Bed, Breakfast, and the Golden Age of Travel

The ‘golden age of travel’ is coming, and the future of related industries is looking bright. At least, this was the claim of Airbnb Inc (ABNB) co-founder and CEO, Brian Chesky, as he spoke to CNBC earlier this week. Admittedly, the San Francisco-based company’s third-quarter earnings report, released Thursday 4th November, boasted of impressive revenues (2.2 billion USD), record net income (834 million USD), and rapidly expanding profit margins. Airbnb stock reacted accordingly as investors were quick to pile into the vacation rental company, sending the share price soaring by approximately 13% in a single day (ABNB is currently trading at 191.61USD per share). In an interview with Yahoo Finance, Chesky commented on his company’s recent success, arguing that ‘remote work is here to stay’. As a result of increased flexibility, individuals would spend considerably more time travelling in the coming years. Whilst this hypothesis is particularly topical, its validity is far from guaranteed. Investors must ask themselves whether Airbnb’s recent success is symptomatic of the dawning ‘golden age’ or, less optimistically, if pent up demand and the lifting of travel restrictions have artificially inflated the company’s valuation.

Airbnb was founded in 2008, when, upon noticing the excess demand for hotel rooms in New York City, Chesky and co-founder Joe Gebbia (and later Nathan Blecharczyk) purchased airbeds and rented out their loft to visitors. 13 years later, Airbnb has offices in 31 different cities and listings in 191 countries. During the COVID-19 pandemic, however, the company found itself paying out a substantial 1 billion USD in refunds and cancellations, as well as cutting jobs and many non-essential projects. Despite this setback, the firm has recovered swiftly in the aftermath of the pandemic. Upon first inspection, its third-quarter earnings report seems to suggest that the company is once again on the up, reporting a 67% year-over-year growth in revenues, which stood at an impressive 2.2 billion USD. Additionally, thanks to significantly increased profit margins, Airbnb accumulated 834 million USD in net income – four times more than it reported this time last year. Crucially, this represented a significant outperformance of its metrics for the same quarter in 2019, suggesting that Airbnb’s success may be more than a sudden rebound from the sector-wide pandemic plummet.

As mentioned above, Chesky has highlighted changing patterns of consumption and a COVID-19 induced shift to remote working, asserting that this ‘work-from-anywhere’ culture would continue into the foreseeable future. Moreover, he believes that this newfound flexibility has, and will continue to, bolster travel and increase stay duration. There is evidence to suggest that his view may be correct regarding the longevity of remote working and its impact upon the industry. For instance, in a recent survey of 3000 UK workers, professors Phil Taylor, Dora Scholarios and Debra Howcroft found that 78% of respondents would prefer to work in the office for just two days or less per week. Additionally, Airbnb themselves have recorded vast increases in stay duration, with the length of stays reported as ‘business trips’ increasing by 250% on average, as consumers plan work trips to coincide with vacations and reunions with family, friends and colleagues. Perhaps, then, once liberated from the shackles of proximity to the office, workers will be free to pursue recreational activities, holidays, and family commitments where they would not previously have been able to do so. Airbnb would be uniquely suited to such an eventuality, offering a wide variety of locations, prices, and properties.

However, there also seems to be a good reason to doubt both Chesky’s initial observation and his following prediction. It is far from obvious that Airbnb’s recent success is a product of changing consumer behaviour, at least not in the sustained way that Chesky suggests. With the pandemic beginning to tail off and the relaxation of travel restrictions worldwide, it is not surprising that the travel and hospitality sector is rebounding with such a vengeance. According to a study conducted by the European Travel Commission, 66% of Europeans have planned trips between now and March of next year. The same survey found that the majority of holidaymakers were more intent on sticking to their plans than they had been since the start of the pandemic. Coupled with the fact that, due to school holidays and warmer weather, the third quarter is traditionally the most profitable for holiday-related companies, this seems to considerably weaken the position that long-term changes to consumption are driving Airbnb’s current success. Goldman Sachs analyst Eric Sheridan reflected this sentiment when issuing a bearish price target of 132 USD per share and a ‘sell’ rating. Despite accepting Airbnb’s serious growth potential, Sheridan argued that investors were ‘already factoring in a huge travel burst from a more flexible work environment in the future’ but he remains unconvinced that this specific ‘outcome [has] a high probability’.

Long-term investors must understand both sides of the argument. Perhaps Sheridan is correct, and the uptrend is simply a response to a sudden actualisation of pent-up demand. In this case, Airbnb would seem to be somewhat overvalued, especially given the recent attention it has received. Alternatively, if one were to take Chesky’s optimistic view, then perhaps the company is valued correctly, or even undervalued, given its potential for future growth. Investors must decide, given all available information, whether or not a golden age lies on the horizon, with Airbnb at its helm.

By Alex Mortier

Sector Head: Robert Armstrong-Jones