The Secret To Airbnb’s Success

Digital technology did much more than transform the business world. It created advanced avenues of communication and made personal connections possible, regardless of geography.

At first, users simply enjoyed the ability to interact with friends and family in more meaningful ways across long distances. That led to platforms and forums dedicated to bringing strangers with similar interests together. Then, an entirely new concept was born.

Why not take out the middleman and facilitate direct connections between buyers and sellers?

The auction site eBay was one of the first to make it possible for individuals to offer items for sale to a large audience. Variations on the same idea followed, and then Airbnb took things a step further.

In 2008, the company’s founders built a site that allowed individuals to rent their unused space. That included everything from spare couches to entire homes.

The sharing economy was born, and a variety of businesses followed in rapid succession.

Uber and Lyft made ride-sharing a reality, and a collection of job sites launched – all designed to connect contract workers with employers for tasks that range from running errands to ghostwriting books. Examples include DoorDash, Fiverr, Instacart, and Upwork.

People from every walk of life gave up their traditional careers in favor of the flexibility and independence of hosting Airbnbs, driving people to their destinations, delivering groceries, and performing all manner of small and large chores.

Many of these companies have been successful, but Airbnb stands out. It is not necessarily outperforming its competition in the tech space, but it is leaps and bounds ahead of its hospitality peers. What is the secret to Airbnb’s success? Is Airbnb stock a buy?

Why Airbnb Is So Successful

The list of hospitality companies is nearly endless. In addition to massive chains like Hilton and Marriott, there are countless resorts, bed and breakfasts, and small hotels in every corner of the world.

However, Airbnb offers something those traditional lodging arrangements don’t – direct connections between hosts and guests on a powerful platform with a global brand.

Airbnb controls roughly three-quarters of the home-sharing market, which makes it the first choice for travelers. Hosts don’t have to put any effort into marketing to reach their target audience – they simply list their properties on Airbnb’s site and wait for the bookings to come in.

A percentage of every booking fee goes to Airbnb, which is how the company makes its money for the most part. The secret to Airbnb’s success is that none of that revenue goes to owning and managing real estate.

Airbnb avoids the biggest, most complex expenses that other hospitality companies face – all it has to do is provide technology. That allows Airbnb to flex and adapt regardless of market conditions, which is a luxury when unexpected events like the COVID-19 pandemic completely upend business plans.

Travel essentially stopped in 2020, and the hospitality industry suffered tremendously. Hotels and motels laid off staff, but that didn’t solve the problem of property-related expenses.

Many hotels were forced to take on debt to cover costs, and some went out of business altogether. Those that remain are still recovering from the disastrous COVID years and have yet to return to profitability.

Airbnb had to lay off staff, too – approximately 25 percent of its workforce. However, while peers in the hospitality industry tried to dig out of their financial pit, Airbnb was free from heavy expenses.

With a 42 percent margin, it’s already turning an impressive profit again, and it beat third-quarter 2022 earnings projections. That’s an enviable position to be in during uncertain economic times.

Airbnb Q3 Earnings Call

Airbnb reported third-quarter 2022 earnings in November, and the results exceeded expectations. The company’s shareholder letter called it the “biggest and most profitable quarter ever despite geopolitical and macroeconomic headwinds.” Highlights from Airbnb’s Q3 results include:

  • Revenue – $2.9 billion (year-over-year growth of 29 percent and a new record)

  • Net Income – $1.2 billion (a new record)

  • Net Income Margin – 42 percent (compared to 37 percent for the prior year period)

  • Adjusted EBITDA – $1.5 billion (year-over-year growth of 32 percent and a new record)

  • Adjusted EBITDA Margin – 51 percent (compared to 49 percent for the prior year period)

  • Free Cash Flow – $960 million

By the way, it is worth noting that Airbnb is one of the few tech companies that benefits from higher interest rates. When guests pay for their stays, Airbnb holds those funds until the trip occurs, then disperses them to hosts.

During the gap in time, the money is invested, and Airbnb earns interest. As interest rates go up, Airbnb realizes higher returns on all of that cash it is holding for customers.

Is Airbnb Stock A Buy?

The global travel market is valued at roughly $1 trillion, and Airbnb controls a solid share of the hospitality portion. Demand for non-traditional lodging is going up as travelers seek more affordable stays and unique experiences, and that increase is expected to continue for the foreseeable future.

Airbnb reported 25 percent year-over-year growth in nights and experiences booked for the third quarter, which is a new record.

Over 90 million people checked into an Airbnb somewhere in the world during the three-month period – more than ever before – and the number of hosts is growing as well.

In mid-November, Airbnb plans to roll out new tools that will make hosting easier than ever. More bookings mean more profits, which is good news for investors who buy Airbnb stock now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.