Airbnb will always fascinate me, even if it’s not something that I’ve been willing to invest in yet due to valuation. I’m writing this from an Airbnb in Knysna, where one of the bedrooms has a broken door, and the en suite bathroom in the other room doesn’t have a working light. The Wi-Fi is good, the location is sensible and safe, and the bed is comfortable. Overall, for the price, it was a decent deal. It was also a reminder that Airbnb hosts really cannot charge the same as hotels do, even though some try to. There’s a far more forgiving approach to things that don’t work in an Airbnb than in a hotel — but only because of the pricing.
Airbnb was founded during the global financial crisis as a way for people to earn additional money. Now, the company provides a platform that allows for a range of users, from more casual providers of accommodation to professional hosts who have several properties. Much like Uber and many other platform businesses that have rapidly developed in the past decade or so, Airbnb has changed the way people behave with fixed assets.
Despite this, most investors in Airbnb during its public years have lost money. The timing of the IPO in a hype market led to a high base from which the share price needed to grow. Though the IPO price was set at $68 in December 2020, trading opened at $146, and the vast majority of investors would have experienced this as their entry price. Now, Airbnb is trading at only $125. It peaked at more than $212 in February 2021, so the best trade was to buy the IPO and sell three months later.
The sideways move in price is a reflection of the valuation at IPO, not the subsequent revenue growth. Annual revenue was $6bn in 2021 and $11.1bn in 2024. As you would hope to see in a platform business, incremental margins are strong, and thus operating income increased dramatically over the same period from $542m to $2.55bn in 2024. Group operating margin was 22.2% in 2024, but the more exciting story is that the incremental margin from 2021 to 2024 was 39.4%. This is calculated by looking at the change in revenue ($5.1bn) compared with the change in operating income ($2bn).
This is a classic example of operating leverage, as several fixed costs aren’t linked directly to revenue. Sure, Airbnb must pay commissions and payment fees on each sale, but its developer and head office salaries don’t rise because more bookings go through the platform.
Airbnb has rebuilt its app to focus on experiences, which is a clever step
There will always be a need to iterate on the product, such as the recent example of showing the total price upfront. Guests were being charged surprising fees (such as cleaning charges), and it was ruining their experience. Airbnb took the criticism on board and made changes, restoring the balance between guests and hosts in this two-sided marketplace.
The next step is an evolution, not an iteration. Airbnb has rebuilt its app to focus on experiences, which is a clever step. It estimates that for every person booking an Airbnb, there are nine others booking a hotel. It’s proving to be difficult to change this statistic, so offering experiences could increase the share of wallet from that one person. Based on the incremental margin, we know how valuable that is, even though the guide is for margins to initially take a knock from the acceleration in marketing spend.
Another near-term headwind for margins is likely to be the impact of US President Donald Trump’s presidency, with Airbnb noting a dip in popularity of inbound tourism to the US. This is between 2% and 3% of Airbnb’s business, so it’s not immaterial. The bull argument would be that the platform doesn’t really care where people travel, as long as they do travel and end up in an Airbnb somewhere in the world. It would be a fair argument that travellers would simply choose other destinations and would likely end up in an Airbnb anyway, so it should be fine in the end.
At a revenue multiple of 6.9 compared with the average since IPO of 13, the multiple has unwound considerably as revenue has grown. The trick is to figure out where it will stop unwinding, as that’s the point at which share price growth would track revenue growth. I don’t think we are there yet, but Airbnb is on my watchlist.
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