When you think of the typical Airbnb (ABNB +0.61%) investor, Warren Buffett doesn't exactly fit the profile.
The Oracle of Omaha is a classic value investor , backing timeless businesses in sectors like banking and big-brand consumer goods. Buffett loves stocks like Coca-Cola that have been around for ages and seem virtually bulletproof.
With its high price tag and mobile-first business model, Airbnb may not look like a Warren Buffett stock, but if you scratch the surface, there are a number of reasons why the Berkshire Hathaway chief would actually love the hotel disruptor. Keep reading to see three reasons why.
Image source: Motley Fool.
1. The Airbnb brand
Remarking on Coca-Cola, Buffett once said, "If you gave me $100 billion and said to take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it couldn't be done."
You could probably say the same thing about Airbnb. The company pioneered the home-sharing industry in 2008 when its founders rented out air beds to host visitors for a conference in San Francisco. Today, its both a verb and a noun, synonymous with staying at someone else's home. It's common to hear travelers saying, "I'm Airbnbing a place down the road," for example.
Though the company faces competition, most notably from Expedia's (EXPE +0.43%) Vrbo, it's well ahead of any of the wannabes in the home-sharing industry. Expedia no longer breaks out results for its home-sharing segment, but in 2019 Vrbo, which includes Homeaway and other home-sharing brands, reported $12 billion in bookings, while Airbnb posted $38 billion. Airbnb was also growing significantly faster than its chief rival back then.
Buffett loves big-brand stocks and considers brands to be a valuable source of competitive advantage. There's no doubt Airbnb would pass that test with flying colors.
2. It's got a wide economic moat
The most important factor Buffett considers when investing in a stock is whether the company has a wide economic moat, his chosen metaphor for a sustainable competitive advantage. Buffett believes a number of factors can create a moat, like a brand advantage, lower costs, economies of scale, or an innovative business model.
Once again, Airbnb meets the bar here. In addition to its brand, the company's two-sided marketplace helps lock in both hosts and guests through network effects. Since it can offer hosts the most potential guests and guests the most potential hosts, it figures to be the most attractive home-sharing marketplace to new users. Additionally, tools like reviews and ratings help lock in users, as hosts who have built up a history of favorable reviews will be reluctant to take their business elsewhere.
The marketplace model itself has also been shown to be a high-margin profit generator at scale, as the success of companies like Amazon, Etsy, and eBay demonstrates. Airbnb itself is now in the powerful position of collecting commissions on transactions on a platform it's already built, meaning the hard part is behind it. As it grows, profit margins should steadily move higher.
3. It's even got a float
Insurance is Buffett's favorite business because it enables him to collect premiums before they need to be paid out in claims. Buffett refers to this cash inflow as a "float," and he can use that money to invest in other businesses.
Airbnb generally collects money upfront on bookings, which could take place months before the actual stay happens, giving the company a float of its own. It generally invests that money in short-term, high-quality bonds. This part of Airbnb's business is generally ignored, but it's not insignificant. The company finished 2020 with $2.2 billion in funds receivable -- or bookings yet to be collected -- and amounts held on behalf of customers. In 2019, before the pandemic sparked a raft of cancellations, it had $3.1 billion in amounts held on behalf of customers. That "float" helped it collect $86 million in interest income that year, and that should help make Airbnb a winner as interest rates rise again.
Though Buffett has said he avoids tech stocks and is often portrayed as being out of touch with current trends, he personally endorsed Airbnb's business in 2015, recommending it to attendees of Berkshire's shareholder meeting. In his annual letter, Buffett wrote, "Airbnb's services may be especially helpful to shareholders who expect to spend only a single night in Omaha and are aware that last year a few hotels required guests to pay for a minimum of three nights. Those people on a tight budget should check the Airbnb website."
While Airbnb's price tag might scare off most value investors, Berkshire's recent investments in tech companies like Apple and Amazon show that Buffett's holding company is willing to pay up for quality, especially for a company with a bright future ahead of it.
He'd likely find plenty to be pleased with in Airbnb.
