Airbnb (ABNB 0.75%) is a controversial stock. Evangelists claim it is going to be one of the next great internet giants, while critics believe it's an overpriced platform that peaked during the COVID-19 pandemic. Investors are generally very optimistic or very pessimistic about Airbnb with little middle ground.
I generally fall into the optimistic camp: It has a differentiated service with a long runway to grow and a fantastic brand. But could the bears be right? Let's take a look at why they're so negative on Airbnb and see if their arguments make sense.
Losing market share
Third-quarter earnings were a classic example of why people are bearish on Airbnb. The company grew revenue 14% year over year in constant currency to $3.4 billion, which seems strong. However, if you look at its largest competitor, Booking Holdings, Airbnb is falling behind. Booking Holdings grew its revenue 18% year over year to $7.3 billion during the same period. Faster revenue growth at double the size? It looks like Booking Holdings is gaining significant market share on Airbnb, at least recently.
Bears also argue Airbnb is oversupplied with hosts, has ruined its brand with high add-on costs such as cleaning fees, and has an inconsistent guest experience that has customers going back to hotels for vacation stays.
As someone bullish on Airbnb's prospects, I think both of these concerns (losing market share and deteriorating brand) can be easily explained. First, on the market share losses, Airbnb deliberately decided to get its hosts to lower prices this year by allowing guests to see an all-in price for stays upfront, prioritizing room sharing, and trying to get more hosts on the platform. This has worked with Airbnb nightly rates barely up in Q3 while hotel prices rose 10%, according to management.
Since Airbnb earns a cut of all the money spent on its platform, these moves have been a self-inflicted short-term headwind to revenue growth. However, it should help improve its customer value proposition over the long term. I think this is the right move and explains why Airbnb's revenue looks weak compared to Booking Holdings right now.
Listings on Airbnb grew 19% in Q3 with stable occupancy levels, according to the company. This flies in the face of the narrative that people are switching away from Airbnb. In fact, it looks like more and more people are trying the service (either as a host or a guest) around the world. Listings growth is the most important metric to evaluate the health of Airbnb's business, and it should be tracked closely by investors.
Global potential, expanding beyond alternative accommodations
Investors are generally optimistic about Airbnb's future for two reasons: global expansions and moving outside of its original alternative accommodations business.
On global expansion, Airbnb has worked to grow supply outside of its largest markets like North America, Australia, and Western Europe. Right now, it's focusing on South Korea, Germany, and Brazil, and seeing great results. These regions are currently some of the fastest-growing markets on Airbnb with nights booked up 54% from Q3 2019, the most comparable pre-pandemic quarter.
Management thinks there are plenty of other markets where it can implement this strategy, like Japan, Mexico, and India. As a global platform, this can not only grow demand from travelers but also widen its competitive advantage. The more listings around the world on Airbnb, the harder it is to replicate with a copycat platform. Again, this is why the platform's number of listings is a vital metric to track.
Going global will be the main growth driver for Airbnb over the next few years. But over the longer term, management wants to move beyond just short-term rentals and alternative accommodations. On the conference call, CEO Brian Chesky didn't provide many details, but he said they could possibly start listing things like hotel rooms and apartment listings. He even mentioned building an artificial intelligence (AI) travel agent for guests.
What makes the company even more compelling is how they're balancing these long-term ambitions while still generating a profit. Through the first nine months of 2023, Airbnb spent $1.29 billion on product development. Over that same period, it had a best-in-class operating margin of 26%.
Data by YCharts.
So, are the bears correct?
If you look at how the underlying business is performing, the clear explanation for slower revenue growth versus the competition, and the potential growth Airbnb has ahead of it, it's hard to be bearish on this business. And yet, as we sit here today, the stock is down 20% from its recent highs, presenting investors with an opportunity to buy a quality business at a discounted price.
At its current market cap of about $79 billion, Airbnb trades at an expensive-looking 35 times its trailing-12-month operating income. But what many investors may miss in covering this business is that it generates a healthy amount of interest income holding customer deposits (as well as corporate cash) in Treasury bills. Over the last 12 months, Airbnb has generated $614 million in net interest income. Add this to its operating income, and the stock trades at a more attractive 27 times earnings, slightly above the market average.
But unlike the average business, Airbnb has a fantastic track record of growing revenue at a double-digit clip and looks poised to do so over the next few years with its international expansion plans. Add all this together, and it doesn't make sense to be bearish on Airbnb stock right now.
