Airbnb needs no introduction. It’s a platform on which ‘hosts’ can list a room / apartment / house for ‘guests’ to rent.
Airbnb was founded in 2008 and one of the original founders, Brian Chesky, continues to be the CEO today.
The gross booking value (GBV), which represents the dollar value of bookings on the platform, has grown from $38B in 2019 to $82B in 2024.
As an investor, there are really two questions to answer.
1. How much can GBV continue to grow?
2. Can Airbnb manage expenses to take operating margins higher?
GBV
Let’s start with GBV
In the last few years, Airbnb has made a concerted effort to launch experiences and services in addition to accommodations. So far, the traction has been lackluster, and I don’t have high hopes of these verticals moving the needle for them. What has grown meaningfully for them is international revenue, and I expect this will continue to be a growth area. As you can see from the table below, US revenue is up about 18% in the last two years, whereas international revenue is up 44%.
This calendar year, GBV is expected to grow 9%. This is in a pretty robust U.S. economy. Going forward, I model growth of 6%, but you can feel free to input your own assumptions in the model here. I could see 7-8% growth as being reasonable too.
Airbnb’s current take rate is about 14% and it doesn’t seem like a stretch that it would grow slowly over time. I have it at 15% in 5 years.
Expenses
With this anemic growth rate, I expect Airbnb will need to be fairly disciplined about expense growth, so I model marginal operating expense growth over five years. It makes no sense to me that Airbnb spends over $2B on R&D today. This is not a business that requires complex tech, so I think there’s room for them to cut there as well as potentially on sales and marketing.
Conclusion
In my base case, this means $5.2B in net income in five years. A 20x multiple seems reasonable for a scaled sticky platform with slow growth (see Ebay today), putting the expected market cap at $104B. Airbnb returns about $1.5B to shareholders each year (net of stock based comp), so put this all together and you get a 7% CAGR for the next five years.
If revenue grows at 7%, and they can cut expense on R&D and marketing, there is a world in which net income is $7B. Using the same multiple, this equates to a 14% CAGR.
The risks are as follows –
Regulators / local governments come after them for higher taxes or just completely shut down short term rentals. They’re an easy target vs hotels because they don’t create employment and detract from the housing stock.
Airbnb has been pretty smart at navigating this by partnering with cities around big events like the Football World Cup and Tour de France. Each of these events brings inventory on to the platform and some percentage of that will remain even after the event is over.
I’m not sure Airbnb has any sort of competitive advantage over Booking.com and VRBO. They do have a head start on alternative accommodations, so their guests and hosts are better ‘validated’ via reviews, but Booking and VRBO can probably offset the risk for hosts with insurance protection. This means there may not be much room for the take rate to increase.
The biggest mitigation to the risks is that Airbnb could probably earn $5B in net income today if they were more disciplined on costs. Even at a 15x multiple, that’s $75B, which is just 5% below today’s market cap.
In summary, this is a low downside opportunity with 7-14% upside. I’m going to take a small position here and watch how things progress. I ideally want a 10% CAGR in the base case to take a position of 5% or larger.