- Strong and Resilient Business Model.
- New Market Creator.
- Growing Customer Base.
The vacation rental giant Airbnb (NASDAQ: ABNB) has gone public in early December 2020. Since its IPO launch, the stock has faced a meteoric rise in its price. Despite its meteoric rise, Airbnb has the potential to generate value and above average returns to its investors. This article is split into two parts: part 1 ask three fundamental questions regarding the strength of its business model and part 2 consists of a detailed reasoning explaining why Airbnb can generate values to its investors.
Part 1: Questions
Question 1: How does Airbnb earn money?
As a home vacation rental, Airbnb’s revenue hinges on the hosts and on the customers. It depends on the host’s willingness to prepare and display their home on their website, as well as the customer willingness to browse all the listings and choose one of them. However, it does not stop there, the customer needs to physically arrive at the place for the money to count as revenue. Once the customer arrives at the listing, hopefully he has a pleasant experience, otherwise the company loses money on refunds. To sum it up, Airbnb’s revenue and my returns as an investor relies on a simple booking process and hosts giving a good first impression of the service.
Question 2: Does Airbnb rivals hotels, or did the company create a whole new market?
The creation of a new market is what makes Airbnb, Airbnb. As seen on the first pages of its S-1 filing, the strong, positive experience of the first 3 guests motivated the creation of the company. If the founders did not host their home, those 3 guests would not be in San Francisco at that time. This is a really important point to consider, since those 3 guests were already out of the hotel’s industry ‘radar’, the hotel industry would not have gained revenue from these 3 guests at the time. This perspective, along with the freedom of both hosts and customers to tailor their host/guest experience to their liking, opened a whole new market. Airbnb simply presents travelers an innovative way to travel that did not exist before.
Question 3: Is Airbnb only a short-term rental company?
While that may be their core business, since 2008 Airbnb has launched Payments and according to their website, it processed about $70 billion in guest and host transactions over 40 countries. In May 2012, it launched a $1 M Host Guarantee. During hurricane Sandy and Covid-19 Crisis it set up a relief fund. Also, in the Covid-19 crisis, Experiences was launched, did it also become a streaming company? As seen, the company is way more than simply a short-term rental booking company, it seems challenging for the market to correctly price this kind of enterprise. This tends to create two kinds of investors on extreme ends: the optimists and the pessimists. The optimists will probably drive the price up and the pessimists the opposite. Therefore, for the first few years in the stock market it is fair to expect high volatility on the stock price. The reason for that is the market will need some time to become fully acquainted with the company.
Part 2: Investing in Airbnb
There are mainly 6 reasons I believe make Airbnb a solid investment. They are presented below, later, I will explain each point further.
- Innovative and adaptive business model
- They are starting to tackle their biggest problems
- Long-term Focus
- Host centric approach
- Strong Community with a growing customer base
Innovative and adaptive business model
The company started as a room rental service and become a multi-service hospitality company. Throughout the company’s 10+ years of existence, it has created new services relevant to any scenario. Some examples of this are the 10-year partnership with the Olympic Committee, the Experiences service, the Hotel Tonight acquisition, etc. From their history, it can be assumed that the company will keep strongly investing in product development.
They are starting to tackle their biggest problems
It appears that Airbnb biggest problems are local governments and profitability, each of these problems will be explained further.
Airbnb’s main problem is cities allowing hosts to rent a room or property followed by profitability problem. Two of the company’s major cities, Barcelona and Paris had banned Airbnb from operating in their cities a few years, due to increasing rent prices. However, those cities have recently allowed Airbnb to operate normally while regulating the hosts. These cases show that as Airbnb expands, it can be expected some resistance from municipalities. This year, the company has launched City Portal, to work alongside local governments so they can be able to operate smoothly.
Regarding the profitability problem, after Amazon’s success investors are more flexible with companies reporting zero or negative net income. In 2020, Airbnb has entered a $2 billion Lien Loan Credit until 2025. While the interest rate is alarmingly high, approximately 10% p.a., the company has their own stock as warrants, and it is important to remember that the company has a 10-year partnership with the Olympic Committee. Even though it is risky, once one looks past the Covid-19 crisis and considers the rebound of large events such as SXSW and the Olympics, it is plausible the company will eventually be back on track.
While on the short-term the Covid-19 pandemic slashed Airbnb’s revenue for 2020 and probably a significant part of 2021. This tragedy will cause long-term changes on the behavior of many people. People will become much more open-minded about isolating themselves more on vacation along with the increase in remote work contracts. Airbnb already has a huge number of listings ready to meet this future demand. The hotel industry will unfortunately have increased costs as they must uphold new hygiene demands and social distancing guidelines, whereas these extra costs falls to the host’s side on Airbnb and not on the company itself.
It is important to remember that Airbnb already has over 10 years of existence and on their S-1 filing, they were clear to say they barely ‘scratched the surface’. They also were quite clear that they were focusing on long-term plans that will benefit the company. It appears they will not be tempted to please Wall Street with their quarterly earnings metrics among other ‘demands’. In many finance and accounting classes, it is taught that the company’s purpose is to make money for its shareholders. While it is true, I do not believe that in most cases the shareholders know what is best for the company and therefore, an Airbnb investor should place his trust on the Airbnb staff.
Host Centric Approach
On the company’s S-1 filing, it is clearly emphasized that the Airbnb’s hosts are what makes or breaks the company, along with guests paying for the service. Consequently, we need to ask ourselves, why would anyone become a host for Airbnb? What would anyone gain from this?
First, let us look at some important statistics, a study in 2019 showed that 82% of Airbnb hosts believe that hosting their home is a good money-making strategy. Also, 93% of users are satisfied with the service. Now, let analyze the host experience a bit closer, the main benefit of being a host in Airbnb, in my opinion, is the low barrier entry. In the U.S. and in many areas of the world, house prices have increased more significantly than income. This means that hosts already have an advantage, as the number of guests should increase at a faster rate than hosts.
Now, we should look at how Airbnb rewards hosts. The first perk an Airbnb host has is flexibility, following minimum obligatory guidelines, the host can decide what he wants to host, the price he wants to set and for how long. While Airbnb suggests price, the ultimate decision is with the host and this for me is Airbnb’s unique selling point. Apart from this freedom, the hosts can share their experience on Airbnb’s conferences and thus improve their service organically. According to their S-1 filing, the best hosts are also rewarded with a label of “Superhost” and some U.S. based hosts will be eligible to receive stock from the company on the company’s Directed Share Program.
It can be concluded that being a dedicated host to Airbnb pays off, with that it can be inferred that the services will improve on its own. This will then attract new customers and strengthen customer loyalty, as hosts would continually strive to improve their service to reap the rewards.
Strong Community with a Growing Customer Base
As mentioned in the beginning, Airbnb’s staff, hosts, and investors income depends on the number of guests arriving at their rental place and consequently having a satisfactory stay. Now, two questions need to be asked, who uses Airbnb and why do they use Airbnb?
Most of Airbnb’s users are millennials. Millennials also dominate the workforce, surpassing the baby boomers, bringing with them approximately $200 billion spending power. 86% of millennials travel to experience new cultures. It is also important to notice that over half of millennials are willing to travel alone, even though the majority prefer to travel with friends. For now, only about 10% of millennials use websites such as Airbnb to book their vacation. Since Airbnb is in general cheaper than hotel booking, I believe that millennials will find Airbnb more appealing over time.
Although millennials dominate the job market, Generation Z cannot be ignored as they are the next generation to dominate the workforce. Generation Z had more contact with social media and internet than millennials and prefer personalization on their vacations. 65% of Generation Z ranked travel and seeing the world as the most important way to spend their money and they prioritize experiences, which coincidently is Airbnb’s focus. Finally, Generation Z constantly travels, meaning most of them travels over 50 miles every one to three months. With these preferences, I strongly believe that Airbnb is ready to meet the demands of Generation Z.
Part 3: Conclusion
Since Airbnb recently started being traded on the stock market, some time is still needed to properly be absorbed by the market. While many investors guide themselves through financial indicators, with the globalization of investments, I believe start-ups nowadays focus on growth first and then think of profitability. While the company has a multibillion-dollar valuation, like the founders, the company has only ‘scratched the surface’ of its full potential. As demonstrated throughout the article, I believe Airbnb has a strong, resilient business model with a lot of room to grow, resulting in above average returns over time.
• Airbnb Statistics (2020): Users, Listings & Fun Facts (muchneeded.com) Over 60 Millennial Travel Statistics (2020) | Stratos Jet Charters, Inc. (stratosjets.com)
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