Airbnb: The Sharing Economy Poster Child
A deep dive into one of the world's leading online travel agencies
Hi, fellow investors!
Welcome back to another deep dive on a wonderful company. This time, we’re analyzing Airbnb, an industry leading online marketplace for accommodations.
Would you rent out a room in your home to a complete stranger in exchange for some cash? Or, on the flip side, would you choose to stay in a stranger’s home instead of a hotel? While it might sound like the initial plot for a horror movie, Airbnb sprouted from this idea. Today, over 5 million hosts rent out their properties through Airbnb, with more than 1.5 billion guests having used the platform over the platform’s lifetime.
Table of Contents
1. History
1.1 The Air Mattress
1.2 Presidential Cereal
1.3 Growing Up
2. Contemporary Business
2.1 Airbnb’s Business Model
2.2 The Essential Numbers
2.3 A Travel Agency’s Moat
2.4 Into the Future
3. Management
3.1 Brian Chesky
3.2 Ownership and Compensation
3.2 Capital Allocation
4. Conclusion
1. History
1.1 The Air Mattress
Brian Chesky, born in 1981, was always a creative person. Inspired by Renaissance artists like Leonardo da Vinci, Chesky spent his teenage years drawing, painting, and designing. In an interview, he once said, “Most kids would ask Santa Claus for toys because they wanted to actually play with them. I would ask Santa Claus for badly designed toys so I could redesign them.” Besides toys, Chesky would sketch redesigns of Nike and Reebok shoes, and he even explored landscape architecture at some point. This interest in large-scale designs eventually led him to visit Disney World. Walt Disney became one of Chesky’s childhood heroes, and Disney’s ideas and strategies later influenced Airbnb's development.
In addition to his artistic side, Chesky became a natural leader, even captaining some of his hockey teams. His father also taught him the importance of leading by example.
Driven by his passion for art and design, Chesky attended the Rhode Island School of Design, where he graduated in 2004 with a Bachelor of Fine Arts in industrial design.
In 2007, Chesky moved to San Francisco to live with his former classmate Joe Gebbia. Around that time, the Industrial Designers Society of America was holding a conference in the city, causing all the hotels to sell out. Meanwhile, Chesky and Gebbia, both unemployed, were struggling to pay their rent. This gave them the idea to turn their apartment into a temporary bed-and-breakfast to earn some extra cash while providing accommodations for conference attendees. Pulling three airbeds out of the closet and providing their guests with Pop-Tarts, they called it the “AirBed & Breakfast”. To attract guests, they built a very simple website. Chesky recalled, “This was not going to be a business; this was a way to make rent for the month.” Of course, we know what happened afterwards. AirBed & Breakfast was going to be a business, and quite a successful one. They charged their three guests $80 a night and, beyond just a place to sleep and breakfast, acted as local guides for them.
Shortly after Chesky and Gebbia’s initial success, Nathan Blecharczyk joined them as the third co-founder. A Harvard-educated engineer, Blecharczyk became Chief Technology Officer, responsible for developing the company’s technical infrastructure. Together, the trio launched Airbedandbreakfast.com, a primitive website of which you can see a page in the exhibit below. The website was created using $20,000 from their combined savings, maxed-out credit cards, and seed capital from friends and family.
What started as a desperate attempt to pay rent evolved into the idea for modern-day Airbnb. But there was still a significant challenge: the three young men lacked the funds to advance AirBed & Breakfast.
1.2 Presidential Cereal
When a startup is founded, the founders often need external capital to grow the business. One of the most common sources of this funding is venture capitalists—investors who provide capital to startups that are too small for public markets and too risky for traditional bank loans. To secure investment from venture capitalists, founders must pitch their idea convincingly, as they typically don’t have anything material to show. With no revenue or cash flow, the challenge is to persuade investors that the idea is promising and worth the risk.
The unique problem Airbnb faced, however, was that it simply wasn’t a great idea. As mentioned earlier, the concept of inviting strangers into your home or staying in a stranger's place seemed more like the setup for a cliché horror movie than a viable business. As a result, Chesky, Gebbia, and Blecharczyk found no support from venture capitalists, which is why they had to find capital elsewhere.
They proved to be resourceful, as they succeeded in securing enough capital to propel their startup forward—through cereal, of all things. Seizing the opportunity presented by the 2008 election year, they purchased large quantities of bulk cereal and repackaged it in custom-made cardboard boxes featuring artwork of Barack Obama and John McCain. They made only 500 boxes and added limited edition stamps on them, in an attempt to make them more desirable. The strategy paid off, as they successfully sold 800 boxes at $40 each. Yes, $40 for a single box of cereal. The trio made a profit of more than $30,000 with their cereal business.
In 2009, AirBed & Breakfast rebranded as AirBnB and received $20,000 in funding from the startup incubator Y Combinator. Interestingly, Paul Graham, co-founder of Y Combinator, shared some e-mails with another venture capitalist who was reluctant to invest in Airbnb and eventually declined. These exchanges provide some fascinating insights into the company’s early days.
They used the newly injected capital to fly to New York, where they met with users, hosted launch parties, and promoted the site. By April 2009, just in time for Demo Day—the final day of the incubation period when startups pitch their businesses to investors and media—Airbnb had become profitable, charging a fee of 6 to 12 percent per booking. Sequoia Capital took notice and led a seed, raising a substantial $600,000, which valued the company at an impressive $2.4 million—a remarkable turnaround from struggling to pay rent just two years earlier.
In 2010, Airbnb secured another round of venture capital, raising $7.2 million, led by Sequoia Capital and Greylock Partners. The company had grown significantly, moving beyond renting just spare rooms to offering entire apartments, homes, castles, boats, and even private islands. By November 2010, more than 700,000 nights had been booked, with nearly 80 percent of those bookings occurring in the six months prior.
Airbnb was now entering a phase where financing was no longer a concern. The company was growing exponentially, with no signs of slowing down.
1.3 Growing Up
Airbnb continued growing, fueled by its scalable business model. But growing into an adult company came with adult problems. Airbnb’s elephant in the room was, and still is, regulation. While renting rooms or apartments to tourists existed long before Airbnb, it was done on a much smaller scale and did not pose major issues. However, Airbnb’s emergence enabled millions to rent out properties to strangers, leading to substantial structural changes in tourist destinations.
One of the most significant impacts was housing shortages, as landlords increasingly shifted from long-term to short-term rentals via the platform. This shift not only drove up rents and property prices but also disrupted local communities. The influx of tourists strained infrastructure, led to noise and safety concerns, and negatively affected the dynamics of neighborhoods.
In response, major cities began implementing regulatory frameworks to better manage Airbnb’s impact. Recognizing the importance of tourism to the economy, many cities opted for a strategy of collaboration with Airbnb, introducing stricter rules rather than outright bans.
Nevertheless, regulation remains the most significant risk to Airbnb’s business as it continues to grow.
Before getting to where we are today, Airbnb underwent other changes. In 2014, the company introduced a new logo, the Bélo, symbolizing people, places, love, and the letter A.
In 2016, Airbnb expanded beyond accommodations by launching "Experiences," aimed at diversifying its offerings. As CEO Brian Chesky explained, the goal was to “give travelers guidance on what to do when they finally get there.” Experiences range from dining and tours to entertainment and more. Although Airbnb doesn’t disclose specific revenue figures for Experiences, it is likely a complementary part of the business.
Airbnb went public in 2020 at $68 per share, but opened at $146 per share due to enormously high expectations, giving the company a market cap of over $86 billion. However, the market cap has since decreased to $74 billion, largely due to initial overvaluation.
2. Contemporary Business
2.1 Airbnb’s Business Model
Airbnb connects hosts with guests through its website and app, offering a platform designed to seamlessly onboard and support over 5 million hosts. Airbnb assists hosts in successfully managing their listings, including scheduling, merchandising, integrated payments, community support, host protections, pricing guidance, and feedback from reviews. Ensuring that hosts have a positive experience is crucial for Airbnb, as a larger number of hosts increases the platform's value to potential guests.
Guests can explore and book a wide variety of unique homes and experiences through Airbnb's website and app. To enhance the user experience, Airbnb launches biannual product updates. In its most recent release, the company introduced and refined features like "Guest Favorites," a badge awarded to top-rated accommodations, making it easier for guests to choose between listings.
Airbnb generates revenue by charging service fees to both hosts and guests, calculated as a percentage of the booking value. Upon guest payment, Airbnb collects the total booking amount plus applicable guest fees. After deducting the host's service fee, typically around 3%, the remaining amount is disbursed to the host. Guest fees usually fall under 14.2%. In 2023, Airbnb's revenue was $9.9 billion, with a gross booking value—the total amount paid by all guests in a year—of $73.3 billion, resulting in a take rate of 13.5%. This metric is crucial as it indicates the company's pricing power.
Airbnb’s take rate has been on an upward trend, peaking at over 14% during 2020 amid the COVID-19 pandemic. However, I would consider this spike to be an outlier, due to the unusual circumstances.
Airbnb’s business model includes a significant yet often overlooked income stream. When guests book accommodations, they typically pay in advance, and while Airbnb collects the payment immediately, it only disburses the funds to hosts after the guest checks in. In other words, Airbnb holds a lot of funds from guests. In fact, as of its latest quarterly report, Airbnb held over $10 billion in customer funds. In the six months ending June 30, Airbnb earned $428 million in interest income, partly due to these funds. This accounted for more than 40% of its income before taxes. In periods of high interest rates, this income stream becomes very lucrative.
Finally, it’s important to mention that Airbnb operates an asset-light business model. Unlike hotels and resorts, Airbnb does not own the accommodations listed on its platform. The majority of Airbnb’s assets consist of cash, short-term investments, and customer funds, with minimal investments in property, plant, and equipment.
2.2 The Essential Numbers
To qualify as a high-quality stock, a company should have:
Consistent and sustainable revenue growth.
High free cash flow generation.
High and consistent returns on invested capital (ROIC).
A strong balance sheet.
Revenue growth is the main driver of higher profits, making it a key aspect of any investment case. Without revenue growth, any company’s profitability is limited. Besides, failing to grow revenue while competitors do grow results in a lower market share.
Airbnb’s 5-year compound annual revenue growth is 20%, which includes the negative impact of the COVID-19 pandemic.
High growth such as Airbnb’s is, unfortunately, unsustainable in the long-term. Additionally, the travel industry is experiencing a slowdown in 2024. Numerous travel companies, including Airbnb, Booking Holdings, Marriott International, and Hilton, are all forecasting slowdowns. Realizing that this is an industry-wide slowdown is important and reassuring. Airbnb expects revenue growth of 8 to 10% in the third quarter of 2024, while it grew revenue by 18% and 11% in the first and second quarter, respectively. This is still above-average growth, and such growth rates should be more sustainable.
Over the long-term, I believe Airbnb can continue growing revenue with double-digit rates—more on that later.
High free cash flow generation is crucial to any investment, as free cash flow provides the actual cash that management can use to reinvest in the business, pay dividends, repurchase shares, and more. High and consistent future cash flow is key for a stock to become an attractive option for the high-quality investor.
The company’s net income has experienced volatility over the years, largely due to the impact of the pandemic. 2022 and 2023 marked a sharp recovery in the travel industry, which also benefited Airbnb. In 2023, net income was notably higher than usual due to a one-time tax benefit of $2.7 billion. Adjusting for this one-time event, net income would have been approximately $2.1 billion. It’s also clear that free cash flow is consistently higher than net income. This can be partly attributed to Airbnb’s stock-based compensation, which is added back to net income when calculate operating cash flow. Adjusting free cash flow for stock-based compensation and adjusting 2023’s net income for the one-time tax benefit yields an entirely different chart.
With these adjustments, free cash flow aligns more closely with net income, although adjusted free cash flow remains consistently higher. This can be explained by Airbnb’s minimal capital expenditures and its highly efficient business model.
Next, a company must achieve a high and consistent ROIC before the high-quality investor even considers investing in it. ROIC is a critical aspect of a company’s fundamentals, as it indicates the efficiency with which a company generates profits from its capital. Generally, the cost of capital ranges from 6-12%, so I focus on companies with an ROIC above 15% to ensure value creation.
Airbnb, as previously mentioned, operates an asset-light business model. In fact, the company is so efficient that its invested capital (calculated using Mauboussin’s method) is negative. This results from Airbnb’s substantial cash and cash equivalents position, of which only a small portion should be considered as invested capital. This is logical, because a company doesn’t need billions of dollars of cash to run its day-to-day operations. Nevertheless, I also calculated ROIC by including all cash, so that we can actually analyze a positive ROIC.
ROIC was negative in 2020 due to significant losses during the pandemic. Since then, however, the metric has grown steadily, reaching 44% in 2023. However, this figure may still be misleading because Airbnb’s effective tax rate in 2023 was -128%, driven by a substantial tax benefit. Adjusting for a more typical 20% tax rate results in a 2023 ROIC of 15%. While this is on the lower end, it’s important to consider that invested capital still includes non-operating cash, highlighting Airbnb’s operational efficiency.
Finally, a company must have a strong balance sheet before the high-quality investor considers investing in it. As of its latest quarterly report, Airbnb had a cash and cash equivalents position of more than $11 billion, while its debt was $2 billion. Clearly, Airbnb is in no risk of default. Moreover, Airbnb’s interest expense in 2023 was $83 million, while its operating income was over $1.5 billion. Thus, the company’s interest cover ratio was 18, which is considered to be very healthy. Airbnb’s debt and accompanying interest is perfectly manageable for the company.
2.3 A Travel Agency’s Moat
The moat, or sustainable competitive advantage, is crucial in determining whether a company can continue to generate above-average returns on capital. Without enduring advantages, a company’s performance is likely to revert to the mean over time.
Airbnb’s moat is primarily driven by its strong network effect. As more hosts join the platform, it attracts more travelers, which in turn draws even more hosts. This classic network effect creates a virtuous cycle of growth. Aside from competitors like Booking Holdings and Expedia Group, no other online travel agency boasts a comparable network effect. These strong network effects create high barriers to entry, making it increasingly difficult for new players to enter.
Second, Airbnb benefits from a highly efficient, scalable business model, which is particularly advantageous when competing against traditional hotels and resorts. Unlike hotels, which require significant capital expenditures to build more rooms and scale operations, Airbnb’s model relies on hosts renting out their own spaces. This asset-light approach allows Airbnb to avoid heavy capital expenditures and scale rapidly. Additionally, the business model enables Airbnb to achieve economies of scale; as the platform grows, it can spread its fixed costs over a larger revenue base, enhancing profitability.
Airbnb also enjoys a competitive advantage through its brand, which has become synonymous with unique and often more affordable accommodations. Unlike traditional hotels, Airbnb is associated with personalized, home-like experiences, offering everything from cozy apartments to entire homes that provide a sense of belonging and comfort. This strong brand identity resonates with travelers seeking authentic, local experiences rather than the standardized offerings of typical hotels.
Most recently, Airbnb introduced the “Icons” experiences, designed to enhance the brand’s appeal. Examples of such experiences include staying in Disney and Pixar’s "Up" house, spending the night in the Ferrari museum, going VIP with Kevin Hart, waking up in the Musée d’Orsay, staying at Shrek’s Swamp, and much more. Such unique experiences are unmatched by other travel agencies, further differentiating Airbnb in the market.
Airbnb’s network effect, business model, and brand, combine to form a sustainable moat. Other players in its industry share similar competitive advantages, but I don’t view that as a problem. The global tourism industry is one of the largest in the world, and there’s room enough for multiple winners.
2.4 Leap Into the Future
Investing is looking into the future. Past cash flows are mostly irrelevant, only valuable in offering insights into a company’s future growth potential. A stock’s price is determined by future cash flows, which is why estimating future growth potential is crucial.
Airbnb operates in one of the largest global industries but currently holds only a small market share. In a recent interview, Brian Chesky stated, “As big as Airbnb is, nearly ten times as many people still stay in hotels.” He noted that hotels dominate because of their reliability—travelers appreciate knowing exactly what to expect. To address this, Airbnb introduced the Guest Favorites feature, aimed at enhancing consistency and reliability for its users. By better meeting travelers' demand for predictable and reliable experiences, Airbnb has the potential to increase its market share.
The tourism industry has also demonstrated remarkable resilience, with international tourism recovering to 97% of pre-pandemic levels in the first quarter of 2024. The industry has benefited from a long-term secular growth trend, driven by increasing global wealth and accessibility to travel. Additionally, the ongoing trend of digitalization provides a strong tailwind for Airbnb, as the company is natively online and well-positioned to capitalize on this shift.
For further growth, Airbnb has some extent of optionality. For example, the company has yet to tap into other aspects of tourism, such as flights, vehicle rentals, or even loyalty programs. Chesky also highlighted the significant growth opportunities in both international markets and the United States, noting that these areas remain underpenetrated. He specifically mentioned that international markets are likely to be a “big story” for the company. Moreover, Chesky emphasized the importance of reinvention, as Airbnb will need to enter a new company phase in the future. While it’s difficult to predict how Airbnb will reinvent itself, Chesky’s creativity and entrepreneurial spirit inspire confidence in the company’s future.
Airbnb operates in one of the largest industries, and while it is one of the leading players, its market share remains small. The combination of favorable secular trends, growth optionality, and underpenetrated markets positions Airbnb well for continued growth.
3. Management
3.1 Brian Chesky
We’ve already discussed Brian Chesky to an extent, so I’ll keep this brief. As CEO and co-founder, Chesky is the most prominent figure at Airbnb. An artist and designer by origin, he prioritizes the product over profit— a typical trait of founders, as opposed to gun-for-hire CEOs. I’d recommended watching some of his interviews on YouTube if you’d like to learn more about Chesky’s personality and leadership style. In particular, I found this interview to be valuable.
3.2 Ownership and Compensation
It is important for management to have interests aligned with those of shareholders. Management often has similar interests when they are shareholders, preferably large ones.
Chesky holds over 3.8 million Airbnb Class A shares and over 63 million Class B shares. The Class B shares aren’t publicly traded and are held almost entirely by the three co-founders. Those shares hold a lot more voting power than the publicly traded Class A shares, which is why the co-founders hold them. Typically, Class B shares can be converted to Class A shares to be able to sell those shares. With that in mind, Chesky holds a stake worth almost $8 billion at the time of writing. He earns an annual salary of $1, and his total compensation for 2023 was almost $300,000. Chesky clearly holds considerable skin in the game.
Next, Joe Gebbia holds a stake in the company worth over $5.4 billion and Nathan Blecharczyk’s stake is worth more than $7.4 billion. All three co-founders are deeply involved with Airbnb.
3.3 Capital Allocation
Effective capital allocation is a crucial task for management. Airbnb allocates a considerable portion of revenue towards product development and sales and marketing—both essential for the company’s longevity. Additionally, Airbnb compensates its employees handsomely through stock-based compensation, which accounted for 11.3% of revenue in 2023. This approach helps attract and retain top talent, particularly in competition with Big Tech, making stock-based compensation a necessary, if costly, investment.
Airbnb's business model requires minimal capital expenditures, allowing the company to allocate resources elsewhere. In 2022 and 2023, Airbnb repurchased $1.5 billion and $2.3 billion worth of shares, respectively—a strategy that seems effective given the stock’s lackluster performance since its IPO. The company does not pay a dividend, instead opting to reinvest in the business and enhance shareholder value through buybacks.
Finally, Airbnb regularly acquires smaller companies, mostly as tuck-in acquisitions to strengthen its position. The remaining capital is accumulated as cash.
Looking ahead, share buybacks could play an increasingly significant role in Airbnb's capital allocation strategy, further reducing the share count and potentially increasing shareholder value. Overall, Airbnb’s capital allocation seems to be solid.
4. Conclusion
Airbnb, the child poster company of the 21st century sharing economy, is a remarkable company led by an outstanding and young founder-CEO. Despite a slowdown in growth in 2024, Airbnb has experienced rapid expansion since its founding. Its scalable business model has driven increasing profitability and solid capital efficiency in recent years. The company’s competitive advantages, particularly its network effect, continue to strengthen, enhancing its market position over time.
Airbnb meets my investment criteria, and the stock seems to be attractively valued at a glance. Airbnb’s stock trades at only a 16 P/E ratio and an impressive 5.7% free cash flow yield. I’ll make a final decision in the coming days on whether to add Airbnb to the portfolio.
Thank you for reading this far. I hope you’ll have learned a ton about this company. Stay tuned for more deep dives into other wonderful companies!
Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.