🏡 Airbnb Joins The S&P 500
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🏡 Airbnb Joins The S&P 500
But NYC's new strict regulations might cast a shadow
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Airbnb (ABNB) earned a coveted spot in the S&P 500 this week.
It isn’t just a symbolic nod to its market dominance. For public companies, entering this elite index is a rite of passage, signifying robust financial health and the trust of institutional investors.
This development comes at the same time as new strict regulations in New York City that the company sees as a “de facto ban” against short-term rentals.
So what did we learn in the latest quarter, and what impact should we expect from new regulations?
Today at a glance:
Airbnb’s Q2 FY23.
New strict regulations in NYC.
Key quotes from the earnings call.
What to watch looking forward.
1. Airbnb’s Q2 FY23
A quick reminder on the key performance indicators:
Gross Booking Value (GBV): Total dollar value guests spend on Airbnb.
Average Daily Rates (ADRs): Daily revenue earned by the hosts from a reservation.
Airbnb’s revenue has two main components:
🛖 A host fee, in % of the price set by the host (roughly 3%).
👨👩👧👧 A guest fee, in % of the price set by the host (roughly 14%).
So, remember that Airbnb’s revenue is only a portion of the GBV. The company has a sky-high gross margin, with limited variable costs such as payment processing, chargebacks, data center, and software development amortization.
Financial highlights:
Key metrics:
Nights and Experiences booked grew +11% Y/Y to 115 million.
GBV grew +13% Y/Y to $19.1 billion (vs. $18.8 billion expected).
Long-term stays (28+ days) were 18% of gross nights booked (stable Y/Y).
Income statement:
Here is a bird’s-eye view of the income statement.
The 10-Q previously disclosed United States vs. International. Management shared a more comprehensive geographic breakdown of revenue. So we get more insights into our diagram! Of note, APAC saw the strongest growth, 37% year-over-year, but was still below pre-pandemic levels.
Main highlights:
Revenue grew +18% Y/Y to $2.5 billion ($60 million beat).
Gross margin was 83% (+1pp Y/Y).
Operating margin was 21% (+4pp Y/Y).
Adjusted EBITDA margin was 33% (-1pp Y/Y).
Non-GAAP EPS was $0.98 ($0.20 beat).
Cash flow:
Operating cash flow was $0.9 billion (37% margin, -1pp Y/Y).
Free cash flow was $0.9 billion (36% margin, -2pp Y/Y).
Balance sheet:
Cash, cash equivalent, and short-term investments: $10.4 billion.
Long-term debt: $2.0 billion.
Q3 FY23 Guidance:
Revenue of $3.3 to $3.4 billion (+14% to 18% Y/Y), vs. consensus of $3.2B.
So what to make of all this?
Guest demand remained strong and drove a beat across the board. Revenue and profit were well ahead of expectations. In addition, Q3 guidance was nearly 6% ahead of consensus on the high end. In particular, the growth in Nights and Experiences books accelerated during the quarter, from 10% in April to 15% in June, showing momentum heading into the summer.
Guests are traveling farther. Cross-border nights grew 16% globally and 80% in Asia Pacific. Cross-border represented 45% of nights booked, higher than Q2 2023 (43%) but still lower than Q2 2019 (50%).
Active listings grew +19% Y/Y and crossed 7 million, illustrating a continued supply growth. Excluding China, active listing growth has accelerated every quarter since the 2020 IPO. Hosting is the foundation of the Airbnb experience, as supply is the most critical function of the platform’s success.
GBV growth continues to slow down after favorable pandemic comps in 2022.
Long-term stays remain stable at 18% of nights booked. They were at 13% pre-pandemic. It illustrates how Airbnb has carved its own niche beyond the traditional travel market. In June, 25% of total monthly stays were three months or longer, an increase from 18% in April. In addition, roughly 45% of gross nights booked were from stays of at least seven nights. Long weekends have been the fastest-growing trip type, with a more flexible workforce boosting this category.
Brazil and Germany are two of the fastest-growing markets, with gross nights booked rising 110% and 63% year-over-year, respectively.
The operating margin expanded, primarily thanks to a favorable comp. Q2 FY22 was impacted by nearly $90 million in restructuring costs. On an adjusted basis (a better representation here), the margin was slightly down (-1pp Y/Y). Why? The timing of marketing spend has been frontloaded toward the first half of the year compared to 2022. Management expects margin improvements for the full year.
The net margin was boosted by interest income, so it’s temporary.
Buybacks: Management bought another $0.5 billion of its $2.5 billion share repurchase program. It shows their confidence in the long-term potential. The share count was down 3% year-over-year, with buybacks more than offsetting the dilution from stock-based compensation.
The guidance includes “a few points” of FX tailwinds, so the real growth is in the low teens.
Is the business sustainable?
Airbnb is in a solid financial position, with a net cash position of more than $8 billion on its balance sheet and generating nearly $4 billion in free cash flow in the past 12 months (43% FCF margin).
The business benefits from a high gross margin and low marketing spending. It gives room for management to invest in future growth initiatives.
If a global pandemic could not upend Airbnb’s business, it’s safe to say the company is unlikely to be shaken by local regulations. But let’s look closer.
2. New strict regulations in NYC
NYC links short-term rentals to the current housing shortage and rising rents. As a result, the city is enforcing new regulations on platforms like Airbnb, likely causing thousands of listings to be removed.
Key Regulations:
Rentals under 30 days are allowed only if the host is present, with two guests max having full home access.
Hosts must register with NYC for short-term rentals, and the hosting platforms need this confirmation to collect fees.
Penalties are high: $5,000 for repeat-offending hosts. Platforms like Airbnb or VRBO face up to $1,500 fines for illegal rentals.
Immediate Consequences:
Non-hotel, unregistered listings will likely be removed. Some might switch to long-term rentals.
Airbnb will face a decline in NYC listings—reservations in affected listings made after the 1st of December will be canceled and refunded.
Of 13,500 Airbnb apartment/home listings in NYC in July, around 7,500 could be affected, according to rental analytics company AirDNA.
Overall, Airbnb's NYC operations face immediate challenges. The number of listings impacted remains marginal (~0.1% of the 7 million active listings on the platform). Nevertheless, NYC could open the floor for more cities to enforce stricter rules against short-term rentals. So it will be critical to watch.
3. Key quotes from the earnings call
Founder-CEO Brian Chesky added some color on recent developments:
On guest trends:
“Active bookers grew in every region, and we had more first-time bookers compared to a year ago.”
This is a crucial soundbite considering the repeated demise of Airbnb, which regularly makes the rounds on social media. The platform has never been more used.
On guests staying longer:
“Millions of people remain flexible about where they live and work, and we see this reflected in our bookings. […] While the ability to travel and work remotely has been an important part of long-term stay growth, people are also extending their typical weekend stays by an extra night or two.“
Hybrid work has allowed Airbnb to see extra nights booked on weekend trips. This trend around work flexibility is here to stay, even if employees are expected to be at the office most of the week.
He touched on three strategic priorities:
Make hosting mainstream: Focusing on the untapped pool of potential hosts globally as leverage for future growth. Supply is steadily growing across all regions.
Perfect the core service: Chesky is known for asking for user feedback on social media and implementing changes to the platform. In May, Airbnb introduced 50 new features and upgrades, from pricing tools for hosts to new ways to plan a trip for guests.
Expand beyond the core: Airbnb plans to launch new products and services in the coming years. The financial fortitude of the business allows for further investment in the platform. Services to hosts, such as paid placements, are “absolutely on the table.” International expansion is also on the menu.
On Airbnb’s uniqueness and the “Only on Airbnb” marketing campaign:
“‘Only on Airbnb’ caps in the global pop culture moments, inspiring guests with some of the most iconic homes in the world. The Barbie Malibu Dreamhouse has been a sensation, and it is now Airbnb's most popular listing ever. We saw 13,000 press hits and more than 250 million social media impressions since it was announced. And to give you a sense of how much that is, that is more than twice as many press hits as were generated from our IPO. ‘Only on Airbnb’ campaigns are an effective way to introduce Airbnb and our unique inventory to new guests, and they'll be an important part of our playbook going forward.”
Its one-of-a-kind listings make Airbnb a go-to place to plan for a trip. Hosts are encouraged to create unique experiences, creating a flywheel.
“Around 90% of our hosts remain individuals.”
This remains a critical aspect of the business. Most listings come from individuals, as opposed to businesses promoting vacation rentals, illustrating the platform's uniqueness.
On ADRs:
“Our prices are essentially flat year-over-year. […] If we can keep prices very affordable, and then also focus on reliability, I think there's going to be a lot of demand to come.”
It’s in the platform’s best interest to have lower prices generating more demand, eating away at the rest of the travel industry. GBV growth matters more than ADR growth in the long run.
On international expansion:
“A couple years ago, we were concerned about the lack of penetration we had in Germany. […] And Germany is on track now to be one of the largest countries in the world on Airbnb. So we're going to take that playbook, and we're going to bring it to Asia, and we're starting with Japan and Korea.”
The under-penetrated markets give a long runway for growth, with a proven formula illustrated by the top markets like the UK or France.
On customer satisfaction:
“95% of reviews that are left for experiences end in a five-star review. And for our core business homes, it's 84%.”
The numbers are clear. People who use Airbnb are happy with the platform.
4. What to watch looking forward
The story of a marketing pivot
Airbnb has been on a multi-quarter pivot away from performance marketing and toward brand marketing. In 2019, Airbnb reduced direct-response to focus on brand marketing, resulting in lower spending. The company has been focused on making hosting mainstream and raising awareness.
As discussed in the YouTube section of our review of Alphabet’s earnings:
Brand marketing aims to build and enhance a brand's image over time, prioritizing long-term goals like awareness and positive brand perception. It's more about establishing a brand's presence and values in the audience's mind, often through channels such as TV ads, billboards, and digital media.
Conversely, direct response marketing urges immediate action from the audience, such as a purchase or sign-up. Success is measured by conversion rate and campaigns often feature a clear call-to-action (CTA). This measurable form of advertising often uses channels like email marketing and pay-per-click ads.
As Airbnb’s CFO David Stephenson explained on the call, 90% of Airbnb’s traffic is direct or unpaid. But note that the company is still investing in performance marketing. From the Shareholder Letter:
“We continue to see great results from our brand marketing across all key markets as we optimize the channel and audience mix. We are also making continuous improvements in performance marketing that are resulting in high ROIs.”
Affordability as a tailwind
Analysts on the call seemed focused on ADR growth. But management is playing a longer game. Airbnb is more likely to win if priced below the rest of the market. Lower prices are a good thing for the health of the entire marketplace.
Airbnb has made it easier for hosts to offer discounts and promotions through features like “Similar Listings.” This feature helps hosts provide the best value by matching other high-performing listings — resulting in a higher value proposition than offerings off-platform.
Similarly, guests can find better deals with Wishlists. In short, great value (for the price) was an essential feature of Airbnb in its early days, and management wants to recreate this advantage.
In this spirit, the company launched Airbnb Rooms in May, a more affordable way to travel with private rooms in someone’s home at an average price of $67 per night. This critical initiative puts pressure on hotels that cannot compete in this price range. If more hosts embrace Rooms, it could open a new category for cost-conscious travelers, particularly younger generations.
The company also launched several incentives to make longer stays more affordable, such as reducing the guest service fee after three months. Active listings offering a monthly discount went from 22% to 50% of new listings.
Innovation as a moat
With its asset-light model, Airbnb has the potential to offer additional services on its platform over time. The founder-led nature of the company gives more room for innovation. One of the most compelling ideas discussed on the call was a potential co-host marketplace to match available hosts with listings.
Chesky explained:
“We're still a very small player in a very large market. […] The hotel industry is more than about 10 times the size of Airbnb.”
It’s tempting to compare Airbnb to other OTAs and hotels. However, the potential for the company to benefit from hybrid work and nomadic lifestyle goes well beyond the existing serviceable addressable market.
“You're going to see a lot more people either living nomadly or some people traveling for the summer, going away for the winter, or extend the weekends, which is a whole new category between travel and housing.”
And you’ll find Airbnb precisely in that spot, surfing the next secular tailwind.
The million-dollar question is if competitors and regulators can get in the way.
What do you think? Let me know in the comments! 👇
That’s it for today!
Stay healthy and invest on!
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Disclosure: I am long ABNB in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members here.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
🏡 Airbnb Joins The S&P 500
Why has the stock price been tranding downwards over the past 2 years if all these metrics are increasing? As a guest of 2,500 nights and a Superhost, the platform itself has not shown any improvmeent.