Airbnb

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

Airbnb is a global online marketplace that connects travelers seeking lodging with hosts offering accommodations in a variety of settings, ranging from private rooms to entire homes.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Airbnb operates as a two-sided platform, connecting hosts (suppliers) with guests (demand). Their revenue is primarily driven by booking fees charged to both sides of the transaction. Here’s a breakdown of their business:

  • Revenue Distribution:
    • Nights & Experiences Booked: This is the primary driver of revenue for Airbnb. It’s the total number of nights booked by guests, plus experiences, and has risen significantly in the past couple years with an average occupancy of 50% for the platform. This is particularly high, compared to hotels at 60-70% occupancy.
    • Average Daily Rates (ADR): The ADR influences revenue per night booked. While rates are not as high as hotels, they offer a large selection of unique accommodations at lower average prices. This is offset by lower overhead costs than traditional hotels.

  • Gross Booking Value (GBV): This is the total dollar value of all reservations before fees or commissions. Higher GBV indicates higher revenues. GBV has been increasing year over year in part due to higher ADR and an increase in the number of nights booked. * Geographical Distribution: North America remains the largest region of revenue, followed by Europe and EMEA. However, these are all becoming less and less relevant as international travel on the platform keeps growing steadily and is becoming a majority. This indicates the business has strong international potential and ability to adapt to new markets.

  • Industry Trends:
    • The travel industry has been bouncing back since the pandemic with a lot of pent-up demand and an increasingly open international market, thus leading to more people traveling in the last couple years.
    • Consumers are showing a higher willingness to spend on experiences and accommodation and travel spending is returning to pre-pandemic levels.
    • The preference of travelers, especially millennials and Gen Z, has been shifting towards more unique, authentic and flexible travel experiences, further leading to the adoption of companies like AirBnb.
    • The rise of remote work has also shifted travel patterns and timelines with more people choosing to travel for longer periods of time and explore more rural locations than more traditional urban areas, giving a new edge to AirBnb.
    • The travel industry is seeing increasing automation and integration into one another, with companies attempting to streamline booking and travelling.
  • Competitive Landscape:
    • The hotel industry. Traditional hotel chains such as Hilton, Marriott, InterContinental Hotels Group, Wyndham, are major competitors. These firms own and operate various lodging facilities, which often includes business class and first class accommodations and a higher focus on business travelers.
    • OTAs (Online Travel Agencies). Online travel agencies such as Booking Holdings, Expedia, and Tripadvisor act as intermediaries between travelers and various types of lodging. These firms often act as a middleman and focus on offering the most listings at the lowest prices. However, since these firms are not directly attached to properties, like Airbnb, it is hard for them to secure as much recurring revenue as well as to provide a completely unique experience.
    • Alternative lodging providers. HomeToGo, Vrbo, and Vacasa, along with other sites that allow for short term leasing, have different focuses and niches, but still compete for the attention of travelers. The benefit of all these companies, other than AirBnb is to give local travelers and other short term travelers a more streamlined option for bookings. However, most of them still lack the network effect that AirBnb has, thus they often have lower booking numbers and more volatile performance.
  • What Makes Airbnb Different:
    • Extensive inventory: AirBnb is different from hotels and other alternatives in that they have built an extensive network of properties in unique locations and cities through a distributed marketplace of owners and investors. The massive scale of this is extremely difficult to compete with and is unmatched by any other alternative.
    • Unique experiences: Airbnb also offer experiences, which allows guests to do something that they wouldn’t have been able to experience without AirBnb. This is particularly attractive to certain segments of the market.
    • Flexibility and choice: AirBnb provides more diverse options for travellers, allowing them to find accommodations that match the budget and needs of their trip, compared to more traditional options.

Financial Analysis:

  • Revenue Growth: Airbnb has seen strong revenue growth in the last few years, as travel markets and restrictions opened up. This growth has been particularly prominent in their core segment of nights & experience bookings. While their growth has slightly slowed year over year, the overall growth rate is still very strong in the current market environment.
  • Profitability: While growth is promising, profitability is still not at peak levels. Specifically, it should be noted that the company’s profit margin declined year-over-year. Their net income margin has been decreasing from roughly 30% in 2021 to 10% in 2023 and 2% in the latest quarterly report. Much of this is due to an increase in expenses including but not limited to customer service, product development, marketing and other variable expenses. This means the company has to focus on managing its operating expenses to remain attractive to investors.
  • On the positive side, free cash flow has stayed steady at roughly 2.3 billion a year, indicating the company has large earning power and can continue to invest in the business for future growth. They also had high positive free cash flow margins at 36%. This means that while profits may not be growing fast, cash flow remains strong.
  • Balance Sheet:
  • AirBnb maintains a strong cash position at roughly 11.5 billion at end of September 2023. Given the nature of the business, this number is extremely important to weather the ups and downs of a volatile economy and protect against adverse market conditions.
  • The company also has $6.7 billion in short term marketable securities, which are a great backup to cash, and provide a low risk option to create a stable source of income, and are generally readily marketable.
  • They also had a total long term debt of about 1.8 billion, which indicates the company has a very strong balance sheet profile. The total liability of the company is 12 billion, which indicates about half of it is cash, meaning it can easily pay back the debts if needed.

Moat Assessment: 2.5 / 5

Airbnb possesses a weak and narrow moat due to a combination of the network effect and brand recognition, with limitations. The network effect does give it an edge, but this advantage seems to be getting weaker.

  • Network Effect: Airbnb benefits from the network effect as a larger network of hosts attracts more guests, and more guests incentivize more hosts to join the platform. This is a solid economic moat, as it’s hard to compete with that kind of advantage, however, other companies like Vrbo are trying to establish their own networks that could compete. This has increased the number of listings and alternatives for travellers, and has diminished some of AirBnb’s market dominance, but it still remains a critical advantage.
  • Brand recognition: AirBnb benefits from the brand that they have created and have the ability to generate positive perception through recognition. They have also managed to establish themselves as a reliable platform for short term travel. However, this brand is more psychological than economical, and because the industry for short term rentals is still maturing it is difficult to say how long the brand can be sustained.
  • Switching costs: While travelers may not incur high costs when switching platforms, repeat users have probably curated a selection of properties, and have probably created a list of hosts that they have enjoyed in the past and would probably like to stay with again, creating at least mild switching costs. However, switching costs are not nearly as significant as other companies, which further strengthens the narrative that the network effect is one of the most meaningful contributors to any moat.

Risks to the Moat and Business Resilience

  • Competition: The biggest risk to Airbnb’s moat is the increasing competition by hotels and other travel agencies. Many hoteliers are seeing the benefit of online booking and may start to market that more heavily than they already do. They may start adding a broader selection of smaller, more unique properties to their booking systems to compete with Airbnb.
  • Economic Slowdown: As travel is cyclical, and tied to personal income, it’s often one of the first categories people cut back on when the economy starts slowing. Since AirBnb has seen very impressive growth over the last few years, it is possible that their growth will have to slow if the economy slows.
  • Regulation: Governments are constantly attempting to regulate the market of short term rentals. In particular, some states and governments are trying to limit short term rentals in their districts which may impact Airbnb’s reach in specific markets.
  • Data Security and privacy: Cybersecurity attacks on platforms like Airbnb are of utmost concern. As a company that manages a ton of sensitive customer information, it may be possible for ill-intended groups to get a hold of it and cause losses for their users. They must continue to protect their customer base against this.
  • Travel Trends: Changes in travel trends and consumer preferences can also effect AirBnb and make them less relevant. If people start to prefer more traditional hotels than unique listings, AirBnb would have to suffer in the competitive landscape. It’s extremely important that they recognize shifts in customer preferences to ensure that the moat stays intact.

Understandability: 3/5 Airbnb’s business is relatively easy to understand for the most part, because it essentially operates as a marketplace. However, its competitive position is difficult to analyze for many people, and it’s difficult to track their metrics as well as their main growth drivers since these vary widely between segments. It also requires detailed analysis of the financial statements, which aren’t always straight forward.

  • The company is attempting to grow in new markets and regions, while also facing competition from other hotel chains, online travel agencies and other lodging companies. Understanding which areas they are succeeding in and why are difficult tasks that need some in-depth analysis.
  • Analyzing their balance sheet and how they keep the balance between their profits, cash flows and financial position is difficult, and requires a degree of financial knowledge to understand.
  • Lastly, analyzing the company’s customer base and overall loyalty is difficult, so determining their long-term profitability based on current numbers is difficult for most investors.

Balance Sheet Health: 4/5 Airbnb’s balance sheet is in very good shape, due to a large cash and marketable securities pile that makes up more than half of their total liabilities, however there have been a steady increase in operating costs and other liability expenses. With this in mind, these factors do need monitoring and can diminish the company’s long-term profit potential, but it is overall very healthy.

  • The company has a considerable cash balance and marketable securities that gives it a large margin of safety for adverse economic conditions.
  • The low debt profile of the company is another benefit, that gives a lot of additional financial flexibility.

The Essays of Warren Buffett: Lessons for Corporate America | Moat: N/A / 5 | Understandability: 1 / 5 | Balance Sheet Health: N/A / 5

A compilation of insightful letters and writings by Warren Buffett, focusing on his philosophy of corporate governance, finance, investing, and accounting, with a strong focus on long term business viability and a focus on fundamentals.

Overview This book is a curated collection of essays and writings by Warren Buffett, primarily drawn from his annual letters to Berkshire Hathaway shareholders. It does not represent a company or a business, rather it is a collection of his insights and business philosophy, thus there are no moats or financial statements to analyze.

Key Themes

  • Corporate Governance: Emphasis on owner-oriented business principles, ethical management practices, and the importance of board oversight.
    • Buffett stresses the importance of management’s role in maximizing long term value for shareholders.
    • The best managers are considered those that act as if they were the owners of the business, showing integrity and intelligence in their capital allocation decisions.
  • Corporate Finance and Investing: Focuses on long-term value creation, the dangers of speculative market behavior, and the advantages of intrinsic value-based investing.
    • The book stresses that markets are imperfect and that long-term investors need to focus on businesses with enduring competitive advantages (that we have come to call “moats”).
    • Investing is not a process to make you rich overnight, but rather to build your wealth slowly with compound growth over a longer period of time, with a lot of patience.
  • Common Stock: Discusses the significance of shareholder returns, the drawbacks of stock splits, and the dangers of mispricing due to speculation and poor market conditions.
    • He shows how companies should focus on shareholder returns rather than increasing stock prices in the short term.
    • He emphasizes value over price.
  • Mergers and Acquisitions: Highlights the pitfalls of overpaying for acquisitions, the importance of sensible stock buybacks, and the necessity of aligning acquisitions with the company’s intrinsic value.
    • Mergers and acquisitions are a great way to generate quick profits for short term investors and speculators, but long term investors need to be weary of such actions.
    • Acquisition and mergers should be done in order to improve the business, not for monetary gain alone.
  • Accounting and Taxation: Provides an understanding of financial reporting and how companies tend to abuse it to increase their perceived short-term performance.
    • Managers should not be focusing on “accounting shenagigans” rather on improving the overall business operations.
    • It’s critical to ignore all the complex and useless accounting terms and instead focus solely on whether the business is performing well overall.

Impact and Relevance:

  • Influence on Investors: Buffett’s essays have served as a cornerstone for value investors globally, emphasizing long-term business focus, and margin of safety. His thoughts, while at times can be slightly outdated, still provide an excellent basis for the general mindset of a sound investor.
  • Management Guidance: These essays have influenced corporate leadership practices and emphasize ethical behavior, long-term strategies, and a strong commitment to shareholders. He has made it abundantly clear that management has to act as if they were the owner of the company.
  • Practical Wisdom: Readers can gain insights into not only fundamental principles, but also an overall understanding of market behavior, as well as some general principles that act as guidance for an ethical business or investor.

Understandability: 1/5

These essays are made in the form of business letters from Warren Buffet, and therefore, are relatively straightforward to read and understand. His business philosophy revolves around some fundamental ideas that are easy to conceptualize for any level of investor. Furthermore, there is a large emphasis on avoiding complex concepts that can confuse people, making the essays easy for anyone to digest.

Balance Sheet Health: N/A /5

Since this book doesn’t represent a company or a single investment, balance sheet health is not applicable. However, there is some information relating to a good balance sheet profile through avoiding unnecessary debt and other obligations.

Philip A. Fisher’s Common Stocks and Uncommon Profits | Moat: N/A / 5 | Understandability: 2 / 5 | Balance Sheet Health: N/A / 5

An investment classic that details the “scuttlebutt” method of analyzing companies, while also providing frameworks for long-term growth investing and avoiding dangerous speculative investments.

Overview “Common Stocks and Uncommon Profits” by Philip A. Fisher outlines a strategy for identifying high-growth companies that are built to last for the long run. Instead of focusing solely on financials, he focuses on identifying a company’s competitive advantages and growth potential with his scuttlebutt methodology.

  • The Scuttlebutt Method:
    • This method is a cornerstone of Fisher’s investment strategy. He emphasized talking to as many people that were involved with the business, or related to the business as possible.
    • You should be speaking to customers, competitors, employees, vendors, and people in relevant industries. The core idea here is that you get a more nuanced and detailed view of a company through multiple sources rather than from a single source such as management or financial reports. This also provides a check on management if that were to lie.
  • Fifteen Points to Look For:
    • Fisher goes over fifteen points that can help you determine whether or not a business would be a suitable long term investment. This ranges from analyzing whether a company has a competitive advantage, to its management style, to its research and development operations, and other key factors.
    • These points are extremely useful in making sure that the investor considers all relevant aspects of the business before purchasing the shares.
  • Investing Philosophy
    • Fisher’s investment philosophy is that growth and value investing go hand in hand. It’s not a matter of growth or value, but rather choosing growth stocks that are offered at a reasonable value.
    • He focuses on long-term growth prospects and believes that good investments provide returns over a number of years rather than quick profits in the short run.
  • He emphasizes identifying companies with sustained competitive advantages and avoiding speculative investments.

Practical Applications:

  • Due diligence: This book is an excellent practical guide for due diligence and teaches investors to go beyond simple financial analysis.
  • You have to talk to people, learn the inner workings of the business, research the people in charge and make decisions that seem to make sense.
  • Long-term perspective: The book advises readers to take a long-term approach to the market and be willing to hold investments for long periods.
    • He advocates for a patient approach that will generate superior returns through the power of compounding, and not short term fluctuations.

Understandability: 2/5

While the principles in the book are not extremely difficult to understand, implementing them and fully using them to your benefit can be a difficult task, especially for newer or inexperienced investors. It takes time and effort to contact many sources, and it can be difficult to weigh all the pros and cons. This book is useful and practical, but at times, it can be too hard to make use of given the complex nature of business.

Balance Sheet Health: N/A / 5 This book doesn’t represent any one company and instead focuses on principles, strategies and guidelines for analysis. Hence, balance sheet analysis isn’t applicable. There are general recommendations to focus on companies with good fundamentals and financial positions. However, specifics aren’t really mentioned.