Why I'm Bullish on Airbnb

In today’s article, I am going to discuss the reasons that I am bullish on the travel industry and particularly on Airbnb.

Reasons I’m Bullish on the Travel Industry

1. Generational Shift

   I believe the travel industry is benefiting from and will continue to benefit from an increased interest among younger generations. My hypothesis is that social media is helping to fuel interest in traveling among younger people. With social media, people, especially younger people due to being the most frequent users of social media, are frequently being shown images of trips, both those taken by friends and those taken by celebrities. This frequent exposure to images and stories about traveling essentially serves as a powerful form of advertising for the travel industry. If my hypothesis is correct, then I expect this general uptick to continue for years to come since the influence of social media will likely only increase in the near future. Thus, I believe there is a generational shift in which younger generations prioritize traveling more.

2. Growth of the Middle Class in Emerging Markets

   I belief the travel industry will benefit from the rise of developing economies. As more people in emerging markets move into the middle class, more people will gain the ability to take vacations, including international trips. China is the most striking example of this. Between 2010 and 2019, outbound tourism increased from 57.39 million tourists to 154.63 million according to Statista. As more countries develop economically, I expect a similar trend will occur. Thus, I view the travel industry as a prime beneficiary of the rise of emerging markets.

3. Artificial Intelligence Will Make Travel Easier

   Artificial intelligence has the potential to make traveling easier. Whenever vehicles become fully autonomous, traveling by car will be as easy as telling your car where to go and sitting back to enjoy the ride. The added ease of car traveling will likely increase the number of trips people take. For example, a quick weekend getaway becomes more enticing if, after a day of work on Friday, you can simply get in your car and watch a movie while your car drives you to your destination instead of having to endure a few stressful hours behind the wheel navigating dense traffic. Similarly, AI has the potential to make planning trips easier. With AI, people will be able to create travel agendas much quicker and easier. By making travel easier, I believe AI has the potential to boost the amount of traveling that people do.

Reasons I’m Bullish on Airbnb

1. Network Effect

   Airbnb benefits massively from the network effect. As more consumers use Airbnb, property owners have more of an incentive to list their property on Airbnb, and the more rentals available, the more incentive consumers have to use Airbnb. Being the leader in its category is a huge advantage for Airbnb due to the network effect. Yes, Airbnb does have competitors, such as Vrbo. However, it will be difficult in my opinion for any competitor to dethrone Airbnb because Airbnb has such a significant lead, and the network effect should help Airbnb stay ahead of competitors.

2. Free Cash Flow

   Airbnb has the potential to generate a large amount of free cash flow. Airbnb’s free cash flow margin for the last twelve months as of their first quarter of 2023 was 43.5%. That is very impressive and helps to show the advantages of Airbnb’s asset light business model. The large amount of free cash flow Airbnb generates gives it many options in the future as to how to best deploy that cash. Furthermore, due to its asset light business model, Airbnb should be able to continue to scale very efficiently while boosting margins.

3. Wide Audience

   Airbnb can serve a wide variety of travelers. From a solo traveler on a tight budget to a large family looking for luxurious accommodations, Airbnb has listings that meet the criteria for many different types of travelers. This broad variety of listings means that Airbnb isn’t reliant on only one segment of the accommodation market. As I expect there will be times that luxury accommodations outperform and other times that budget and mid-market accommodations outperform, I like that Airbnb has exposure to various market segments.

Conclusion

The market wasn’t a fan of Airbnb’s last earnings report, mainly because of concerns about its guidance. However, I view Airbnb as being a major beneficiary of a long term travel tailwind that will play out over the next decades. Thus, I am not overly concerned about the short term. Furthermore, since most travel is a discretionary expense, economic conditions have a significant impact on the travel industry, so I expect there will be lumpiness in Airbnb’s business. As an investor who tries to think about the long term, I was not upset with Airbnb’s 2023 first quarter report, and I continue to believe in Airbnb’s long term potential.

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