Alternative accommodation, including homestay rentals, have surged in popularity over the last decade thanks to various advantages over traditional hotels while offering similar benefits. They are not only more economical thanks to reasonable pricing and self-catering facilities that help reduce costs, but also more convenient since bookings are primarily executed via online travel agencies (OTAs).
Most importantly, homestay rentals offer a unique and genuine travel experience of living like a local which is not available in generic hotel rooms. The strategic advantages, compounded with the overall explosion of online travel, have enabled alternative accommodation to become one of the fastest-growing travel sectors pre-COVID.
Accommodation is among the main beneficiaries of the rapid recovery of the travelling industry. After the lockdown period, a pent-up travel demand has materialized, creating a significant growth driver for the hospitality industry. According to Google, in May 2021, search demand for travel was up 270% compared to May 2020, and the figure is likely to rise even higher. Bernstein also found that in the U.S., demand for domestic accommodation is up 20% versus 2019 while international travel demand continues to rise, up 25% since September 2021 and at 15% growth versus 2019, led by reopening of U.S. borders and eased travel restrictions for vaccinated travelers.
Despite being adversely affected by the pandemic, the travelling industry still represents a massive Total Market Addressable (TAM). Travelling is one of the largest categories of spend by both consumers and businesses worldwide with a combined spend of over $1.4 trillion annually, according to Phocuswright. Goldman Sachs expects the size of the global travel industry to reach $1.7 trillion by 2026, of which online travel bookings will represent $950 billion or 55% market share. Oppenheimer holds an even more bullish view, forecasting the global stays-and-experiences market to grow at 7% annually, reaching $3.4 trillion by 2030, and representing a $437-570 billion revenue opportunity.
Fundamental shifts in consumer behavior within the travelling industry also presents alternative accommodation with strong secular tailwinds. The pandemic has substantially accelerated the growth of remote working, and as employers acknowledge its various benefits to both employees and companies, a more flexible hybrid between staying in a physical office and working from anywhere is poised to eventually replace conventional working practices. Thanks to the work-from-anywhere trend, millions of people can now take more frequent and longer trips to more locations, and even live anywhere. As a result, alternative accommodation, with its cost-effectiveness and penetration in non-urban areas, is strategically positioned to capitalize on this shift.
Competition within the alternative accommodation industry, particularly among online service providers, is fierce. Among them, Airbnb (ABNB US) has firmly established its position as an industry leader. Airbnb is a global online accommodation marketplace that is best positioned into post-Covid-19 recovery based on its global brand, a strong network effect and the ability to quickly adjust to travelers’ demands.
Airbnb’s offerings include:
• Home-sharing marketplace, which connects users (guests) with hosts around the world. The platform provides hosts with global demand, activation and merchandising, and a wide array of support in the form of pricing and scheduling assistance and host protections. As for travelers, Airbnb has listings in over 100,000 cities, many of which are not served by hotels. Guests are attracted to Airbnb thanks to its flexible booking periods, and authentic travel experiences.
• Airbnb experiences, which are in-person or online activities hosted by local experts. Hosts offer their guests special knowledge, unique skills, and inside access to local places and communities that guests couldn’t find on their own, creating lasting connections and treasured memories. Within two weeks of the onset of COVID-19 social distancing measures, Airbnb launched Online Experiences, a new, more accessible virtual experience for guests around the world.
Airbnb has a massive global network, with over 7.4 million listings, 5.6 million of which are active listings, in 100,000 cities in over 220 countries. The platform has grown to 4 million hosts who have welcomed more than 1 billion guest arrivals in almost every country. The U.S, France and Italy are its biggest market in terms of total listings.
Regardless of the pandemic, Airbnb has consistently demonstrated outstanding financial results, and even exceeded 2019 levels. In 3Q21, strong recovery in Nights and Experiences Booked combined with significantly higher Average Daily Rates (“ADR”) drove nearly $12 billions of gross bookings, 48% YoY growth and 23% growth over 3Q19. 3Q21 revenue of $2.2 billion was their highest ever—nearly 70% YoY growth and surpassed Q3 2019 levels by 36%—demonstrating the strength of the travel rebound on Airbnb.
Airbnb’s most significant competitive advantage over peers is its strong global brand awareness, which has created a powerful flywheel for its two-sided marketplace (guests and hosts). Airbnb’s network advantage was established by attracting private accommodation owners to post their dwellings (supply side) on the company’s platform, which in turn attracted more travelers (demand side) subsequently enticing more supply, creating a virtuous cycle that increases value for both new and existing users.
Additionally, Airbnb’s strong brand enables it to derive a significant portion of its traffic from unpaid/direct channels. Airbnb’s ability to generate direct traffic is extremely important as it: 1) limits “Google risk”, which means Google putting its own products at the top of the search results page, funneling traffic away from others; and 2) enables Airbnb to spend less on marketing. Truist securities expect this competitive advantage to be reinforced by the company’s strategic focus on growing brand awareness with guests and hosts, leading to sustainably healthy growth and margin gains.
Airbnb’s flexible business model puts it in a unique position to take advantage of the incoming surge in travel demand. Unlike traditional-hotel operators which need a lot of time in order to build additional rooms and properly forecast long-term demand for these rooms to avoid over-supply, Airbnb simply needs to sign on new hosts to increase room supply as needed.
Airbnb also has multiple growth vectors which could meaning fully expand its TAM. While Experiences is still very early days, the Service Addressable Market of over $300 billion is massive. In addition, there isn’t a major player in this market, which we think gives Airbnb a clear tailwind to capture a meaningful portion of that opportunity over time. Other opportunities of Airbnb include other travel modalities, financial services, additional loyalty partnerships and advertising—all of which we think would add hundreds of billions to the overall addressable opportunity.
Airbnb is well positioned to capitalize from long-term stay segment as a result of remote-working trend. Trip length of 28 days or more remains their fastest-growing category compared to 2019 as the way people travel and live continues to change. Long-term stays accounted for 20% of gross nights booked in 3Q21, up from 14% in 3Q19. Overall, 45% of gross nights booked were from stays of at least seven nights in Q3 2021.
As Airbnb recovers rapidly from the pandemic, RBC forecasts Airbnb’s bookings to reach $53.7 billion by 2022, a 50% CAGR from 2020-2022, and net revenue to reach $7 billion, a 44% CAGR from 2020-2022. Another estimate from Cowen Equity research projects $155 billion in bookings and $5.5 billion net income in 2031.
Airbnb’s top competitors are the two dominant OTAs, Booking and Expedia. Now that Airbnb has driven the short-term rental market to capture a material share of the overall travel market, Booking and Expedia have recently prioritized building a short-term rentals business. Although Booking and Expedia are building up supply, a new short-term rental listing is most likely to go on Airbnb. 59% of all whole-home short-term rental listings are listed on Airbnb, and 45% of these are exclusive to Airbnb.
