a network of guests and host like Wimdu was doing, Airbnb earned it market by market.

Airbnb with its rock solid network beat the more well funded competitor by listening to its users, hustle and building the best product experience. It took only two years after its inception for the defeat to be official with Wimdu approaching Airbnb to be acquired. CEO Brian Chesky saw the flimsiness of Wimdu's business and declined. Today, Airbnb is worth $73B (as of August 24th) and Wimdu is worthless.

Trust and protection

Imagine being approached by a complete stranger from another city, in the early days of Airbnb, to rent a room in their house. Living with a stranger, with no references, for a night or two in a foreign city was not an appealing proposition for most travelers. Airbnb realized early on that they needed a privacy and safety system to win the trust of travelers and realize mainstream adoption. They set about building a system to enable millions of strangers to trust one another. The system includes communication tools that allow hosts and guests to communicate safely before booking, a secure payments platform, artificial intelligence to sniff out rowdy guests that would likely throw a party in the hosts property, fraud detection, screening and verification tools, and a 430M+ review system that instills guest confidence before booking on the platform. Top it off with always available safety agents and the industry's best host guarantee and protection insurance coverage, Airbnb's trust and protection program is a differentiator that powers its scale and expansion.

Despite these measures, Airbnb still has a lot on their plate to maintain the quality and safety of their product experience. Nefarious methods for circumventing Airbnb's background checks, last minute cancellations, theft, invasion of privacy, and in the most extreme cases rape and murder are all challenges Airbnb continues to contend with.

More broadly speaking, Airbnb faces broader, societal risk they continue to navigate. This includes the impact of Airbnb guest on the surrounding residents quality of life, a lack of compliance with safety codes and the rise in the cost of living that Airbnb seems to have on the neighborhoods and communities that feature the more speculative Airbnb hosts/real estate investors. Governments around the world have imposed, relaxed, and then re-imposed restrictions on short term rentals. These are the same sort of risks that players in other sharing economies, such as Uber, face. If you believe the regulators will win, and not the consumer, then maybe Airbnb is not a good investment for you.

Airbnb wants its second act to be their Experiences offering. Underwhelming results since its launch leave their aspirations in doubt. For Airbnb to achieve optionality it may require them turning Experiences around as the other options each have their own set of challenges.

One new potential business for Airbnb, advertising, would grow revenue but it would likely come at the cost of host retention. With an estimated 200 million active users and $17B in gross booking value in the last quarter alone (Q2 2022), there seems to be ample opportunity for Airbnb to monetize thru advertising. Like Google, Airbnb could sell keyword search ads for destinations that hosts could bid on. If a user searches for accommodations in Toronto, as a host in Toronto I could buy ads from Airbnb to serve up my listing and standout from competitors. Many transactional platforms, such as Amazon, Walmart and Etsy, all sell advertising to their merchants; and in each case advertising has become a substantial business. Unlike these ecommerce platforms, Airbnb needs to tread carefully when it comes to further monetization of the hard side of its network, hosts. I believe Airbnb hosts would likely revolt against having to pay Airbnb more just to get their listing in front of potential guests. And then, once a guest books, it would burn a lot of the hosts that chose to advertise on the platform, to then have to have to fork over another 3% in service fees to Airbnb.

Another opportunity for Airbnb is to capture more of the $1.8T global travel market by expanding into new segments. The most obvious segment for Airbnb to consider expanding into is the travel market's second largest segment, travel packages. Through its existing accommodations and experiences offerings, plus the treasure trove of travel preference data they have collected over the years, Airbnb is in a good position to curate some compelling packages for its users. The biggest missing piece preventing Airbnb from competing in the travel package industry is air travel. During the pandemic Airbnb was forced to cut bait on its long rumored plans to launch an airline. As a shareholder, I hope Airbnb does not decide to dust off its airline plans and go for it. The airline industry has terrible economics and Airbnb would be foolish to enter it. However, Airbnb is in a good position to become more of a one-stop shop for travelers by reselling flights on behalf of airlines on its platform. Next up, Airbnb could add car rental and meals and it would cover all the bases for complete travel package offerings. Letting my imagination run wild for a moment, Airbnb could use its $8B+ in cash it has on its balance sheet towards acquiring Turo, the world's largest car sharing marketplace. Another acquisition target in this totally made up scenario could be Resy (competitor Open Table is already owned by Booking) - the online restaurant reservation site.

The biggest, yet least feasible at scale, would be helping people live on Airbnb. Rather than just using Airbnb for booking travel, Airbnb has been quite public about wanting to entice a new generation of young people to live off its platform. This entails foregoing the traditional one year lease agreement to stay in multiple cities throughout the year, all powered by long term stays on Airbnb. If people have flexibility on where and for how long in each city, no company in the world is better positioned than Airbnb to enable this new lifestyle. But, that's a big if.

Airbnb has a current market capitalization of ~$72 billion (as of August 28th 2022), larger than any of the other major hotel companies. The closest is Marriot at $50 billion. You may ask, how can a company that doesn't own any of the accommodations it enables millions of customer to book be worth more than a hotel company with 1.4 million rooms worldwide? The power of platform.

While Airbnb may appear to be expensive, an argument can be made that the current share price of Airbnb is reasonable. Down from its 52-week high of $212, Airbnb has been kicked in the teeth like most tech companies in this bear market. It is now more than 40% lower than its highs, currently trading at $113.64 (as of September 2nd, 2022), a reasonable Price/Sales ratio of 9.

In their most recent published financial results, Q2 2022, Airbnb showed a big turnaround in profitability and cash flow. Net income was $379 million, a nearly $700 million improvement from Q2 2019. They generated $795 million of free cash flow in Q2 2022, a $1.1 billion improvement from the nearly $300 million cash burn two years ago at the depth of the pandemic. Airbnb also reported that their trailing twelve month cash generation was $3 billion in free cash flow, leaving them with $10 billion in cash. This past quarter's profitability benefited from Airbnb's expense management discipline stemming from the financial stress the pandemic put on their business. Their CFO has shared they will focus on growth and profitability so temper your expectations here.

A key lever that drives Airbnb revenue and profitability is their take rate, the percentage of revenue collected from a booking. Airbnb's take rate is a split fee structure, a host-only fee and a guest fee. Airbnb takes a 3% commission from the host’s payout after a booking. Guest fees are typically 14% on top of what the host charges, but can reach up 20% for more premium listings.

Morningstar has calculated Airbnb's realized take rate (after promotions, cancellations and other components) to be 12.8% in 2021, up from 11.4% in 2014. The steady rise of its take rate over the years is a very encouraging sign that both hosts and guest are realizing significant value from Airbnb's platform.

While I wouldn't expect major take rate growth for Airbnb in the short to mid-term due to increasing competitive forces, it could be a longer term opportunity for them. Airbnb charges hosts (3% - inclusive of transaction fees) five percentage points less than their closest competitor VRBO (5% commission, plus 3% transaction fees). As Airbnb grows its long term stay business (28+ days) I believe they have more justification to raise their commission fees given the attractiveness longer term stays holds for hosts. For now, I like that Airbnb is keeping hosting fees low to continue growing the hard side of its network. Longer term, this could result in such dominance over VRBO and other competitors that Airbnb will have even more room to grow its take rate. Morningstar is projecting an increase of Airbnb's take rate by 1.2% points to 14% by 2031.

Management has done well to turn what was an inefficient cost structure prior to COVID-19 to a lean model, removing meaningful marketing expense while still maintaining strong sales. Due to the strength of its brand and the organic traffic it generates, Airbnb has a significant edge over its competitors in this area. According to SimilarWeb, 80% of Airbnb's traffic comes from low cost direct and free organic search channels in 2019, as compared with 65% at Booking and 90% at TripAdvisor. This directly translates into lower sales and marketing spend as a percentage of revenue

Source: https://skift.com/2022/08/15/airbnb-boosts-marketing-advantage-over-rivals-in-2nd-quarter/

The 18% of revenue spent on sales and marketing in Q2 2022 is down considerably from its 2019 level of 34%, demonstrating Airbnb's ability to drive efficiencies in its operations.

It is also expected that Airbnb's investment requirements for trust and safety will wane in the future due to improvements from artificial intelligence and automation.

With its asset light business, efficient sales and marketing spend, and expected operations and customer support efficiencies, Airbnb has the makings of a very cash generative business for years to come.

Airbnb was founded in 2008 by current CEO Brian Chesky and his then San Francisco roommate, and recently retired, Joe Gebbia. The impetus of the idea came from a desire of the two roommates to pull in some extra cash to pay their overdue rent. Spotting an opportunity to cash in on the shortage of hotel rooms for an upcoming Industrial Designers' Conference the duo built a simple website -airbedandbreakfast.com, to offer airbeds and homemade breakfast for $80 a night. Gebbia's former roommate Nathan Blecharczyk joined the team as a founder and the three set off to build the business model and launch, several times. Airbnb achieved legendary status amongst other entrepreneurs for persevering and iterating its model thanks to the entrepreneurial leadership of its founders. Its an impressive feat that the founders were able to turn such an unconventional idea into a world wide phenomenon. It took bold vision, customer empathy and uncompromising execution. Something the co-founders seem to have in spades.

Three years ago the co-founders surrounded themselves with seasoned leadership, filling their executive suite with former VPs from only the best companies in the world, Apple, Amazon, Disney, and Google. While co-founder Gebbia retired from Airbnb recently to focus on fatherhood and pursue various philanthropic, documentary and Airbnb related projects, he remains a member of the board.

The best way I know to get some insight on the quality of leadership at a company is to go to the source. What are the employees saying about the leader and company. Below are employee provided reviews of Airbnb and Chesky from Glassdoor. CEO Brian Chesky is highly regarded by Airbnb employees.

The bottom line

My greatest concern about the Airbnb investment thesis is not Airbnb itself. Don't get me wrong, I will continue to check in on leadership's execution. But, I think it's unlikely at this stage for the wheels of Airbnb to fall off. Especially with its extremely valuable brand, strong network effects and superb leadership team with a proven track record. It would be very expensive and it would take a very long time for competitors and newcomers to duplicate Airbnb's network of guests and hosts.

For me to continue my long term investment in Airbnb I must see proof of at least one of two tail winds materializing:

• Continued growth of the long term stay market

• Vacation rentals stealing more share of the global travel annual spend

Airbnb (NASDAQ: ABNB) is a holding in the The Wealthy Owl Growth Portfolio. It was added on February 25, 2022 at a price of $155.09.

Airbnb is a high growth stock that carries risk. Expect a lot of volatility. I recommend, if you are interested in the stock, easing into a position and adding over time as you learn more about the company.

As with any investment decision you make it’s important to complete your own due diligence and assess if the investment matches your risk profile.

-------------------------------------------------------------------------------------------------------------------------- Before making investment decisions please do your own research and/or seek the advice of a professional adviser. This is not a stock recommendation.