Every business has characteristics that can impact its future. Savvy investors tend to grasp a good majority of the things that can determine the return on their investment. For instance, in Airbnb‘s ( ABNB -2.11% ) case, these three facts are well known among top investors: It runs an asset-lite business model that can deliver exponential growth; it’s participating in a massive total addressable market; and it’s gaining market share.
Let’s look closer at each of these factors below.
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1. Airbnb runs an asset-lite business model
Airbnb does not own or operate physical properties. Instead, it aims to bring together the prospective traveler and the property owner, and take a percentage of each transaction between the two parties. In that way, it gains access to millions of households worldwide that can potentially list a room or entire home on the Airbnb platform. Acquiring hosts to list on Airbnb can be just as important a task as acquiring travelers looking for a place to stay. As more listings are available, it will attract more travelers and vice versa.
The asset-lite business model employed by Airbnb lends itself well to the potential for exponential growth. Consider the opposite: a company that builds and operates hotel buildings. As travel demand booms, the company books its rooms. Eventually, all its rooms are reserved year-round, hitting a ceiling. To grow, the company that operates physical hotels needs to build another hotel or add to its existing structure. As you might imagine, this takes time and millions, if not hundreds of millions, of dollars for construction.
In contrast, for Airbnb, as demand for travel booms, hosts earn more money and are encouraged to list more places more often. The word gets out that hosts are making good money renting out spare rooms and vacation homes, and it attracts new hosts to the platform. The virtuous cycle continues so long as the travel boom continues. A supplemental benefit is if there is a recession in the industry. Companies that operate physical hotels are left with a massive structure that is half reserved and expensive to maintain, whereas Airbnb does not carry that risk.
2. Airbnb participates in the massive travel industry
Of course, the opportunity for explosive growth would not be as valuable if the total addressable market was small. Fortunately for Airbnb investors, the travel industry is massive. According to Statista, the travel and resort industry generated $1.5 trillion in revenue in 2019 before the pandemic devastated consumer demand. It fell to $610 billion in 2020 before recovering to $950 billion in 2021.
In its recently completed fiscal year ended Dec. 31, gross bookings on the Airbnb platform were $46.9 billion. Not an insignificant sum, to be sure, but still a tiny part of the overall industry.
3. Airbnb is gaining market share
Interestingly, Airbnb’s gross booking value, which measures the value of consumer spending on the platform, was 23% higher in 2021 than it was in 2019. When compared with the overall travel industry numbers from 2019 to 2021, it’s apparent that Airbnb is taking market share.
Airbnb’s gain in share highlights that customers perceive better value from it than from competing options. Making this feat even more impressive is that Airbnb reported net income for its most recent two quarters, for a total of $889 million. It is easier to gain market share if you offer your products and services at prices undercutting competitors but not enough to cover your costs. Management streamlined operations to reduce expenses at the pandemic onset, and that could mean consistent profits from now on.
Admittedly, no investment is without risk, but the factors mentioned above can largely explain what makes Airbnb my highest conviction stock to buy right now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
