This week’s report for Steady Compounding Insider Stocks members features an in-depth analysis of Airbnb. The company has emerged from the pandemic as one of the most profitable tech companies. However, recent disappointing forward guidance sent the stock down 14% post-earnings.

In this report, I explore whether investors should own a piece of Airbnb, given its challenges and current valuations. Below, you'll find snippets from my Airbnb research report.

To unlock the complete report and gain exclusive access to all my stock research, click here to become a Steady Compounding Insider Stocks member.​

Compound steadily,

Thomas

Airbnb Next Moves: Can Chesky’s Vision Deliver Long-Term Value?

​Airbnb CEO Brian Chesky on the next chapter: “We’re now beginning to prepare the next chapter of Airbnb, and I want Airbnb to be one of the most important companies of our generation. And to do that, we’re going to need to do more than one thing. We’re going to have to do multiple new things. We’re going have to have multiple new products and multiple new services.”

When the pandemic hit, Airbnb flipped the switch on profitability like no other. Their free cash flow (FCF) margin skyrocketed from a modest 2% in 2019 to a remarkable 41.5% today, positioning them as one of the most profitable companies in tech.

Two key factors drove this transformation:

1. Strategic Shift to Brand Marketing:

Airbnb moved away from performance marketing, which emphasizes immediate sales through paid campaigns (like paying Google for top search rankings), to brand marketing, which builds long-term loyalty by connecting with consumers on a deeper emotional level. This shift drastically reduced their sales and marketing expenses as a percentage of revenue:

2017: 34%

2018: 30%

2019: 34%

2020: 24%

2021: 20%

2022: 18%

2023: 17.8%

Unlike performance marketing, which relies on paid advertising to drive immediate sales (a tactic favored by OTAs like Booking and Expedia), brand marketing focuses on building lasting brand awareness and loyalty through emotional connections with consumers. Airbnb’s emphasis on its values, mission, and unique offerings has cultivated a positive brand image and encouraged repeat bookings.

The effectiveness of this strategy is evident when comparing Airbnb’s sales and marketing expenses to its competitors:

Airbnb: 17.8%

Booking Holdings: 31.7%

Expedia: 53.5%

Airbnb isn’t just stopping at reduced costs. They’re pushing users to download their app by optimizing their mobile website, leading to a 19% year-over-year increase in nights booked. Impressively, bookings via the app now account for 55% of total nights booked. This not only saves on traffic acquisition costs and boosts profitability but also enhances customer retention, repeat bookings, and data collection for personalization.

2. Streamlining the Core Business:

Airbnb cut back on non-essential investments, laid off staff, and focused intensely on their core business—short-term accommodations. This disciplined focus allowed the company to thrive even without significant expansion beyond its core offerings.

However, with growth decelerating, Airbnb is now focused on moving beyond short-term stays as it explores new growth avenues.

Airbnb’s Growth Strategy:

In the latest earnings call, Brian Chesky outlined Airbnb’s growth strategy into short-term, medium-term, and long-term plans.

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Dark Clouds on the Horizon?

Airbnb’s share price dropped 14% following its Q3 2024 earnings report, primarily due to guidance that fell short of analyst expectations. The company projected revenue growth of 8% to 10% year-over-year, signaling a slowdown. Airbnb has noted shorter booking lead times globally and early signs of weakening demand from U.S. guests.

This trend mirrors what other players in the travel industry have observed:

Booking Holdings: “We have seen some softening in room night growth in the third quarter, particularly in Europe. We believe this is related to a number of factors, including the uncertain macroeconomic environment, the fact that we are lapping a period of very strong growth last year, and some shift in consumer behavior towards shorter booking windows.”

Expedia Group: “… what we’re seeing more recently, and in particular, in July, is a shrinking of the lead times… And so, it’s that, I would say, softness in terms of longer lead times that is a big factor in terms of the outlook that we’ve provided.”

Marriott: “I think one thing that’s just interesting is that ancillary spend around the world, U.S. and Canada and frankly, all of the other regions, ancillary spend with a hair softer than we anticipated. And I think it does show that the consumer in general is perhaps being a bit more judicious about the fancy dinner or going on that extra trip when they’re on a vacation.”

Samsonite International: “Global travel and tourism trends have continued to retracted levels. You look at US travel numbers, they’re every major kind of travel events, they’re at record levels for this year. But consumers have become more selective and intentional with their spending habits.

Airlines are also adjusting to excess capacity, leading to cuts in domestic routes:

Delta Airlines: “While this is a quarter where industry capacity growth exceeded still solid demand… The pressure other U.S. airlines are experiencing today is due in large part to their unprofitable flying in many domestic markets.”

United Airlines: “It was always inevitable that carriers would begin to cancel this unprofitable flying, and you see that happening in earnest in the second half of August in the schedules. As a result, it appears that the domestic industry capacity growth will moderate by roughly 5 points by the fourth quarter.”

Ryanair: “We look around and we see the consumer spending under pressure all over Europe. There’s no one market where we’re seeing any material strength or weakness. We think the consumer is under significant pressure across Europe. Interest rates are materially higher. Mortgage loans, et cetera, are materially higher. Most consumer-facing operators are under pressure, and we believe that is being translated into air travel.”

Navigating a Cyclical Industry

The travel industry is highly cyclical, and it seems we are at the beginning of a significant deceleration in travel-related spending. When times were good, it was cheap for Airbnb to grow, with those gains directly boosting its bottom line. However, with low-hanging fruit now plucked, the company must push beyond its existing markets.

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The Battle with Booking Holdings

Airbnb acknowledges that hotels are often preferred for shorter stays, especially by solo business travelers, while its strength lies in catering to group travelers and longer stays, particularly in non-urban areas. As Brian Chesky explained, “There are use cases where hotels are better, and Airbnbs are better. If you need a stay for one night, you’re traveling alone, you’re a business traveler, and you plug in and plug out, a hotel is better. If you’re traveling with a group, for more than three nights, or in a non-urban area, Airbnb is better.”

While Airbnb does offer hotel stays, its selection is mostly limited to boutique hotels. Chesky mentioned in this earnings call that Airbnb plans to push more aggressively into offering hotel accommodations to capture a slice of the business market: “We think there’s an opportunity to offer more hotels on Airbnb, especially for one-night business stays. We already have hundreds of thousands of boutique hotels and non-home inventory on Airbnb, and we plan to continue expanding that in the coming years.”

Meanwhile, Booking Holdings is not sitting idle. They are aggressively expanding into Airbnb’s territory by increasing their “alternative accommodations,” essentially home and apartment rentals. As of Q2 2024, Booking Holdings has grown its listings by 11% year-over-year to reach 7.8 million. To put this in perspective, Airbnb only recently surpassed 8 million active listings, meaning Booking Holdings is quickly catching up.

Valuation: A Comparative Lens

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See you inside,

Thomas

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