Airbnb vs Booking Holdings
Suspend reality and buy despite Airbnb’s objective challenges
Now that we have some hard data on Airbnb, I thought it would be revealing to compare Airbnb and Booking Holdings with objective numbers in an attempt to better understand Airbnb’s valuation and its potential going forward.
Summary:
- Airbnb’s expected IPO valuation could be reasonable in the absence of Covid. But I would suspend reality and buy under the current conditions given Airbnb’s track record in breakthrough thinking and its successful adjustment to new travel dynamics.
- Airbnb’s top line is admirable. Like Booking’s. Airbnb’s bottom line is not. Unlike Booking’s.
- Airbnb’s organic and direct business might be all the rage, but it hasn’t translated into profitability. When it’s time again to push on all cylinders, Airbnb will need to push the performance marketing accelerator to drive growth, adding pressure to its already fragile bottom line.
- For all the bad rap about performance marketing in relation to the “purer” organic and direct marketing, Booking Holdings and other OTAs have operated with this constraint (higher marketing costs) and built finely tuned performance marketing machines and operationally and financially efficient businesses. It remains to be seen for Airbnb.
- Airbnb’s inventory still is somewhat unique, but it is becoming less so. And if we define inventory as consumers think about it, Airbnb is at a clear disadvantage versus Booking Holdings.
- Comparing Airbnb and Booking Holdings on objective terms leads me to admire Booking Holdings even more than I already did. But it’s in the subjective categories (psychology, design thinking, magic) that Airbnb has an edge.
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Valuation — Airbnb is still sky high but it’s heading back to earth
Airbnb raised $1 billion in 2016 at a $31 million post-money valuation. In 2019, Airbnb was estimated to be worth about $38 billion, but its valuation fell to around $18 billion when it secured a $1 billion loan in April of this year, as bookings plummeted under Covid. The WSJ reported that Airbnb is expected to garner a valuation of roughly $30 billion at its IPO. This valuation is roughly where Booking Holdings’ market cap was in 2012. This could be reasonable in the absence of Covid. But it also is not completely unreasonable under Covid, given how Airbnb has outperformed its peers this year and how it has adjusted to new travel behaviors.
If we look at valuation measured as multiple of revenues, Booking Holdings has been hovering at around a 6 multiple. Airbnb ’s 2019 implied valuation of $38 billion would be at similar levels of Booking, coming down from X28 and X19 in previous years.
Gross bookings — On the same path, with a 6 year gap
Airbnb’s gross bookings from 2015 to 2019 is a carbon copy of Booking Holdings’ gross bookings from 2009 to 2013.
Revenues —similar path with an 8 year gap
The 6 year gap in gross bookings does not apply here. Booking Holdings had much higher revenues from 2009 to 2013 than Airbnb had from 2015 to 2019. The gap in revenues is more like 8 years. If this progression were maintained, and if we disregarded the global pandemic, Airbnb would reach Booking’s 2019 revenues by 2027. Booking Holdings has consistently grown year after year in gross bookings and revenue. Airbnb will have to deliver in a complicated post pandemic world.
EBITDA — the end of the similarities
When we look at EBITDA, the story between Airbnb and Bookings could not be any different. Booking Holdings has followed a consistent EBITDA growth while Airbnb has struggled to post positive EBITDA. In 2019, Airbnb’s EBITDA was -$0.25 billion, while Booking Holdings’ was $2.6 billion in 2013.
Marketing — higher direct traffic share for Airbnb, but…
Many comparisons between traditional OTAs and Airbnb focus on Airbnb’s higher share of direct traffic. This factor should be a tremendous advantage given that OTAs rely on their ability to generate demand in order to feed their growth. If the bulk of the traffic comes from free or low cost channels, it should be translated directly into higher margins and a healthier bottom line. This is not happening with Airbnb yet.
The marketing over revenues ratio can point to the relative efficiency of marketing spend. The higher the ratio, the more marketing pressure the company requires to drive sales. It’s interesting to note that Airbnb’s marketing / revenues ratio in 2015 was as high as Booking’s two years before. This ratio decreases consistently for Airbnb since 2015, except for 2019, when Airbnb increased its performance investment to accelerate demand, maybe in preparation for its IPO. Booking’s ratio also has decreased since 2017, although at around 10 percentage points higher than Airbnb. In 2020, Airbnb has been able to rely more on its direct and organic traffic, as we can see from the decrease of the marketing / revenues ratio.
When it’s time to retract (like in 2020), having a high share of organic and direct traffic has big advantages (see Airbnb’s marketing / revenues decrease in 2020), but when it’s time to push on all cylinders, it will be critical for Airbnb to have a well functioning performance marketing machinery that still puts Airbnb in a position to be profitable.
Airbnb requires less marketing to generate revenues, but this advantage has not yet translated into Airbnb’s ability to generate profitability. In spite of higher marketing, Booking has been able to create a growing and solidly profitable business. Unlike Airbnb so far.
Airbnb’s marketing strength could be its liability
Airbnb’s direct traffic is far ahead of Booking, but Booking’s overall traffic remains dominant.
For all the bad rap about performance marketing in relation to the “purer” organic and direct marketing, Booking Holdings and other OTAs have operated with this constraint (higher marketing costs) and built finely tuned performance marketing machines and operationally and financially efficient businesses. It remains to be seen for Airbnb.
Performance marketing is a growth lever and an engine to bring in new customers who could become loyal in the future. Relying on direct traffic could be insufficient for businesses that need tremendous scale and constant growth. Airbnb started having to hit on the performance marketing accelerator in 2019. From 2018 to 2019, Airbnb’s brand and performance marketing increased by $474 million dollars, of which $314 million was performance marketing. I am expecting Airbnb to further increase its performance marketing pressure in future years as it needs to deliver growth as a public company. This shift will be putting additional pressure on Airbnb’s ability to achieve profitability.
Furthermore, Airbnb’s reliance on organic traffic should not be taken for granted, as TripAdvisor and other travel players know well.
We focus on unpaid channels such as SEO. We believe that our SEO results have been adversely affected by the launch of Google Travel and Google Vacation Rental Ads, which reduce the prominence of our platform in organic search results for travel-related terms and placement on Google. — Airbnb S-1 Filing
Airbnb complaining about Google? It’s starting to sound like a real OTA.
“But Airbnb has unique inventory”
It depends what we mean by inventory. Even if we define inventory as vacation rentals, 55% of such properties are not exclusive to Airbnb, as per Transparent data.
Looking at booking data, the exclusivity argument loses some value. According to data from Transparent, 67% of bookings in the vacation rental category go to listings for which Airbnb has no exclusivity.
Furthermore, if we define inventory as “accommodations” (hotels + alternative accommodations), then OTAs like Booking and Expedia have a very strong inventory advantage. Phocuswire estimated that 19% of global accommodation bookings in 2018 were alternative accommodations. Having hotel inventory (81% of global accommodation bookings) is therefore essential. Airbnb is clearly at a disadvantage versus Booking on this.
Booking’s approach of having all types accommodations under one roof is also more aligned with how consumers think. Consumers think in terms of “a place to stay”. We cannot expect consumers to be experts on knowing which suppliers are best for each subcategory of accommodations (in addition, it would be suboptimal user experience). Booking Holdings and Expedia are building all-category accommodation inventory and letting consumers find the right one based on search and filtering criteria. I think it will be more difficult for Airbnb to become an “all category” accommodation platform than for the likes of Booking to continue expanding their “alternative accommodation” inventory. Airbnb’s brand is very strongly associated to “alternative accommodations” in consumers minds. Booking has been successful at expanding the scope of its brand to address “a place to stay”.
2020 — Airbnb’s top line bodes well for an IPO
Airbnb seems to be doing better than its peers as a result of being well positioned to address accelerated consumer behaviors
- Domestic travel
- Short-distance travel within 50 miles of guest origin
- Travel outside of traditional urban centers
- Long-term stays
Comparing Airbnb and Booking Holdings on objective terms leads me to admire Booking Holdings even more than I already did. But it’s in the subjective categories that Airbnb has an edge. All in all, I am optimistic on Airbnb because of reasons that are difficult to put on a graph. It just feels like a new generation of OTA that has its finger on the pulse of a new generation of consumers.
Airbnb’s relatively good results become more evident when we look at Q3 2020 results and include other publicly traded online travel companies in the analysis.
Airbnb was born from an irrational value proposition: to trust strangers to stay in your house. Airbnb is a good example of how not everything that works makes sense, as Rory Sutherland explains in his Alchemy book. The Airbnb founders believe in rationality, but they also know that psychology and irrationality sometimes plays an even greater role, particularly when the undertaking is all about human interaction and creating something new. This is Airbnb’s business, and why I would not bet against it.
“It seems likely that the biggest progress in the next 50 years may come not from improvements in technology but in psychology and design thinking” — Rory Sutherland
