Airbnb's International and Noncore Business Expansion Plans Support Its Network Advantage

Senior Equity Analyst

Dan Wasiolek

Nights and Experiences Booked

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We think that Airbnb's global online travel agency, or OTA, position will strengthen over the next decade, driven by a leading alternative accommodation network (source of its narrow moat) of over 5 million hosts and cumulative 1.5 billion guest arrivals since its start in 2008 through 2023. We think this network advantage will be supported by generative artificial intelligence investment and expansion into the experiences vertical and international markets over the next several years. Also, Airbnb is positioned to benefit from the ongoing shift to mobile bookings, witnessed by Airbnb being a top-10 iPhone travel app in 104 markets versus 28 for Expedia and 149 for Booking Holdings, according to App Annie on Feb. 17, 2024. Further, we expect some durability in remote working to enhance long-term travel demand.

Mitigating our otherwise favorable view of Airbnb’s network position in the online travel growth industry are competitive, regulatory, and structural cost threats. We expect Expedia and Booking's investment into the vacation rental industry to continue. Also, focused entry into the OTA market from Google, Alibaba, Amazon, and others could double the current handful of players that have dominant scale, leading to a meaningful impact on profitability. That said, replicating Airbnb’s network would require significant time and expense, and we expect most of the aforementioned operators to deploy a metasearch model (which doesn’t control hotel relationships) versus directly competing against Airbnb's OTA model (which does control hotel relationships). Beyond competitive threats, Airbnb’s core alternative accommodation faces opposition concerned with the industry's impact on society (resident quality of life), safety (adhering to codes), and economics (cost of living). Regulation could place requirements (such as sharing personal information with local governments) and restrictions (such as the number days a listing can be rented out) on hosts and guests that reduces demand and elevates cost. And in addition to these regulatory costs, servicing individual vacation rental hosts can lift expenses compared with that found in the traditional accommodation industry.

Business Strategy & Outlook

Like narrow-moat companies Booking Holdings, Expedia, and Tripadvisor, we surmise that Airbnb has developed a two-sided marketplace network effect that it is able to properly monetize, thereby driving a narrow economic moat for the company. Airbnb’s network advantage was established by attracting the fragmented marketplace of private accommodation owners to post their dwellings (supply side) on the company’s platform, which in turn attracted more travelers (demand side) subsequently enticing more supply, creating a virtuous cycle that increases value for both new and existing users (hosts and guests).

Airbnb’s platform took time to reach a network advantage. In fact, it had to launch its platform a few times to generate an increased amount of interest, while resorting to aggressive marketing tactics like door-to-door communication and innovative engineering (links to Craigslist and Google AdWords that generated free or lower-cost advertising) before reaching critical-mass scale. Even when Airbnb launched its website for a third time on Aug. 11, 2008, it still had only 800 listings with an undisclosed number of bookings. However, continued investment into the platform and word of mouth drove an inflection point, where the network of hosts and guests entered a virtuous cycle. By March 2009, the company had 2,500 listings with 10,000 users, and by the end of 2010, around 700,000 cumulative nights had been booked on Airbnb, reaching 1.6 million by May 2011. Since then, Airbnb’s network has continued to expand, reaching 7.7 million active listings with more than 1.5 billion cumulative guest arrivals, as of Dec. 31, 2023.

We believe Airbnb’s platform hosts the industry’s largest amount of individual rental owners, which are tough to aggregate given their fragmented nature, driving the supply side of its network advantage. In total, Airbnb’s network actively lists 7.7 million alternative accommodations across its 5 million hosts, the majority of which are individuals. Booking Holding’s vacation rental supply is also above 7 million listings, although we estimate around half are property managers versus individual hosts, which are easier to aggregate. Meanwhile, Airbnb’s content offering in the vertical sits well ahead of Expedia’s more than 2 million listings through its VRBO brand as well as other much smaller competitors.

Airbnb’s rental supply offering has driven strong user metrics, buoying the demand-side of its network advantage. In this vein, Airbnb is a top 10 travel iPhone app in 104 countries, versus 149 at Booking and 28 at Expedia, as of Feb. 17, 2024, according to App Annie. In 2023, Airbnb’s platform saw 446 million rental room night bookings versus roughly 900 million at Booking (rental and hotel combined), 351 million at Expedia (rental and hotel combined).

The supply and demand of Airbnb’s platform has allowed the company’s core alternative accommodations business to reach a critical-mass advantage, which we believe is achieved when a company garners at least 10% demand share of a market, at which point it becomes increasingly challenging for smaller competitors to catch up. This view is buoyed by Airbnb’s $73 billion in alternative accommodation and experience bookings in 2023, equating to over 50%, according to Euromonitor. Airbnb’s bookings in the vertical stand well above the estimated roughly $40 billion in 2023 for Booking Holdings, the number two player in the market.

Airbnb, Booking, and Expedia have a large share of the online travel agency market, making it extremely challenging for any smaller competitor or new entrant to gain customer traffic or supplier scale. In fact, the next biggest peers, Trip.com (narrow moat) and MakeMyTrip (not rated), had sales of just two thirds and a high-single-digit percentage compared with Airbnb’s sales in 2023. Smaller competitors need substantial human capital to build relationships with travel suppliers as well as provide service and a user-friendly technology platform to customers. A successful travel network not only involves personnel and technology investments but also advertising expense to attract and retain traffic to the platform. Here, Airbnb spent $1.8 billion, or 17% of sales in 2023 on marketing, including both direct spending on marketing channels and indirect spending on marketing personnel. And while Booking and Expedia spend a few times Airbnb's amount on marketing, smaller competitors like MakeMyTrip and Trip.com’s each spend less than half compared with Airbnb.

The ability of Airbnb and its largest peers to spend behind their travel networks aids traffic scale, which further supports its network advantage by allowing it to test and implement platform changes quicker than smaller competitors, leading to an improved user experience and conversion. Here, we see that in January 2024, total monthly traffic to the airbnb.com domain was 87 million, according to SimilarWeb. This compares with traffic that month of 505 million to booking.com and 82 million to expedia.com (this is traffic only to these dot-com domains and doesn’t represent other brands or geography domains controlled by these companies). For perspective, the domain makemytrip.com garnered 46 million in monthly traffic, while smaller online travel agency peers received even less domain traffic, making it tough for them to improve the user experience and conversion to the degree of Airbnb and other larger peers. One way to gauge how a travel platform is resonating with travelers is through the percent of traffic that comes direct to the network, as this signals users are aware of and find value in the customer experience, supporting network advantages. Encouragingly, in January 2024, 72% of Airbnb’s traffic was direct, compared with 52% and 41% at narrow-moat peer domains booking.com and expedia.com. In our view, the high level of direct traffic to Airbnb not only is aided by the company’s network advantage but also benefits from its namesake having become a verb in society.

Airbnb generates healthy adjusted ROICs which we expect to average 31% over the next five years, well above our 9% average cost of capital estimate. Further, Airbnb’s 37% adjusted EBITDA margin in 2023—and our forecast for expansion to the high 30s by 2028—offers quantitative evidence of a competitive advantage.

Despite its strong ROICs and operating margins, we don’t believe Airbnb has carved a wide moat due to potential changes in technology that could alter the online travel landscape and meaningful competition beyond the next 10 years from existing and new entrants that already have the customer traffic and budgets to build network scale, which include Google, Meta, Alibaba, Amazon, and hotel consortia. In the past 15 years online travel industry platforms have had to adapt to the proliferation of mobile devices or risk losing share to peers. It is not hard to envision industry players having to stay in tune with the evolution of virtual reality, blockchain, artificial intelligence, and other future technologies in the online travel industry. While we think it is likely that no technology will alter economic profits for the next 10 years, we can’t have a high degree of certainty this will be the case in more than 20 years. Focused entry from these competitors would double the current handful of players that have dominant scale, leading to commodification of the industry and a meaningful impact to margins. 

That said, we expect the market to support some level of increased competition over the next several years. The travel booking market remains large at $2 trillion, and we believe online penetration of the travel market can continue to expand the next 10 years from its current mid-60% level.

Narrow

Economic Moat

Airbnb

Airbnb, Inc. engages in the management and operation of an online marketplace. Its marketplace model connects hosts and guests online or through mobile devices to book spaces. The company was founded by Brian Chesky, Nathan Blecharczyk and Joseph Gebbia in 2007 and is headquartered in San Francisco, CA.

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Airbnb is going public. Read about how the founders went from idea to IPO in the Public app.

Brian Chesky and Joe Gebbia come up with the initial concept for AirBed & Breakfast during the Industrial Design Conference. With attendees unable to book hotel rooms, the duo dreamed up a website for booking short-term living quarters paired with free breakfast and business networking opportunities.

Chesky and Gebbia find a third co-founder in architect Nathan Blecharcyzk.

First iteration of the site launches – and it's a mouthful: airbedandbreakfast.com.

The trio finds themselves owing $20K but still pre-revenue, and so they come up with a creative solution ahead of the 2008 Presidential Election: selling novelty cereal boxes in the form of Obama O's and Cap'n McCains. They raise $30K in a matter of days.

The stunt helps them gain attention from new investors. Airbnb is accepted into Y Combinator's 2009 batch, with one investor saying that while he didn't believe in the core business, he did see something in the founders' creative problem-solving.

Website name shortened to Airbnb, and the list of available inventory expands from aero-beds to a range of lodging options spanning from apartments to castles and everything in between.

Airbnb raises $112 million, led by Andreessen Horowitz.

Already in London, Airbnb builds on its global footprint with offices in Paris, Milan, Copenhagen, and São Paulo, Brazil.

Airbnb reaches 10 millionth booking milestone.

Airbnb refreshes its logo with mixed reviews.

A new $475 million investment round values Airbnb at $10 billion.

New legislation is passed in San Francisco that makes short-term rentals legal. It's quickly known as the "Airbnb Law."

Airbnb raises another $1.5 billion, with total funding now north of $2 billion and a valuation of about $25 billion.

Airbnb launches "Experiences," which allows people to book local activities and tours.

In response to an Executive Order temporarily banning refugees from the U.S., Chesky offers Airbnb housing to refugees and others impacted.

Company announces Airbnb Plus and Beyond by Airbnb to expand its high-quality and luxury vacation rentals.

Airbnb acquires Danish startup Gaest, which provides a platform for booking venues for meetings and other large-scale events.

Airbnb buys HotelTonight for more than $400 million. HotelTonight is a service for booking last-minute hotel rooms at a discounted rate.

Airbnb files S1 and prepares for its debut in the public markets.

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