Demand is improving, profitability is improving: Equity analyst on Airbnb Q3 performance

Key Concepts

• Reserve Now, Pay Later: A new feature allowing customers to book accommodations and pay at a later date, similar to hotel booking practices.
• Total Addressable Market (TAM): The overall revenue opportunity available for a product or service. Airbnb aims to triple its TAM.
• North America Revenue: Represents approximately 50% of Airbnb's total business.
• Experiences: Ancillary offerings beyond accommodation, such as tours and activities, with a significant market opportunity.
• Boutique Hotels: Unique, smaller hotels that Airbnb is selectively listing.
• Booking Holdings: A major competitor to Airbnb in the vacation rental market, also owning brands like Booking.com and Priceline.
• Vrbo: Another competitor, owned by Expedia, currently the third-largest player in the vacation rental market.
• EBITDA Margins: Earnings Before Interest, Taxes, Depreciation, and Amortization margins, a measure of profitability.

Airbnb's Strong Performance and Growth Strategies

Airbnb's recent performance has shown significant strength, with shares rising in pre-market trading due to stronger-than-expected revenue. This positive outlook is attributed to several key factors:

1. Improved Demand and Profitability

• Demand: Despite consumer economic pressures, demand for travel remains robust. This is evidenced by North America, Airbnb's most mature region, seeing a 5% year-over-year increase in nights booked. This growth is particularly noteworthy when compared to US hotel operators, who are experiencing flat to slightly negative volume growth.
• Profitability: While near-term investments are impacting operating margins, the company is focused on long-term profitability. They have guided up EBITDA margins for the year, indicating a positive trend, though they will remain below 2024 levels in the current year.

2. Strategic Market Expansion

• Total Addressable Market (TAM): Airbnb is actively expanding into new markets, aiming to triple its TAM over the next several years. This expansion is a key driver of their long-term growth strategy.
• International Markets: While North America constitutes about half of their revenue, Airbnb operates in 220 countries, highlighting a global presence and significant international growth potential.

3. Introduction of New Features and Services

• Reserve Now, Pay Later: This feature, officially launched in the US in August after successful testing, aims to level the playing field with hotels, where payment is typically deferred until the stay. The feature has seen strong adoption, with 60% of those offered the option taking it up. While concerns about cancellations exist, Airbnb's testing suggests they will be "relatively minor."
• Improved Maps and Updated Cancellation Policies: These are other new features introduced during the quarter that are contributing to the company's positive performance.
• Experiences: Airbnb is expanding into the "experiences" market, which includes activities and tours. This is a substantial market, estimated at $300 billion with only 30% online penetration. Airbnb believes its individual hosts with local expertise are well-positioned to capture a significant share, projecting $10 billion in bookings from experiences and services by the end of the decade.
• Hotel Listings: Airbnb is strategically adding boutique and unique hotels to its platform, particularly in areas with limited Airbnb supply. This acknowledges that for certain travel needs, a hotel might be a better fit, while still recognizing the vast opportunity in their core alternative accommodation business.

Financial Outlook and Valuation

• Fair Market Value: Morningstar's senior equity analyst, Dan Wasle, places Airbnb's fair market value at $154, suggesting the stock is trading at a roughly 20% discount.
• Near-Term vs. Long-Term Focus: The market has been focused on Airbnb's near-term investments in international expansion, hotel-like services, and experiences, which are currently lowering operating margins. However, Morningstar takes a longer-term view, seeing these investments as attractive for future growth and profitability, presenting an opportunity for investors.
• EBITDA Margin Inflection Point: The company has communicated that they are past the peak investment phase. As such, 2026 and beyond are anticipated to be an inflection point where margins begin to expand again.

Competitive Landscape

• Booking Holdings: Identified as Airbnb's primary competitor in the vacation rental space, with a significant international presence.
• Vrbo (Expedia): The third-largest player, Vrbo has been losing market share but is now showing signs of returning to growth after platform reinvestments. Airbnb holds an estimated 50% market share, Booking Holdings around 30%, and Vrbo approximately 10%.

Key Arguments and Perspectives

• Dan Wasle (Morningstar): Argues that Airbnb's current stock price presents an investment opportunity due to the market's short-term focus on investments that will drive long-term growth and profitability. He highlights the company's strong execution in expanding its TAM and its outperformance in the US market despite economic uncertainties.
• Airbnb Management: Emphasizes the success of new features like "Reserve Now, Pay Later" and the significant growth potential in the "experiences" market. They also acknowledge the strategic rationale for listing boutique hotels.

Conclusion

Airbnb is demonstrating robust performance driven by improving demand, successful new feature rollouts like "Reserve Now, Pay Later," and strategic expansion into new markets and services like "experiences." While near-term investments are impacting margins, the company is positioned for significant long-term growth and profitability. The current stock valuation, according to Morningstar, offers an attractive entry point for investors with a longer-term perspective. The company is navigating a competitive landscape effectively, with its primary rivals being Booking Holdings and Vrbo. The guidance for increased EBITDA margins and the indication of passing the peak investment phase suggest a positive outlook for future profitability.