Chit Chat Stocks - Airbnb (ABNB) with Alex Morris

Episode Date: September 9, 2021

We are joined by Alex Morris, otherwise known as The Science of Hitting. We discuss Airbnb, a company that went public less than a year ago. Airbnb is a company that was severely impacted by the global pandemic. Alex brings his expert knowledge of Airbnb for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Alex's work? Find his substack here: https://thescienceofhitting.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps AirBnB | (6:10) Investor's Concerns | (29:10) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Thursday, September 9th. Today, we have an interview with Alex Morris. This is our deep dive show. We talk Airbnb. This was a lot of fun. He just published a good write-up on it on his sub stack. What is his nickname? The Science of Hitting. Yeah. If you know him from Twitter, yeah. But yeah, it's very thorough. He obviously knows the company very well. So I hope you enjoy it. before we get to that we have to talk about our friends our sponsor quarter uh i've been using the app a little less lately well it's earning season it's a little you know yeah i'm on my uh it's my dry period after uh after earnings season but it'll pick back up soon yeah they have some

big stuff in store that they've been talking about they sent us over uh they actually just sent us over a banner that we're supposed to print and put up on our wall so if you watch this on youtube i guess we don't do these ones on youtube well we do some stuff on youtube if you want to either way there's some yeah it'll be up there soon it's going to be huge yeah big time news we'll call it the quarter studio okay maybe maybe but a little bit about quarter it is an investor relations uh app essentially for all the companies that you might want to listen to it's 100 free it's on ios it's on android they include companies from all over the world uh speed up that conference call, go straight to the Q&A, get through that boring stuff that's tedious.

It's easily the nicest way to listen to conference calls. Yes, we'll save you time. And you can follow them on Twitter at quarter underscore app. It's a Q-U-A-R-T-R, no E. So go ahead and follow them. Now for the interview, what were some of your highlights? Yeah. So I think I'll just highlight the comprehensive knowledge he has on the business and the way that Alex goes about valuing a company. It is very, I like it. I like it.

Yeah, it's similar to our style. I know everyone has different styles, but if you are thinking about signing up for a service, here's how I classify it. So there are services that, you know, we're partners with potential multi-bagger, seven investing, there's stuff like the Motley Fool, right? Those are for people that, you know,

may not be doing this as their full-time job. It's more of something that you invest in your retirement account, something like that. The subscribers. The subscribers, yes, for wanting to pay for it. Alex's, the science of hitting service, I would argue is for more of a professional who almost wants to outsource an analyst. It's more of that higher level stuff. That is why if you're someone that's more of doing this professionally, it's great for

that. You're getting updates on new companies. You're basically getting research weekly. I don't know the exact cadence, but it's great. And you can see it in this interview with Airbnb. be. I don't have an exact perfect part, but he was really comprehensive. After either listening to this or reading his report, you feel up to speed on the business. Easily. All right. Without further ado, here's the interview. Welcome to Chit Chat Money. On this show, host Ryan Henderson

and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome to Chit Chat Money. This is our deep dive Thursday show. Today, we are welcomed by what is this third time guest now is this third time on the show i think it's third yeah i'm pretty sure it's third i did it yeah i did a co-episode with uh

who was it francisco yes the big spotify episode that was a fun one um we're not talking about that today surprise surprise talking to airbnb uh but before we get to the questions you've recently launched a sub stack so how's that been going how uh kind of how is that process of just writing independently? Yeah, it's been going really well. Well, first of all, thanks for having me on. The sub-stock has been going really well so far. It helped that I wrote about investments for, I think, 10 or 11 years before I launched it. So I had a good amount of experience and I've been doing the equity research type stuff for a very long time as well. So it was a natural transition for me. The launch, as you might suspect, going from a normal job to

something that didn't pay anything out of the gates was a little bit terrifying. But it's had a really good reception so far. The biggest thing for me is just continuing to put out work that I'm proud of. And another nice part of it is that it's been a forcing function for me to expand the universe of companies that I look at. And Airbnb is a good example of something that I looked at when the S1 came out, but writing an article about this week, truly doing a deep dive, made me dig in in a way that I had not previously. And I learned a lot of things I didn't know about the company previously. So it's been really beneficial, both in terms of my individual equity research and hopefully my portfolio performance long term. But yeah, it's gone

very well. And I'm very thankful for anybody who's listening who's a sub to the service. And what industries are you focusing on? It seems like it's retail, consumer internet, and media. I know you focus on media a lot. Is there anything else that you do with the Substack? Yeah, those are the biggest ones. I mean, I did a deep dive on what I consider to be the main players in US retail, kind of in between first quarter earnings and second quarter earnings.

Some of the things that I own that I update on fairly frequently, Microsoft, Comcast. So, you know, some of the tech stuff, some cable, some of the bigger U.S. financial institutions. So, yeah, it kind of depends what catches my interest and what looks attractive. And obviously, it also be something that I understand. So that cuts it down pretty good. But yeah, there's a pretty wide range of companies that I'm covering now. All right. We're going to hit Airbnb, which you just, that was your latest post.

So if anyone's looking for something to read up on that, you can go check out the sub stack. We'll link it in the show notes. but most listeners know the Airbnb brand, but may not know how the business model works. So can you explain first off how Airbnb makes money? Sure. So at a high level, it's a service B business, and it's a platform where, and there's been different business models in this space in the past, most notably what HomeAway did, which is part of Expedia now. They had a different way of doing it, but they've since changed. But Airbnb, the most simplistic way of framing it is you go on there,

you list your home, you want to charge $100 a night. If you want to charge $100 per night and someone books it, you're going to net $97. So you pay a 3% service fee, which is basically how much it costs for payment processing anyways. So it's a very low service fee for the host. The guest, what they're going to see when they go onto the website is that $100 listing, but then it's also going to include about $13 in service fees. And then it's also going to include about $4 of lodging taxes that'll be remitted to local authorities. So in total, the listing will be roughly $117, $97 paid to the host, $4 to local authorities for taxes, and then the remaining $16 to Airbnb. And so that's 16 on 117 is roughly a 14% take rate.

And again, before all costs of any, you know, payment processing, whatever it may be. Is that a common take rate in the industry among like OTAs or maybe, I guess, VRBO, is that kind of mainstream? So VRBO, just to start there, this has been one of their kind of talking points over the years. They've kind of dropped this line because I think the results have not been particularly good. So they kind of stopped trotting it out.

But they used to say, hey, our kind of take rate is 11%. So it's obviously a little bit lower. If you look at these things measured on gross profits, which is probably a better way to compare them, booking holdings, which is the largest OTA, has a higher take rate than Airbnb does. There's a couple ways to think about that. But the easiest way for me to think about is to look at gross profits per booking. per transaction, essentially. And if you look at it on that framework, Airbnb is at about $11

in gross profits per booking and booking holdings is at roughly $19. So it's a very large difference. There's some components in there that are not just the take rate. Most notably, that booking has a higher ADR, the average booking on there. And I get this is really confusing saying booking a million times. So I'm sorry, but that's what the company's called. So they have higher ADRs on average. The rooms cost more. So naturally, the dollars that they get should be slightly higher because of that. But yeah, so Airbnb is quite a bit lower than booking holdings on a dollar basis per booking. And in your article, I won't spoil too much of the article, but you called Airbnb a different kind of animal, in quotes. So I'm curious, what makes them so

unique in your opinion? And then who are sort of their main competitors? So I think what makes them unique, it probably helps to use an example. And I made that comment referencing what happened during the pandemic and really what's happened afterwards. So So if you go back to the start of 2020, Airbnb had a very strong two months to start the year off, which most of their competitors did as well. Then their business got absolutely crushed in March and April, which we can talk about this more if you guys would like to. But business got absolutely crushed.

What you saw then was they use this term inherently adaptable to talk about their platform. And I think you saw that happen as the pandemic started to play out and people decided, well, they didn't really decide in terms of international travel. They couldn't do it anymore by law. But in terms of other travel, people stopped getting on flights and flying somewhere halfway across the country. They started traveling closer to home. Or the other big change that they saw is they saw a large increase in extended stays as people were working remotely. So just an example of how the platform can really adapt to what people want or what people need at a certain point in time. And Airbnb has nothing to do with that. It's the hosts who are

letting that or making that happen. So as you look at the results, fast forward a year past the pandemic, if you look in the second quarter, Airbnb's gross booking value versus second quarter 2019 was up nearly 40%. Now, that reflects a mixed shift because more of their business was in markets like North America than had been previously. And those have higher ADRs and ships are for longer stays, extended periods of time. So there's two impacts there. But if you look at on a volume basis, number of nights booked, it was roughly flat versus 2019. And if you look at any OTA, any major hotel chain on nights booked, but especially on GBV, they were materially worse off than that. So I think it just reflects a part of Airbnb's business

that is quite a bit different than than what we consider in a typical typical travel company now what uh just for the listeners what what's adr mean uh because some people may not know yes the average daily rate so you know essentially the cost of of a night okay what uh can you kind of highlight covid's impact on the business because i you had some good charts in your write-up, particularly the one I found fascinating was how the hosts have stagnated. I'm curious, what's happened to the business since COVID hit? Is it in a better position now than maybe prior to the pandemic? There's two really interesting things that happened to this business. The first one, I think, is, as I said, January, February,

the business was doing well. March, I believe bookings were down 40% year over year. April bookings were down 80% year over year. I think those numbers are roughly right. And this is 2020 we're talking about. If you include cancellations, the business was less than zero. The value of cancellations was larger than the gross bookings. And I believe in March and April, but maybe just april but yeah so the business went you know from full speed to a complete stop in eight weeks airbnb up until that point you know it's kind of funny this company was started by two industrial designers and the business in if you go back and listen to interviews in the period like 15 16 17 those years 18 you get the sense that they have a really grand vision for what they want this to be

And that included things that I think have a lot of merit, like getting into the experiences business, which we'll talk about. But it also included other things that were a little bit off the reservation in my mind, things like flights and something that sounds comparable to TripAdvisor, basically, like things like reviews on local. So they really were interested in doing a bunch of different things outside of the core home sharing platform. And when you get into 2020, and the business comes to a complete stop. And also on top of that, they had a billion dollars worth of bookings that were non-refundable, where people were like, well, I can't travel now. If you force me to travel because I have $1,000 booking, then I'm risking my health.

So Airbnb had a really difficult decision. They said, okay, we'll refund all those bookings. And then the host went, what the heck? That was my money. That's not your money. So long story short, it led them to eventually give those hosts $250 million out of their own pocket for all those bookings. 25% coverage, basically. But anyway, so they took a huge financial hit. And it was really the first time in the company's history, I think that they were forced to really focus on operating efficiency and really have focus. And I think if you look at the financial results, it's pretty clear that's having a lasting impact to this day. And even in what they say, it's having a lasting impact. So I really think it was actually a net benefit for the company. It's something they really needed to go through. And I think for Brian Chesky, the CEO, I think it really is a defining moment because when you listen to him talk, I really believe he has a passion for what

this business could be and what it does for the world. And he really does care about his employees. but going through that period forced him to be a bit more of a business leader than I think he may have viewed himself as in the past. Right. That makes sense. And recently, I guess management like Chesky and all the other ones have given out a lot of data around longer term stays, monthly stays. They've been highlighting that as a really fast growing part of the business right now. How much of an opportunity do you believe there is there? Is that a short-term thing or have you found any data points that shows that that could be a really big part of this business someday? I think it's incredibly difficult to say.

I've read everything I could find on the topic and I've listened or I've read transcripts of every executive kind of in the industry talk about this. And I just think it's so difficult to say. You know, there's a lot of people, I believe in the idea and obviously I'm biased because of my anecdotal experience where I kind of am living this creator economy life or whatever you want to call it, where essentially I could live anywhere that I want to. And I appreciate that that could be maybe millions of people down the road. But at the same time, there's a large number of people who work at companies that have told them, hey, you're not coming back until at least September, November 1st of the year, whatever it may be. so they had the ability to go out and book an airbnb for a month if they wanted um i'm not sure i would totally bet on this being completely sustainable um i mean in terms of us not having any you know short-term pullback once the world normalizes assuming we ever actually do

normalize um but i do think it highlights what the platform can do and how it can it can really adjust to whatever comes down the road. Right. That's interesting. So that comes back to where it seems like Airbnb's focus is to serve the hosts and then the hosts serve the people who book stuff. I'm forgetting whatever the normal term is. I can't think of it right now, but is that an important distinction where Airbnb's customers are really the host and getting as many of them on the platform is the most important thing for driving this business? Yeah, I think it's the most important thing by far. Some of the stats that I have in the article at Code 2018, which is a big conference, Brian Chesky said that

70% of the homes on the platform, which I believe is 5 million at that time, 70% of the homes were unique. The only site they were on was Airbnb. And they give some data now of the 4 million hosts that they have, 3.5 million, something like that, are individuals. And you can look at the numbers and you can see that clearly this is a supplemental source of income for the average host. I mean, the number across the platform is something like $7,000, $8,000, $9,000 a year in terms of bookings that would be going through a given listing. So not enough money for someone to truly live on. I think there's a huge advantage in that regard in terms of being a company that has really streamlined the ability to get your listing on there to have it.

One of the things they famously did early on is when they joined Y Combinator, which is a startup incubator, I think it was Paul Graham said, where are your customers? And they said, well, it's mostly people in New York using this right now. And he said, we'll go to New York then. So what they did during the three months they were in Y Combinator was every weekend, they'd fly to New York. And what they do is they would go knock on host's door. And I think they would introduce themselves and they'd say, Hey, do you want free professional photographs of your listing? And people would say, Yeah, sure. And later on, a professional photographer would show up and it would be them because they couldn't afford to pay anybody else to do it. they were going and doing it themselves. But what they found out is that something as small as that was important to driving comfort with using the platform and driving booking. So that's one example of something that Airbnb still offers to this day. They have freelancers who will come take professional photos for people. They have really good host guarantees. They have the process for

listing your home is quite simple. And then in terms of the activity that you see, they share data that says, within the first four days, half of new listings have a booking. And within the first 16 days, 75% of new listings have a booking on their platform. So you really see how they focus a lot of their attention on ensuring that hosts have a good experience and then the activity on the other side of the platform seems to follow. Why aren't the hosts, you said 70% of them are unique to airbnb like why is that why wouldn't they be platform agnostic i figure if i had if i was renting out my room or whatever i'd want it wherever demand possibly is is there just enough on airbnb this will get to which i'm sure we'll talk about in a moment there's there's

interesting considerations in terms of where else you might consider listing and so for example uh vrbo which i think they want to be called verbo now so i can't really say that because it's a really weird word i think i'm just going to say vrbo forever but vrbo is more of a you know it's more of a vacation uh uh vacation listing type site it's it's not really somewhere you'd list a spare bedroom in your house so for for certain listings i don't even know you know what else would be the next alternative you get what i'm saying yeah okay that kind of There's not really a clear alternative. I mean, outside of I guess you listen on Craigslist or find something like that. But Airbnb is just such a clear leader. And I think the other consideration gets back to what I just said a minute ago, which is if people are listing their homes on this platform, and they're having a lot of success getting bookings for, you know, the 60 to 80 days of the year where they want to have bookings when they're not there, or when they're when they're willing to do the work, it almost becomes why even bother? Why deal with the headache of having multiple listings on different platforms, worrying about getting double booked, et cetera, et cetera.

So for the people who are truly doing it themselves, as opposed to having some other channel manager or someone who does it for them, it might just be as simple as I'm meeting my demand through Airbnb. It's a clean platform. I know I'm protected here. Why bother? So I think it might be as simple as that. what's the value from the consumer side like why do they choose airbnb is it significantly cheaper than the hotels or is it kind of the unique homes that they find on the platform yeah i think it's a combination i think it depends um you know i think it depends where

you're going and and what you're what you're looking for which again gets us to get into this inherent adaptability of the platform if you're going to new york city for example and you just want to find a bed that's in someone's home that's actually downtown, you're not going to pay $500 a night like you might pay if you stay at a nice hotel, then Airbnb can be a good fit for that. It's funny, I went back and looked at my Airbnb transaction history because I was curious how much I've used it as I was doing this research. And the first time I ever used Airbnb was back in 2014. And I stayed in someone's apartment in New York City. And I think I paid like 150 bucks. And I can remember the closest hotels were like 300 bucks. And they were hotels

that when I looked at them, I was like, Oh my God, I do not want to stay in this place. Like they were terrifying. And I don't think they were even downtown either. So, you know, stuff like that. Um, and then also, you know, when people go to places and they have whatever, a party of eight or they have pets or, you know, they want to go somewhere that has a pool or a hot, you know, things like that they're just they're so easy to search for on the platform and you can you can get exactly what you want um and you know that's kind of an alternative alternative accommodations comment generally why airbnb specifically yeah i think it gets back to that that unique supply um you know and even and even what they did during covid where they said hey we're

going to give you a you know things like that i just think i think they have pretty strong brand equity. And I think it's been well-deserved, at least so far. Right. And I guess we'll have to keep going. But one last one on this. You mentioned they have a competitive advantage, and I think it's hard for maybe an investor to nail down which one. Is it the brand? Is it an economies of scale thing? Is it network effect? What do you think the most important thing is that's keeping Airbnb having a defensible position versus any other upstart? i think it's really i think it's difficult to say and you know it's funny as i think about businesses like this and i think sometimes what can be helpful from an investment perspective

is as opposed to always and i understand people want to answer those questions i want to answer them too sometimes they're really hard to pin down i think what's interesting to do sometimes is to take a step back and go what happened over the past three years the past five years why if did this company win over that period i'd argue clearly that airbnb has won relative to the competitors um i have i have gbv data it's at airbnb in 28 2019 was at about 38 billion dollars booking holdings which we can talk about more was at about 22 billion dollars and VRBO was at about $12 billion. So they're clearly the biggest player.

They were the smallest player not too long ago. So clearly they've outperformed the competition. I think sometimes it's interesting to think about, well, why did that happen? And do we have reason to believe it's going to continue? And I think when you look at those factors, I just feel like from a brand perspective, from a host and guest satisfaction

with the platform perspective, what would really cause someone who used Airbnb previously as a host or a guest to change, you know, to use a different platform to the extent there even is one. I just think you see a lot of reasons why this business in particular will have the most tailwinds in a category that, you know, has naturally had some tailwinds of its own over the past 12 to 18 months. So not a great answer directly, but I think it's one of those things we see a lot other companies that the three of us have talked about like spotify and even netflix at one point in time etc right it's kind of the question if they didn't get dethroned why not and it's like okay well then there must be something here but i think we want to it's it's definitely a verb

by now the verb thing comes into it uh to an account too yeah so what are your thoughts on management i know chesky is kind of one of the big in the silicon valley lore even you know most people that aren't in investing kind of know who he is them you know Trav Kalanick kind of the big names uh from this era what are your thoughts on management how important is it to Airbnb's future yeah I think he's incredibly important in terms of the in terms of truly caring about the platform and caring about the all the related parties and it doesn't just mean hosts and guests that also means obviously employees, shareholders, but also the cities and the people that the platform is interacting with, not really by choice, but it's an externality of what this

business is. So I think he has a really clear focus on, especially post-COVID, what he thinks his business can be long-term and also how to navigate a bunch of those issues. And again, to the previous question, that's a good example. Airbnb has the muscle memory from dealing with really terrible guest days where they had to figure out how to make the host whole. You know what I mean? They've personally dealt with issues like New York City politicians. They've been dealing with that for over a decade. So a lot of these things, they've found solutions or tried to find solutions at least to the best of their abilities, but they have the muscle memory.

They have the experience at this point in time. And someone like Booking Holdings just plugging US alternative accommodations into their platform, it's a lot harder for me to see how they truly take market share from someone like Airbnb. So back to Chesky, I think in general that he's a good leader. I think he needed a little bit more business focus. And they brought in a CFO from Amazon who I... It's kind of funny. You notice this on conference calls sometimes where the CEO and the CFO don't seem to totally be aligned in their messaging or they have a different sort of way of answering a question. I definitely got a feeling like that as I listened to their first few calls um after having gone public in december of 2020 so you know it's probably a

little bit different for him but i think it's something that they they need long term do you think they should bring back the uh breakfast cereals i mean they made a lot of money selling those things i might try that myself maybe i'll do uh what would it be i guess i missed the chance on trump and biden i should have done that yeah sign up for myself yeah sign up for the sub stack If you don't know what we're referring to, go read Alex's sub stack. We're going to hit a quick break here and then we've got more questions on the second half. in a workout at their fitness center. Either way, you're ready to conquer the day.

Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware.

Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? All blocked. Thanks to advanced security included with Cox panoramic Wi-Fi. Advanced security must be enabled in the panoramic Wi-Fi app. Restrictions apply.

All right. Welcome back in, Brad. It looks like you got the first question. Yeah. So we're going to try to hit some of the concerns I think a lot of investors have. And you see, you know, just on Twitter, at least in the FinTwit community, there's always those quips of people complaining about Airbnb experiences, you know, bad room quality, hidden fees, all that classic stuff that you kind of see floating around there. And then like abrupt host

cancellations, that stuff comes up a lot. Do you believe those matter to the investment thesis? Could that be a concern to the business quality over the long term? Yeah, I think it's a hugely important point. I mean, just the idea for people who have never use the platform, the kind of the fear, uncertainty of what this is, it goes back to when they were founded, when people thought you would never sleep on a stranger's couch or bed, particularly not when they're there. But I'm sure there's some people who think it's weird even to do it when they're not there, if you're running the whole home. So I think the concern about that for people who have never used the platform, and then for people who have used the platform, who have

experienced those low quality outcomes before, which I have myself, yeah, it's a real risk. And, you know, one of the things I think about with this business is, you know, ratings inflation seems to be pretty prevalent across platforms like this, whether it's Airbnb or, you know, a bunch of Google reviews, Yelp, things like that. But if you have a ratings inflation and you go to a restaurant and the restaurant actually kind of sucks, even though the platform says it was good, if Yelp said it was good, that's kind of not that big of a deal. If you book something for a week and it says it was good and you get there and it sucks, that's a lot different. The pain of the platform kind of misguiding you is much more real on something like Airbnb. So I think it's

incredibly important for them to address it long term and you know to to ensure that the platform and obviously they can help guests and or help hosts in terms of you know improving the quality experience and and they can also have signals things like super hosts that uh kind of indicate hey these are these are the best suppliers on the platform so i think they need to continue to work at it and it's incredibly important long term but i'm kind of i'm confident they can figure that out Well, this is kind of anecdotal, but I think they should require the host to put the Wi-Fi speed on their listing. If they're leveraging that whole remote work, it feels integral. But I guess another question is around some of the other stuff beyond the core platform.

Do you think that, obviously, you kind of talked about it, they were planning to do all these different parts, whether it was experiences, flights, all that stuff, pre-COVID. Do you think that any of those products still have promise or that there's any, if there's tons of optionality to the business or do you think it's really just this core bookings platform? I think a lot of the things that they were trying to do are, again, kind of outlandish. I didn't, I never totally understood what they wanted to do with flights. And, you know, some of these things were just said in interviews and who knows how big of a focus they were internally. But at Code in 2018, Chesky said they had, I believe he said, dozens of initiatives, things that they were trying to do. And he, in that interview, kind of laid out a grand vision of what he thought this platform might become. And three years later, again, none of those things have really happened.

Experience is a super interesting one because I used to own booking holdings. I've done work on TripAdvisor. both of those companies really thought that they could find a way to do something in experiences. And if you think about experiences, you know, most places, obviously the supply is really fragmented. There's reviews online, but there's not much more than that. There's not really, you know, well set up booking process, things like that. So those companies tried to find a way to make that work and to build a

scalable business out of experiences. And it just, it has never worked essentially. Um, and I think Airbnb so far, which granted the type of experiences they were going after are a little bit different than, um, a little bit different than your typical go to New York city and do an experience. It had a little bit of an Airbnb feel to it, a little bit more personal, kind of like cooking glasses, right? Stuff like that, things like that.

Exactly. And then they launched online experiences, which is a way to maybe try and still make that work. um i think they can figure something out something out here long term and i i partly say that because i think the customer who is using airbnb is uh much more of a fit for what they're trying to do than your typical consumer um so they might be able to figure that out and i think you know by nature of having the real estate on someone's phone or on the computer and knowing when they booked and being able to show that to them in a really compelling way. I think they might be able

to figure out the experiences long-term, but I don't think it's anything that can happen in the next, call it even five years. I just don't see how it becomes a material part of the business in the short term. And I think their commentary around it is really telling. Chesky, in particular, was very gung-ho about what experiences could become in a relatively short period of time. He would say things like, in the next year, this is going to become pretty important. And he was saying those things a few years ago now. If you go back and read the Q221 call or the Q121 call, he's definitely toned that down a lot.

So I think they're still focused on it, but it's going to take a while. What about a loyalty credit card or a travel card? They were talking about that. Do you think more things like that can kind of just add on top membership programs and maybe something like i know they've added more so say you're at your you're researching your location or your your reservation at a certain spot now they kind of have guides for food or you know local reviews on food restaurants and activities kind of on a map it's not like experiences through the platform do you think stuff like that can really be additive stuff

like the wi-fi thing that ryan mentioned is that really something that they can just ride this tailwind on the on the traveling part and uh i don't know that just seems like a giant opportunity to go after and just focus on that yeah i think it's funny you know you started that by saying essentially a kind of like a uh what would you call it like a guest rewards program basically which you know it's pretty every orbits whoever else they all have some version of this and airbnb has talked about that in the past and as far as i know they've never they've never launched anything on the guest side like that. And that seems kind of like table stakes,

like the place they should start. As we start talking about other things like restaurants or, you know, like Dave talked about flights, booking calls is a connected trip. And it's this idea that, and Airbnb has kind of said, hey, this is what they used to say.

We have this all-inclusive app, all-inclusive travel app is what we're going for. I just don't think the vision's particularly realistic, even for booking to do. And they may have, you know, in their case, you may book your flight through them and you may also book your hotel and your car through them. So they have a lot of information about your trip. Airbnb is just at a point in the booking funnel where I don't think they can make that work. And, you know, that would mean displacing things like TripAdvisor and Yelp to a certain extent.

I just don't think it's going to happen. Do you think Google is kind of the big threat there that's stopping someone from integrating this? yeah i've at a high level i've thought that google is the company that can figure this out if anybody because of mainly because of their position as uh the email inbox and i'm sure as well i don't know if it's the same on iphones but i know on android if you book a flight you don't have to set reminders i mean google will just tell you you know six weeks later when the flight's coming hey you have a flight later today at x time so i mean they know where you're going they know what you're doing by crawling your email confirmation. And obviously, they have their own reviews and things

like that. So I've always thought if anybody's going to figure this out, it makes the most sense that Google will be part of it. Obviously, they don't have the focus on this category in the way that someone like Airbnb does. But it seems like they are in the position to use data to make that happen. Now, that said, they have also tried to do things with this. And as far as I know, those efforts haven't gone too far. So it's a problem that's evaded everybody so far. Well, a lot of Airbnb's customers are repeat customers, right? Not the host, but the guests. Yeah, on both ends of the transaction, a lot of the customers are repeat customers.

That said, management gave that data in the S1 and hasn't given it since. They didn't give it in the 2020 10K, which for me is, you know, it's a small thing. It's not like a make or break for the investment thesis, but I just don't like seeing things like that on what I consider to be pretty important financial disclosures. what if if they're already getting a lot of repeat guests do you think that's maybe why they haven't launched the rewards yet because they already but that makes more sense to do that maybe i don't know right doesn't make a lot of sense you're discounting it for people that might be doing it anyways right true true i guess that's right it's hard to know with you know the

s1 and this is maybe not just an airbnb issue the s1 disclosures in my mind are kind of pitiful like in Airbnb's case, they give you three years and they give you, you know, let's call it six or seven metrics, like not, not income statement or balance sheet metrics. They give you kind of KPIs. They, they give you a handful that are really important, which can help you with guessing things like, you know, based on the numbers they give, my guess is that they disclose the number of active bookers in 2019. That was 54 million people. My guesstimate is that the average booker booked about six nights on the platform. So you can try to back into data like this, but then they don't give you five plus years of historic data. They stop reporting these numbers after

the S1 is published. So it just gets really hard to make continuing or even historic statements about how some of these trends have evolved over time. I guess, do you think another part on the repeat customers, people kind of just go into the app without, it's already on their phone. Do you think that can help them reduce the need for marketing expenses? Yeah. And that was another big part of COVID that I didn't mention earlier. You know, they've historically had a fairly high percentage of direct traffic anyways. They're not as reliant on performance marketing spend as some of your traditional OTAs are.

But when COVID happened and they really needed to cut back on any discretionary spend, they cut back on marketing in a big way. And when that rebound happened, you know, starting in June or so, when that rebound happened, they saw a major increase in traffic from the lows, at least, but they saw a major increase in traffic without commensurate, you know, growth and marketing spend. And so I think, you know, we kind of inherently know this for the people who know the company have used a product that has a pretty strong brand. And I think they're realizing they, at least for the current customer base, they don't need to lean as much on performance-based marketing to drive activity. And so they leaned up a lot during COVID.

And I think you wrote about how that could have big lasting impacts and make it a more of an efficient business. do you think they should maybe reverse course and start spending again if if they have given given the current valuation uh they can kind of use that as financing oh in terms of using equity yeah well they still have a good amount of stock-based comp and um they don't they don't seem uh too worried about spending generally speaking so i think it was this is like the start of them getting efficient um i don't think we're at we're not at the end of the road yet um and you know to put it in numbers even on margins granted this is a weird year obviously but

even on margins of the first half of the year were mid single digits booking holdings or even margins going back um you know to a to a point in time when they were similar size to airbnb their even margins are like mid 30s 40 somewhere around there so we're talking about a massive gap and profitability between these two platforms and it's not all a cost issue but i certainly sense that that's a part of it okay how do you go about valuing airbnb i guess you know that's kind of how we'll wrap up here what are the key metrics you know financial non-financial that you're tracking and do you believe they can get to that 30 percent even to margin target uh like the otas yeah so the key metrics in my mind are you know you can break these down obviously but gbv is kind

of when it all comes together. I don't know if I've already said this. GBV is gross booking value. It's just the total dollar value of all the nights, mostly the nights booked on the platform. So let's start there real quick. Airbnb's GBV in 2019 was $38 billion. As I showed in the write-up, it's interesting. If you look back over the previous five years and comp that to booking holdings at a time when their gbv was in a similar range the growth rates are almost identical like it's kind of scarily so like the lines are right on top of each other um and by growth rates i mean the dollars of of gbv that they're reporting so um i kind of start from there and i think about okay what's a reasonable estimate for 21 they've had they've had a really good start to the year

Q2 was a really good quarter. You know, if you kind of assume that we can get 20% growth off of 19, that puts 21 at about 45 billion. Then I looked at Booking Holdings growth rate from the time they were at about 45 to when they got, they topped out at about 100 billion in 19, I believe. So I looked at their growth rate, just thought about it logically as well. You know, Airbnb's growth rate in 18 was 38%. Their growth rate in 19 was 33%. So I assumed, what happens if this is a 20% to 25% annualized growth business after that 21 kind of reset? That gets you to $100 billion in about five to six years. So that's the first metric. Then we look at the take rate, which as I discussed earlier, again, that $16 on 117, whatever those rough numbers were,

works out to about 14%, 13 to 14%. So that would be your revenue on that hundred billion. So call it 13 or 14. Now your question on margins, as I said, they're at mid single digits right now on EBITDA. That does not account for pretty significant stock-based comp. I tend to think about it as, um, I don't know if this business can truly in a, in a reasonably soon period of time, let's call it, you know, five years. I don't know if they can truly get to that kind of mid thirties level that booking's at. My sense is that there's just a lot more handholding in this business. And I think, I think management at Airbnb and at competitors like booking has, alluded to this fact that it's just a more cost intensive business. So even if we assume they can

get close and properly account for DNA and also stock-based comp, if you want to say this is a 20% to 25% EBIT margin business, let's say we're at $13 billion. So that puts you at roughly $3 billion in EBIT. You know, if you, a tax rate of 20% roughly gets you to two five, we'll call it, uh, the market cap today is like 110. So, you know, 110 billion, not 110 million, unfortunately. Um, so, you know, as I think about that and I, I try not to get too cute with these things, unless I have a lot of confidence in what this business looks like once it's at $100 billion, is this a business that's going to grow significantly faster than booking holdings, a leading OTA is growing today? And I'll get more into the booking thing in one second.

Is it going to grow significantly faster or are those margin estimates way off? Is that way too low? Without believing that, it's hard for me to see how you pay $110 billion right now. And probably the easiest way to make that point is to look on a relative basis to booking, which, as I said a moment ago, kind of peaked at around $100 billion. They already have that margin structure, actually a little bit higher than that, call it 20%, 25%. The other interesting thing about booking is they already have a pretty large alternative accommodations business. I actually had someone message me after I posted the article from Europe who lists his home and kind of said, you know, this is a little bit different than the U.S. here. You know, booking isn't a big player in the U.S., but they're a massive player in Europe. And he kind of suggested to me that they're a big alternative accommodations business.

And if you go and look at management's words at booking over the years, they've spent a lot of time trying to move into the U.S., both on alternative accommodations and hotels. They'll readily admit that they have not done particularly well in the U.S., particularly in terms of signing up the individual hosts. So they're a company I've followed for a while, and I tend to take their word for pretty close to fact. And to me, it sounds like of that $22 billion of gross bookings that they did in 19 that I mentioned earlier, a large percentage of that is from Europe. So it sounds to me like they have a halfway decently sized business. And obviously, you're getting a huge hotel OTA business as well. And you're paying $90 to $95 billion for that, as opposed to paying $110 for Airbnb. So long story short, on both an absolute and a relative basis, I kind of struggle to get to Airbnb's valuation.

But maybe people are much more optimistic about its growth right past $100 billion. Maybe they think experience is going to be a huge business long term. I'm not totally sure what the market sees. Sometimes when I finish up an exercise like this, I'll look at some sell side reports, especially like initiation type pieces, just to get a sense. Are people seeing things differently than how I see them? Are they looking at different numbers, et cetera, et cetera. The recurring conclusion that I saw from basically everybody was this is a really good business.

We like this business a lot and they didn't say this explicitly, but I'm used to sell side language. We try to make the numbers get to as close to this price as we could, and we can kind of get there, but we can't call this a buy. So I think a lot of people who look at this business are a bit perplexed by the valuation, but we'll see. think we're in the same boat yeah so two-part question to follow that up yeah you think that airbnb has an ability to uh raise their fees or like have pricing power or does that kind of

degrade the value of the platform and then secondly let's say those rosy assumptions or the optimistic projections worked out and they got to 30 percent even margins and uh continued to grow to that bookings value you talked about, what's the price that you would be comfortable paying today? Say the first one one more time. Sorry, I got lost. Do you think they have pricing power? Yeah, I think it's almost inevitable that you'll see their take rates going to move higher over time. And by the way, bookings take rates move higher over time. As I wrote in the article, there's been a persistent gap of about 500 basis points between them on the metric that I showed. But what I didn't didn't say in words, but you could see from the chart was both their take rates have actually trended a little bit higher over time.

I think it's inevitable that Airbnb has a higher take rate. That said, I think having just gone through the pandemic, which, you know, it's been some head. There's been some headwinds there in terms of acting with active listings growth and in terms of host growth. I think that's partly explained by there being a pandemic and people not wanting to now suddenly list their home and have strangers coming inside. But I also think there's a real question about, you know, TAM can mean growth in listings, growth in bookings. You know, it can mean a couple of different variables that drive it. I don't know if they know better than anybody else in terms of how big the host numbers can be. And, you know,

I spoke before about them being a little bit iffy on some of the disclosures from the S1. They were asked on the Q2 call about the fact that they've, they've given qualitative commentary around active listings and hosts on the platform since the S1, but they've been very tentative to give actual numbers. To me, that strikes me as odd because those are huge KPIs for this business. When asked about it, they essentially said, yeah, we don't feel the need to do that, essentially. I assume they'll have to in a 10K because it's a material disclosure, but they aren't just going to do it on the conference

calls, it sounds like. When I hear something like that, I start to wonder, are they a bit tentative about this KPI as well. So we'll see, but I definitely think that's something to think about. In terms of your second question, if I have a lot of confidence into that GBV number, or maybe even something a little bit above it, and I have a lot of confidence

on what those normalized margins look like, I can really get comfortable on how much stock-based comp bleed there's gonna be in the share count. On that normalized number, call it five years out. If I truly love this business, which there's a lot of things about this business I do love, if you told me I had to pay 30 times on that 2025, 2026 number today, I wouldn't love that, but I would definitely consider it. So in that kind of 20 to 30 times range, I think there's... I'd have to think really hard about whether... I've imposed

to rule on myself that I won't have positions that are smaller than 5% weightings because I don't want to just do things. I want to have conviction around my ideas. And if I don't have conviction around my ideas, I don't want to own them at all, essentially. So if it was in that 20 to 30 times range, I'd really have to think about whether or not I want to make this 5% position. And there's a part of me that says I definitely would. Any other questions? No. Did you have the risk one or do you think we covered that? I think we kind of covered that. So I think that's all the questions we have. Thanks again for joining us. Where can people find you? What's the Twitter handle?

Twitter handle is at TSOH underscore investing. And yeah, my name is Alex Moore. So everybody knows. And then what's the Substack called? TSOH Investment Research Service. Perfect. Okay. Well, that's going to do it. I'm going to try to hit the disclosure and not butcher this time. So we are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you guys for listening. We'll see you next time.