Airbnb vs Booking Holdings

Suspend reality and buy despite Airbnb’s objective challenges

Now that we have some hard data on Airbnb, I thought it would be revealing to compare Airbnb and Booking Holdings with objective numbers in an attempt to better understand Airbnb’s valuation and its potential going forward.

Summary:

If we look at valuation measured as multiple of revenues, Booking Holdings has been hovering at around a 6 multiple. Airbnb ’s 2019 implied valuation of $38 billion would be at similar levels of Booking, coming down from X28 and X19 in previous years.

Airbnb’s gross bookings from 2015 to 2019 is a carbon copy of Booking Holdings’ gross bookings from 2009 to 2013.

The 6 year gap in gross bookings does not apply here. Booking Holdings had much higher revenues from 2009 to 2013 than Airbnb had from 2015 to 2019. The gap in revenues is more like 8 years. If this progression were maintained, and if we disregarded the global pandemic, Airbnb would reach Booking’s 2019 revenues by 2027. Booking Holdings has consistently grown year after year in gross bookings and revenue. Airbnb will have to deliver in a complicated post pandemic world.

When we look at EBITDA, the story between Airbnb and Bookings could not be any different. Booking Holdings has followed a consistent EBITDA growth while Airbnb has struggled to post positive EBITDA. In 2019, Airbnb’s EBITDA was -$0.25 billion, while Booking Holdings’ was $2.6 billion in 2013.

Many comparisons between traditional OTAs and Airbnb focus on Airbnb’s higher share of direct traffic. This factor should be a tremendous advantage given that OTAs rely on their ability to generate demand in order to feed their growth. If the bulk of the traffic comes from free or low cost channels, it should be translated directly into higher margins and a healthier bottom line. This is not happening with Airbnb yet.

The marketing over revenues ratio can point to the relative efficiency of marketing spend. The higher the ratio, the more marketing pressure the company requires to drive sales. It’s interesting to note that Airbnb’s marketing / revenues ratio in 2015 was as high as Booking’s two years before. This ratio decreases consistently for Airbnb since 2015, except for 2019, when Airbnb increased its performance investment to accelerate demand, maybe in preparation for its IPO. Booking’s ratio also has decreased since 2017, although at around 10 percentage points higher than Airbnb. In 2020, Airbnb has been able to rely more on its direct and organic traffic, as we can see from the decrease of the marketing / revenues ratio.

When it’s time to retract (like in 2020), having a high share of organic and direct traffic has big advantages (see Airbnb’s marketing / revenues decrease in 2020), but when it’s time to push on all cylinders, it will be critical for Airbnb to have a well functioning performance marketing machinery that still puts Airbnb in a position to be profitable.

Airbnb requires less marketing to generate revenues, but this advantage has not yet translated into Airbnb’s ability to generate profitability. In spite of higher marketing, Booking has been able to create a growing and solidly profitable business. Unlike Airbnb so far.

Airbnb’s direct traffic is far ahead of Booking, but Booking’s overall traffic remains dominant.

For all the bad rap about performance marketing in relation to the “purer” organic and direct marketing, Booking Holdings and other OTAs have operated with this constraint (higher marketing costs) and built finely tuned performance marketing machines and operationally and financially efficient businesses. It remains to be seen for Airbnb.

Performance marketing is a growth lever and an engine to bring in new customers who could become loyal in the future. Relying on direct traffic could be insufficient for businesses that need tremendous scale and constant growth. Airbnb started having to hit on the performance marketing accelerator in 2019. From 2018 to 2019, Airbnb’s brand and performance marketing increased by $474 million dollars, of which $314 million was performance marketing. I am expecting Airbnb to further increase its performance marketing pressure in future years as it needs to deliver growth as a public company. This shift will be putting additional pressure on Airbnb’s ability to achieve profitability.

Furthermore, Airbnb’s reliance on organic traffic should not be taken for granted, as TripAdvisor and other travel players know well.

Airbnb complaining about Google? It’s starting to sound like a real OTA.

Booking’s approach of having all types accommodations under one roof is also more aligned with how consumers think. Consumers think in terms of “a place to stay”. We cannot expect consumers to be experts on knowing which suppliers are best for each subcategory of accommodations (in addition, it would be suboptimal user experience). Booking Holdings and Expedia are building all-category accommodation inventory and letting consumers find the right one based on search and filtering criteria. I think it will be more difficult for Airbnb to become an “all category” accommodation platform than for the likes of Booking to continue expanding their “alternative accommodation” inventory. Airbnb’s brand is very strongly associated to “alternative accommodations” in consumers minds. Booking has been successful at expanding the scope of its brand to address “a place to stay”.

Airbnb seems to be doing better than its peers as a result of being well positioned to address accelerated consumer behaviors
- Domestic travel
- Short-distance travel within 50 miles of guest origin
- Travel outside of traditional urban centers
- Long-term stays

Comparing Airbnb and Booking Holdings on objective terms leads me to admire Booking Holdings even more than I already did. But it’s in the subjective categories that Airbnb has an edge. All in all, I am optimistic on Airbnb because of reasons that are difficult to put on a graph. It just feels like a new generation of OTA that has its finger on the pulse of a new generation of consumers.

Airbnb’s relatively good results become more evident when we look at Q3 2020 results and include other publicly traded online travel companies in the analysis.

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