Airbnb: Bold Competitive Threats & A New World of Travel

Airbnb, Inc NASDAQ: ABNB has been punished for being both a tech stock as well as for being in the tourism industry. Its price was sold off heavily following the announcement of the pandemic and was sold off yet again in December last year when the valuations of many tech stocks cratered. The stock is currently down 33.95% YTD and trades 43% below the MarketBeat consensus price target. When examining the company’s earnings and skill in responding to the pandemic, it could be argued that these sell-offs were the result of prejudice. The company now benefits from all-time high revenues and a growing account of free cash flows quarter to quarter. What made these wins possible for the company is its business model which many of its competitors have been quick to imitate.

Airbnb’s Competitive Moat

The growth of Airbnb is supported by a strong economic and competitive moat which has allowed it to easily market share away from traditional hotel chains and even grow during the height of the pandemic. Airbnb benefits from the network effect; as the number of listings for rooms and accommodations on the site increases, so does its availability and geographic reach to host additional guests. And as more guests sign up to use the platform, this attracts more hosts to sign up in order to cater to this swelling demand. These effects synergize naturally with each other, which is where the rapid success of the brand comes from.

Due to its flexible business model and unparalleled geographic reach, Airbnb was able to pivot its business model and see opportunity in the shifting trends of consumer travel during the pandemic. Consumers were uninterested in renting accommodations in cities and other densely populated areas due to the threat of infection. Instead, the demand for accommodation in remote areas surged. Airbnb rapidly promoted these new locations to travelers who were sick of lockdowns and worrying about social distancing, while its competitors with static accommodations saw their revenues plummet. Underlining the success of Airbnb's pivot, the company finished Q4 FY 2021 on $1.5 billion in revenues and made $76 million in operating profit. 

Airbnb’s Impressive Financial Growth

Airbnb serves an enormous total addressable market. The travel industry is estimated by the company to be worth $3.4 trillion, and the company is serving a small fraction of that by comparison. The travel industry is also set to rebound above pre-pandemic levels next year, as it’s expected to grow 5%.

The company is also set to take advantage of the rebound in travel and continue its strong financial performance. Revenue for the company increased 70% YoY ending at $1.5 billion for FY 2021. The number of bookings on the platform also increased by a significant amount, increasing by 59% YoY to $102 million. Airbnb is unusually profitable for a tech company. It recorded $1.2 billion in free cash flow for Q1 FY 2022, with an unlevered free cash flow yield of 2.8%.

The Change of Travel and Airbnb’s Competitive Threats

While the trends of travel are changing, so too is the competitive environment that Airbnb operates in, which has opened the door for its competitors to put their foot in. Hotels and other inflexible accommodations served the needs of travellers pre-pandemic, with working remotely for long periods of time an uncommon practice in many industries. Now working and travelling remotely has become a normalized practice, and employees today have the equity to demand it from employers as a perk due to labor shortages. This means that Airbnb’s threats have shifted from what could be considered legacy accommodation models or hotel and motel chains, to new entrants in the market that are attempting to commoditize Airbnb’s business model. The company also faces the threat of these legacy accommodations changing their business models to adapt to the change in consumer preferences.

A number of new companies have been spun off from giants in the travel industry after witnessing Airbnb’s success. These names include Expedia NASDAQ: EXPE, which owns Vrbo, and Booking Holdings NASDAQ: BKNG, which is now placing more emphasis on host-based accommodation. Airbnb also faces increased competition online from platforms that traditionally recommended hotels and motels to travelers buying airline tickets. Now, these companies have pivoted more towards offering independent hosts to directly compete with the company. These companies include Kayak and Trivago.

Airbnb's Technicals

Over the short term, the technicals for Airbnb are not cut and dry. The MACD generated a buy signal with a cross-over to indicate that momentum is shifting to the upside. However, the strength of this upside movement was not met with the additional volume on the green candles, which suggests a weak movement. There is far more volume and therefore motivated sellers on the red candles so this signal should be treated with suspicion. Additionally, the trend is clearly pointing towards the bottom. This signal could therefore be an oversold bounce rather than a convincing correction in the stock’s price.