Airbnb, Inc. (NASDAQ:ABNB) is becoming harder to value as a traditional travel company. The business is expanding beyond home rentals, attracting new customers faster and using technology to improve both sides of its marketplace. The bigger question is whether those changes can turn Airbnb into a much larger travel platform.
The second quarter offered some evidence that the strategy is working. Revenue increased 17% year over year to $3.6 billion, while gross booking value rose 16% and nights and seats booked increased 10%. First-time bookers grew 11%, the fastest growth Airbnb has seen in four years. Even some of its most established markets, including the U.S., France, the U.K. and Australia, accelerated during the quarter.
That matters because Airbnb isn’t simply benefiting from more people traveling. It is trying to make more of the people who already visit its platform actually book something.
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Airbnb’s core business is getting stronger
The company has spent the past few years making the booking experience simpler. Search and discovery have been redesigned, pricing and cancellation policies are clearer, sign-up and login have been streamlined, and Airbnb is making its flexible payment option available to more customers.
These changes sound mundane compared with the usual technology stories, but they can matter a lot for a marketplace. Airbnb already has ginormous traffic. If the company can convert a slightly larger percentage of that traffic into bookings, it can grow without having to increase spending at the same rate.
The same principle applies on the supply side. Airbnb is giving hosts better pricing recommendations, more useful insights, and easier tools for managing listings and calendars. The company is increasingly using artificial intelligence to do this, including a pricing model that can analyze Airbnb prices, hotel rates, upcoming events, and booking patterns.
There is also evidence that these improvements are becoming more efficient. Customer-support costs per booking fell about 16% year over year, with Airbnb attributing part of the decline to its AI assistant. Nearly 45% of issues that begin with the assistant are now resolved without a human agent.
The important point is not that Airbnb has suddenly become an AI company. It is that AI can help the existing marketplace work better.
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The bigger opportunity is outside homes
Airbnb, Inc. has started adding hotels, car rentals, airport pickups, groceries, luggage storage, resort passes, and experiences. Most of these businesses are still small, but that is not necessarily a problem yet.
Hotels are the clearest example. They currently account for only a single-digit percentage of nights booked, but hotel nights are growing about three times as fast as the homes business. Airbnb also says roughly 35% of first-time hotel customers later return to book a home.
That suggests hotels could do more than generate hotel revenue. They could bring an entirely different group of travelers onto Airbnb and then introduce those customers to the company’s original business.
The same logic sits behind the other services. A traveler who uses Airbnb to book a home and then gets airport transportation, stores luggage, rents a car or books an experience has more reasons to keep using the platform.
CEO Brian Chesky described this as the next phase of Airbnb’s expansion, with the eventual goal of becoming a one-stop shop for travel. That is a much bigger ambition than simply taking more market share in vacation rentals.
But expansion brings competition
There is a reason Booking Holdings, Expedia and Trip.com cannot simply be dismissed.
These companies already operate broad travel marketplaces. Booking has hotels, alternative accommodations and other travel services. Expedia owns Vrbo and has a large hotel business, while Trip.com has accommodation, transportation, tours and other travel products.
Airbnb therefore has to prove that its brand and customer base can give it an advantage as it enters these categories.
There is also a risk that adding too many products makes the platform less distinctive. Airbnb became one of the most recognizable brands in travel by doing one thing differently. Turning it into a broader travel marketplace could create a bigger opportunity, but it also makes execution more complicated.
And some of these new businesses will take time. Chesky was clear that homes remain the biggest near-term growth driver, hotels represent the next major opportunity, while services and experiences are longer-term bets.
That means the investment case still depends heavily on the core business continuing to improve.
Then comes the valuation
This is where I would get cautious.
Airbnb trades at 25.38x forward earnings. Booking Holdings trades at 13.28x, Expedia at 11.29x and Trip.com at 11.72x. The average for those three peers is just 12.10x.
So Airbnb is trading at more than twice the average forward earnings multiple of its closest public competitors.
That premium is not completely unreasonable. Airbnb is growing faster than the group, and it arguably has more room to expand its addressable market by adding hotels and other parts of the travel experience.
But investors are not simply paying for today’s 17% revenue growth. They are paying for that growth to continue while the newer businesses become meaningful contributors.
If Airbnb keeps growing in the mid-teens, improves conversion, expands internationally, and turns hotels and other services into successful additions to the marketplace, 25.38x could eventually look much less demanding.
If growth settles back toward the pace of its larger peers, however, the valuation gap becomes much harder to defend.
Conclusion
Airbnb’s story is becoming bigger than home rentals. The core marketplace is accelerating, the company is finding new customers, and its expansion into hotels and other travel services could increase the value of each customer over time.
That gives Airbnb a stronger growth profile than Booking, Expedia and Trip.com. But investors are paying heavily for that difference. At 25.38x forward earnings versus a 12.10x peer average, Airbnb has to keep proving that this is more than a period of strong execution. It has to become a meaningfully larger and more valuable travel platform.
Market Sentiment
Hedge fund sentiment toward Airbnb was mixed in the second quarter. According to Insider Monkey’s database, 75 hedge funds held Airbnb in Q2, down from 87 funds in Q1, while the value of those positions increased from $5.21 billion to $5.37 billion. The decline in the number of funds was offset by higher overall investment value, suggesting that some hedge funds were becoming more cautious while others increased their positions.
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This article is originally published at Insider Monkey.
