You know a company has entered the cultural zeitgeist when its name becomes a noun or a verb. It is a sure sign that this particular company owns its market.

Think of all the examples. Do you ask for an adhesive bandage, or do you ask for a Band-Aid? Do you get on your phone to find a ride share... or do you call an Uber? Do you perform an internet search to do research, or do you "Google it"?

Today's company has entered the lexicon as strongly as any of these.

I'm talking about Airbnb (ABNB). It has recently showed up in the Green Screens... and turns out it is a pretty remarkable company! Let's take a look.

Creating A Whole New Market

Online lodging reservations are nothing new. It was one of the first applications of the Internet, with online travel agencies (OTAs) like Travelocity and Microsoft's Expedia launching as early as 1996. Priceline - which later became Booking.com - launched in 2000.

Online hotel bookings proved far more convenient and price-efficient for consumers than travel agents or phone calls. They had the added advantage of offering research capabilities, with search functions and hundreds of reviews. Predictably, OTAs took off, growing rapidly through the 2000s and early 2010s.

It was a great advancement, but ultimately it is just a more efficient way to do something (booking a hotel room) that has been done for over 150 years.

Airbnb had a different idea. Launching in 2008, its goal was to allow everyday people (the company calls them "hosts") to list their properties for short-to-medium term rental.

What an idea it was! These "alternative accommodations" are now known the world over as "Airbnbs".

In less than 15 years, Airbnb's network has grown to over 4 million hosts listing close to 6 million properties. The company is worldwide, operating in over 220 countries, with 80% of hosts located outside of the U.S. Nearly 250 million guests book a property through its platform annually - an immense $70 billion in gross booking volume!

Airbnb has staked out a position as the network provider, offering its hosts listing visibility, marketing opportunities, reservation management, and payment services, while providing guests an enormous variety of choices for lodging and an easy way to reserve one.

How Airbnb Makes Money

The revenue model is pretty simple to understand. The company makes money by charging service fees to both the guest (about 14% of the transaction) and host (~3%) on every booking.

This is a fantastic model. Hosts listing on Airbnb pay the company for every booking on their property, usually numerous times monthly. Guests have enjoyed the experiences so much that over 70% of bookings on Airbnb are from recurring users. On both sides of its network, the company is collecting recurring revenues - multiple payments from the same customer annually in a predictable fashion.

Growth has been excellent, as well. Despite a 30% drop in 2020 due to COVID-19 (which was still a lot better than the 50-60% drop at most OTAs), Airbnb has more than doubled its revenue since 2018. 2021 saw a rebound to over 77% growth, and 2022 looks to come in at +40%.

Going forward, there remains excellent potential for 15-20% annual sales increases. Management estimates a $1.5 trillion (yes, with a 'T') market opportunity. If this proves accurate, Airbnb's current $70 billion in gross booking volume represents only about 5% of that opportunity.

The firm is also quite nimble in accommodating guest wants and needs. For example, in the aftermath of COVID, many people are finding they can work from anywhere. This has led to an increase in long-term (30+ day) rentals on Airbnb, which now comprise over 20% of nights booked.

A Dominant Network And Brand

This is also a company with some outstanding long-term competitive advantages. I would consider it a "wide moat" company.

Clearly, the most powerful advantage is its NETWORK EFFECT. While OTAs like Booking.com have tried to build out a similar alternative accommodations network, nobody has been able to come close to Airbnb's volume and quality of offerings. The firm dominates the space with over 74% market share. If you are an aspiring host with property to rent, you would be a fool NOT to list on Airbnb! At the same time, this supply dominance makes Airbnb the first place that guests go to look for a unique property to stay at. This is a very difficult competitive advantage to break.

We previously touched on the fact that the company name has entered the language as a noun, as in "renting an Airbnb". This is a clear sign of a CONSUMER BRAND ADVANTAGE. Specifically on the "automatic purchase" side. Instead of doing painstaking research on where to list, hosts naturally just know to list on Airbnb, because of its brand. It's the same story for guests. People just "know" Airbnb is THE place to go for alternative lodging options.

Airbnb's variety and flexibility in offering accommodations for all needs have been key to the company's recent success. It has gained significant market share at the expense of Booking.com (BKNG), Expedia (EXPE), and Tripadvisor (TRIP).

Still Founder Led

My obsession with founder-led companies continues with Airbnb!

No less than 3 co-founders remain in positions of leadership within the company.

Brian Chesky is the CEO, having been the original host on Airbnb and co-founding the firm back in 2008. His partner Joe Gebbia remains on the board of directors as the chairman of the non-profit arm. The third co-founder, Nate Blecharczyk, is Chief Strategy Officer.

All three of these men are still quite young - Chesky and Gebbia are just 41, Blecharczyk is 39. All have massive financial stakes in the company. Chesky holds 29% of the Class B ("super-voting") shares, while Gebbia and Blecharczyk own around 25% each. That puts each man's stake in Airbnb between $7-10 billion. That is quite a vested interest in the company's success!

Chesky has done a phenomenal job. He has raised the company from nothing into a cultural powerhouse in just 15 years. Not only that, Airbnb boasts some of the most impressive financial metrics I've ever seen. Free cash flow margins are now routinely over 40%. The firm has grown with minimal acquisitions, and as a result currently has a free cash return on invested capital of over 40%.

These are financial metrics you only see in the world's very best companies, like Apple (AAPL). And Apple isn't growing 30% a year!

It will be interesting to see what Airbnb does with its burgeoning free cash flow. Recently, it has put some of it to work buying back shares, with a $2 billion repurchase authorization. This looks well timed, with the company's stock down almost 50% from its highs.

Risks

Airbnb is impressive, but it is not without risks.

As a discretionary expense, the travel industry at large is subject to volatile swings in demand. Economic recessions, geopolitical unrest, natural disasters, terrorist uprisings, and global health pandemics all have a history of gutting the sector in short order. Currently, a resurgence of COVID remains a risk, and there is widespread expectation of a general recession going into 2023. These could damper Airbnb's prospects in the near term.

Like Uber and other technology-based competitors to established industries, incumbents have frequently used their financial power to buy political influence and enact laws limiting an Airbnb host's ability to do business. Hotel-dominated cities like Las Vegas or Sedona have very restrictive laws in their zoning code preventing Airbnb-style rentals (and protecting their hotel economy). More large cities enacting these kind of laws would hurt Airbnb's addressable market size.

Finally, while the firm is on a very strong competitive footing, some large players have tried to encroach on the space. Booking.com actually has a comparable number of alternative accommodation listings on its network, although it has not seen the success in filling them that Airbnb has. Still, this being a growth market, I expect to see a lot of capital put into the space to gain market share back.

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