By expanding the concept of what room (and home) rentals mean for the hospitality industry, Airbnb (ABNB -2.78%) has become a leading brand in the space, inviting the wrath of global hoteliers vying to come up with their own competing platforms.
Marriott partnered with home rental firm Hostmaker to offer Airbnb-style rentals through its Tribute Portfolio Homes; Choice Hotels Vacation Rentals business began offering private residence, cabin, and resort-style accommodations; and Wyndham Hotels has an extensive vacation rental business that is pretty much just an Airbnb direct competitor.
AirBnB has plenty of hurdles in front of it but also a substantial runway for growth. Let's look at the bear and bull case for the short-term rental platform.
Bear case: Airbnb looks hot, but don't overlook the risks
Keith Noonan: I have to start my presentation of the bear case on Airbnb by stating upfront that I see a lot of promise in the business and own the stock in my portfolio. There's a lot to like about what the company has done so far, and I'm not bearish in the immediate sense. That said, I also think investors should be approaching the company with a sound understanding of the bear case and where things could go wrong.
Airbnb has already reached enormous scale with a market capitalization of roughly $113 billion, and the stock is valued at roughly 19 times this year's expected sales. That kind of valuation comes with big expectations, putting the stock at risk of major volatility relative to the broad market, and investors shouldn't treat years of runaway growth as a given going forward.
The company has managed to rapidly build its business, but there's a significant risk that unfavorable regulatory developments will limit growth in key markets. As just one example, the European Union is currently weighing legislation to revamp how short-term vacation rental companies will be regulated in the territory. Other regulatory movements in the E.U. and other markets targeting large digital services providers could also hurt its growth prospects, potentially hobbling the company's big push into local-experience booking services.
There's undoubtedly a strong brand here, but there's also not much to prevent other competitors from moving in on the company's turf. In addition to facing challenges from Booking Holdings and other existing competitors in its core service category, the possibility exists for disruptive new competitors to take aim at Airbnb's markets, limiting its growth opportunities. It's not unreasonable to think that diversified tech giants such as Alphabet, Amazon, or Meta Platforms might eventually make moves in the category too, and there are a number of rising upstarts in the real estate space that could make their own plays.
Bull case: The leader in an industry just getting going
Rich Duprey: Airbnb stock comes with risks as the pandemic proved last year. Its business was hammered hard by the global coronavirus outbreak, which caused revenue to fall 30% in 2020 as losses reached $4.6 billion.
Yet underscoring the power of its brand, which is almost synonymous with the category, Airbnb has bounced back sharply with revenue up 77% through the first three quarters of 2021.
There are more than 130 million households in the U.S. and around one billion globally, but the idea of individuals renting out their entire home or a few rooms to short-term travelers is an industry still in its infancy.
Airbnb stays are generally cheaper and more convenient than those at traditional hotels, and its recent results show the pandemic did not permanently dent consumer demand for these rentals.
In the third quarter, Airbnb hosts earned a record $12.8 billion in income, up 27% from the same period in 2019, as gross booking value (GBV), or the total charge to guests for a stay, cleaning, and other fees, jumped 48% year over year to $11.9 billion. GBV was also up 23% on a two-year basis.
During the earnings call, CFO Dave Stephenson told investors the company expects those numbers to grow at an even faster rate in the fourth quarter.
Analysts expect revenue to grow from $5.9 billion this year to over $13.6 billion in 2025, good for a 23% compounded annual growth rate. The market has certainly priced a lot of the reopening opportunity into the stock as it trades at significant premiums across almost all metrics, but with the new potential posed by longer stays, Airbnb can grow into its valuation.