The short-term rental space continues to grow at an impressive pace, and travel platform Airbnb (ABNB 0.75%) is proving that it has a clear competitive advantage in this blossoming industry.
But you would hardly know it from some of the headlines. In 2023, social media was full of anecdotal evidence aiming to prove Airbnb's imminent demise -- otherwise known as "Airbnbust." The story went that Airbnb had too much supply, and the oversupply meant that its hosts weren't making money and the entire ecosystem was about to collapse.
To be sure, Airbnb has experienced a dramatic increase in the supply of homes on its platform in recent years. In the fourth quarter of 2023, the platform surpassed 7.7 million active listings, which was an 18% year-over-year jump. That's big.
However, this increase in Airbnb's supply was met by a strong increase in traveler demand as well. Travelers booked about 99 million nights and experiences during Q4, which was 12% higher than in the prior-year quarter.
Did demand increase enough to counteract the increase in supply? Consider this: Airbnb keeps track of its average daily rates, or how much it costs on average per booking per day. In Q4, its average daily rate was $157, up 3% year over year globally and completely stable in North America.
According to common sense supply and-demand economics, the stability of Airbnb's average daily rates suggests that supply and demand are in balance. In other words, more spaces than ever are being listed on Airbnb's platform, but demand from travelers is growing as well. This shows that short-term rentals are still a growing opportunity.
Now, I'll show you one chart that explains why Airbnb stock is the top way to invest in this trend.
The 1 chart that you need to see
The chart below shows that Airbnb used to spend a ton of money on sales and marketing. When the pandemic started, however, the company quickly cut this operating expense to preserve cash as it faced uncertainty. But to its surprise, business picked back up before it started spending on sales and marketing again.
In the fourth quarter of 2020, Airbnb's co-founder and CEO Brian Chesky noted this and said, "We don't intend to ever again spend the amount of money as a percentage of revenue on marketing in the future as we did in 2019." The purple line on the chart below shows that he kept his word -- Airbnb doesn't spend nearly as much as it used to on sales and marketing.
ABNB Sales and Marketing Expense (% of Annual Revenues) data by YCharts
The blue line on the chart above shows the benefit of this for Airbnb's business -- it's spending less on marketing, and its net income is consequently skyrocketing.
Regrettably, this chart isn't up to date with Airbnb's financial results for 2023. But the company's recent financial report showed that the same trends are continuing. The company generated $9.9 billion in revenue in 2023, up 18% year over. It spent almost $1.8 billion on sales and marketing, which was less than 18% of revenue. And because it kept expenses in check, it had net income of $4.8 billion -- a stunning net-profit margin of 48%.
If cutting back on marketing is working so wonderfully for Airbnb, then why don't its competitors do the same? Well, chances are that they can't -- this is where Airbnb's competitive advantage comes in. When it went public in 2020, Airbnb's management said that 91% of its traffic to the platform came in organically, meaning these users weren't responding to ads. In 2023 this trend continued, as management says that still about 90% of its traffic was organic.
Airbnb is simply at the forefront of travelers' minds, and that's mind-share that can't be bought. Putting it all together, travelers appear to increasingly want to stay in short-term rental spaces. And when they want to book a place, they automatically think of Airbnb -- they don't need to see an ad.
The company has accepted this reality and turned the dial way down on marketing spending -- and as a result, it has turned into a cash cow. The company may experience a hiccup here and there, and there may be periods of slowing growth. But the long-term trend is still pointing up, and Airbnb appears to have the top position in the space. This makes it a stock that investors can buy and hold for the long haul.
