- Uber and Airbnb are two special companies: they were the first to massively disrupt the taxi and hotel businesses respectively, creating two-sided marketplaces that enjoy strong competitive advantages.
- Both companies are still growing quickly, but they are both very expensive, both in absolute terms and when compared to competitors.
- We believe Airbnb has a stronger competitive moat, which is reflected in its higher profit margins that rival those of software SaaS companies.
Uber (NYSE:UBER) and Airbnb (NASDAQ:ABNB) are two special companies in that they were the first to massively disrupt the taxi and hotel businesses respectively, creating two-sided marketplaces that enjoy strong competitive advantages. We were wondering which of the two has a stronger competitive moat, and if either of them is a buy at current prices. We'll explore that in this article and also talk about their valuations, growth, and risks.
Like with most marketplaces, Airbnb's and Uber's biggest competitive advantage is their network effect.
The larger the number of hosts who list on Airbnb the more guests it will get, and the larger the number of guests booking through Airbnb the more hosts it will get. Two-sided marketplaces are very difficult to start, but once they have some momentum, it's even more difficult to unseat them. The same logic applies to Uber, where more drivers mean better service because you get a ride faster, which means more users, and therefore more drivers want to join the Uber platform.
In general, the network effect occurs when the value of a particular good or service increases for both new and existing users as more customers use that good or service. The network effect is a virtuous cycle that allows strong companies to become even stronger.
Airbnb and Uber benefit the most from the network effect because they have the largest networks, but their competitors also benefit from it to a lesser extent. In Uber's case, its competitors DoorDash (DASH) in deliveries and Lyft (LYFT) in rides also have managed to reach critical mass with their networks allowing them some benefit from this competitive advantage. In Airbnb's case, all of its main competitors, Booking (BKNG), Expedia (EXPE), and Tripadvisor (TRIP) also have reached enough scale to benefit to some degree of the network effect moat. Huge reservation transaction volumes run each year through Booking and Expedia, making these platforms highly coveted distribution channels for travel suppliers like hotels and airlines. This increases the appeal of the booking sites to travelers, thus setting off the virtuous cycle. In Tripadvisor's case, it has the most hotel reviews, so users go there to research hotels, and the more users visit the site the more new reviews get added.
While the network effect moat source is the most important for both Airbnb and Uber, there are other important sources of competitive advantages that each has. As innovators, first-movers, and the biggest corresponding networks, their strong brands have become an important intangible asset. They have both become both a noun and a verb, with people saying things like "let's Uber to the party" and "let's book an Airbnb for this vacation". The fact that both companies have become so well known lowers their sales and marketing costs, as people are more likely to try them if they hear others are using them too. People also feel safer using the well-known companies and are willing to pay a little bit more to make sure they are not taking risks.
The third main competitive moat source for Uber and Airbnb is switching costs. Switching costs are those one-time inconveniences or expenses a customer incurs to change from one product to another. Companies whose customers have high switching costs can charge higher prices without the threat of losing business. Therefore, customers just tend not to switch, giving these companies pricing power. Both Uber and Airbnb have some switching costs for users, such as having to download a new app and enter payment information if they want to migrate to a competitor. These switching costs are not as high for the demand side of the marketplace. Switching costs are more important on the supply side of the marketplace, where someone with a property on Airbnb rated 5 stars will be very hesitant to move to a new platform where they have to start earning reviews from zero again. While a property owner can list on multiple platforms, this quickly becomes a hassle and managing the calendar gets more complicated. This moat source is less important for Uber, as people only want to get a ride and will usually not compare driver ratings when ordering a ride. Uber is trying to increase the switching costs to customers by offering a rewards program, trying to increase user loyalty and less price comparison.
Beyond the main sources of competitive advantage, there are a few additional nuances that make Uber and Airbnb better businesses than average.
In Uber's case, it benefits from having the biggest international coverage. Therefore, its customers are less likely to have to download a local app when traveling. That could make some users prefer Uber over Lyft if they travel often and don't want to have multiple apps. Uber's service also lends itself nicely to offering a subscription service for users that use its rides or deliveries apps very often. One weakness that Uber has is that the network effect is mostly important at a local level. If you don't travel often, you will probably favor the ride share app with the most drivers in your city, even if Uber has the most drivers and coverage in the national and international scales.
Similarly, there are a few differentiation benefits that Airbnb gets thanks to its focus on entire properties over hotel rooms. This gives it a leg up over competitors Booking, Expedia, and Tripadvisor when it comes to group travel and out of the way locations, as well as long-term stays.
Airbnb clearly has stronger margins, with impressive ~80% gross margins versus ~46% for Uber. Airbnb has also already attained positive operating margins, while Uber continues operating below break-even.
Both companies are growing spectacularly fast, with Uber posting ~82% quarterly year over year growth, and Airbnb ~78%. This has moderated from extremely high growth that was the result of the recovery after the Covid pandemic period.
Airbnb has a much stronger balance sheet, with a net cash position of ~$6 billion, while Uber has a net debt position of ~$5 billion.
Neither of the companies is cheap, with both trading at very high forward EV/EBITDA multiples. Surprisingly, it is Uber that is more expensive despite the lower profit margins and weaker balance sheet. It is possible that investors are valuing the loss-making delivery service separately from the ride sharing business.
Compared to its main competitors, Uber appears more expensive than Lyft but cheaper than DoorDash and JustEatTakeAway that is still unprofitable in an adjusted EBITDA basis. With respect to Lyft, it is a wide valuation gap, since Lyft is trading about half the valuation Uber is trading at.
In Airbnb's case, it is trading much more expensively than its three main competitors, at more than twice the forward EV/EBITDA ratio of Booking, and more than three times that of Expedia and Tripadvisor.
Airbnb has a stronger moat, and this is proven by its higher margins compared to those of Uber. Both companies benefit from competitive advantages, but we believe Airbnb has a much stronger competitive moat compared to Uber and to most companies. That said, Airbnb is one of the most expensive companies in the market right now.
Both companies have significant regulatory risks, and each has some specific risk to their business models. Contrary to what some investors think, self-driving cars would be a disaster for Uber's two-sided marketplace, as competitors could simply purchase a fleet of self-driving cars and launch a competing app. This would severely weaken the network effect Uber benefits from. Deliveries is also an issue, since it has demonstrated to be a hyper competitive market with very low margins, and there are strong competitors like DoorDash.
Uber also has a relatively weak financial profile with an Altman Z-score of only 1.59.
Airbnb's main risk is regulatory, followed by its reputation. Should the company's brand suffer due to controversies/scandals it could lead to an opening for a competitor like Booking to significantly scale their home offerings. Airbnb has a high Altman Z-score of 7.29 thanks to its high profit margins and strong balance sheet.
Both Uber and Airbnb are very interesting companies that possess strong competitive advantages. We believe Airbnb has a stronger competitive moat, which is reflected in its higher profit margins that rival those of software SaaS companies. Both companies are growing quickly, but they are both very expensive in absolute terms, and when compared to competitors. We recommend keeping an eye on both, adding them to the watch-list, hoping that at some point they will either grow into their valuations or have a share price correction that makes them attractive investments. It is important for investors to also keep an eye on regulatory risks, which are significant for both companies.
This article was written by
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