Latest / The Dutch Investors / #18 | Airbnb vs Booking Holdings | Which company is better?

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#18 | Airbnb vs Booking Holdings | Which company is better? · The Dutch Investors

• 0:00
  SPEAKER_00: Welcome back to the Dutch Investors Podcast.
• 0:03
  SPEAKER_00: My name is Sim, and today we're tackling one of the biggest questions in travel and investing: Booking Holdings versus Airbnb.
• 0:11
  SPEAKER_00: Which company is better?
• 0:14
  SPEAKER_00: These two huge travel companies have very different ways of doing things.
• 0:19
  SPEAKER_00: Booking has been dominating the hotel space for years.
• 0:23
  SPEAKER_00: Well, Airbnb is like the new kid on the block.
• 0:27
  SPEAKER_00: They have changed how people think about travel.
• 0:30
  SPEAKER_00: But which business is better?
• 0:31
  SPEAKER_00: Which mode is stronger, and which has a better future?
• 0:35
  SPEAKER_00: But also, which stock would we rather own?
• 0:39
  SPEAKER_00: Curious?
• 0:40
  SPEAKER_00: Well, let's dive in.
• 0:50
  SPEAKER_00: First, Booking Holdings.
• 0:53
  SPEAKER_00: Everyone knows Booking, but until 2018, the company was actually called Priceline.
• 1:00
  SPEAKER_00: In 2005, the American company acquired to Dutch Booking.com for$135 million, perhaps one of the best acquisitions in history.
• 1:13
  SPEAKER_00: Today, Booking Holdings is worth over$160 billion.
• 1:19
  SPEAKER_00: Over the past decade, the company has delivered an annual return of around 12%.
• 1:24
  SPEAKER_00: A key success factor is the number of bookings, which shows how well customers find and use the platform.
• 1:32
  SPEAKER_00: Currently, travelers book over a billion nights per year through booking holdings.
• 1:38
  SPEAKER_00: Then we have Airbnb.
• 1:41
  SPEAKER_00: They went public in late 2020, and since the IPO, they have delivered a horrible negative return of minus 1.7% annually.
• 1:51
  SPEAKER_00: The company started in 2007, when Brian Chesky and Joe Gebia, nearly broke at the time, decided to rent out air mattresses in their apartment during a San Francisco conference, sparking an idea that did change travel forever.
• 2:09
  SPEAKER_00: Airbnb allows the middle class to become property entrepreneurs in a way, with the average US host earning around$14,000 per year.
• 2:19
  SPEAKER_00: The company makes money by charging guests a percentage service fee, between 6 and 15% a day, and hosts a 3% fee per booking.
• 2:30
  SPEAKER_00: They also include a cleaning fee.
• 2:33
  SPEAKER_00: In fiscal year 2013, Airbnb booked 448 million nights and experiences compared to bookings over 1 billion nights and XPDS 360 million nights.
• 2:48
  SPEAKER_00: Today, Airbnb has around 4 million hosts and 7 million active listings across 220 countries.
• 2:58
  SPEAKER_00: Of course, these numbers will change once they both release their annual report for fiscal year 2024.
• 3:05
  SPEAKER_00: Let's start with how these two companies make money.
• 3:08
  SPEAKER_00: Booking Holdings is an online travel agency or OTA.
• 3:14
  SPEAKER_00: Their biggest brand is Booking.com.
• 3:17
  SPEAKER_00: But they also own Priceline, Agoda, Gayak, Rentalcars.com, and OpenTable.
• 3:24
  SPEAKER_00: Essentially, they act as a middleman between travelers and hotels.
• 3:31
  SPEAKER_00: Their business model is highly scalable.
• 3:34
  SPEAKER_00: They earn commission fees from hotels, and over time, they've increased their control over payments, shifting from an agency model to a merchant model.
• 3:45
  SPEAKER_00: That means instead of just taking a cut from hotels, they're now handling payments directly, giving them more power and profitability.
• 3:55
  SPEAKER_00: Airbnb is similar and owns no real estate.
• 3:59
  SPEAKER_00: Instead, it's a marketplace for short and long-term rentals.
• 4:04
  SPEAKER_00: Anyone with an extra room, apartment, or house can list it and Airbnb takes a cut.
• 4:11
  SPEAKER_00: They are also focusing more on experiences nowadays.
• 4:15
  SPEAKER_00: Unlike booking, Airbnb doesn't rely on traditional hotels.
• 4:20
  SPEAKER_00: Instead, it has over 7 million active listings globally, most of which are pretty unique and privately owned.
• 4:29
  SPEAKER_00: This gives them a direct kind of network effect.
• 4:32
  SPEAKER_00: Travelers go to Airbnb for experiences, while hotels stick with booking for its enormous supply.
• 4:40
  SPEAKER_00: But the question remains, which business model is better?
• 4:45
  SPEAKER_00: Booking's hotel focus means higher reliability.
• 4:48
  SPEAKER_00: Hotels are run by professionals, rooms are standardized, and there's less legal and regulatory risk.
• 4:56
  SPEAKER_00: Airbnb's home sharing model gives travelers more unique options, but it comes with higher risks, regulations, quality control issues, and host dependability.
• 5:08
  SPEAKER_00: I'd have to say booking holdings has the better business model for now.
• 5:14
  SPEAKER_00: Okay, next up, numbers, and focus specifically on the key indicators for both companies.
• 5:22
  SPEAKER_00: Before we begin, we will not compare free cash flow because Airbnb pays out an absurd amount of stock-based compensation which skews the free cash flow drastically.
• 5:33
  SPEAKER_00: I'll give my thoughts on this later.
• 5:35
  SPEAKER_00: Booking currently has a market cap of around$160 billion compared to Airbnb's$85 billion.
• 5:43
  SPEAKER_00: Booking grew revenue close to 10% over the past 5 years, while Airbnb grew revenue faster around 19% over the same period.
• 5:53
  SPEAKER_00: Booking has gross margins of almost 85%, pretty similar to Airbnb's 83%.
• 6:00
  SPEAKER_00: Operating margins of 29% for booking compared to Airbnb's 15%.
• 6:08
  SPEAKER_00: ROIC return on invested capital is 38% for booking holdings, which is extremely high, indicating very strong capital efficiency.
• 6:19
  SPEAKER_00: Airbnb had an ROIC of 34% in fiscal year 2023, but this dropped to 10% in fiscal year 2024.
• 6:31
  SPEAKER_00: Just remember that Airbnb's financials are a bit more all over the place because of different factors playing into their business model.
• 6:40
  SPEAKER_00: So both companies have great margins, but booking is much bigger and more profitable.
• 6:47
  SPEAKER_00: Airbnb's revenue is growing faster, but booking has double Airbnb's revenue and a longer history of proving strong financials.
• 6:56
  SPEAKER_00: Airbnb still has much to prove here.
• 6:59
  SPEAKER_00: If we had to pick one based purely on financial performance, booking holdings is the clear winner.
• 7:06
  SPEAKER_00: So far, it's up to zero for booking.
• 7:10
  SPEAKER_00: Now let's take a look at the competitive advantage of both companies.
• 7:14
  SPEAKER_00: A company is only as strong as its mode, the thing that makes it nearly impossible for others to steal market share.
• 7:22
  SPEAKER_00: Booking has a few advantages going for them.
• 7:25
  SPEAKER_00: The first being network effects.
• 7:28
  SPEAKER_00: If you're a hotel, you need to be on booking.com because that's where customers are.
• 7:34
  SPEAKER_00: And if you're a traveler, you use booking because it has the biggest selection.
• 7:39
  SPEAKER_00: This creates a reinforcing loop.
• 7:42
  SPEAKER_00: They have the strongest possible global network effect out there.
• 7:47
  SPEAKER_00: The other mode would be economies of scale.
• 7:50
  SPEAKER_00: This combined with the network effect gives them enormous pricing power.
• 7:56
  SPEAKER_00: Hotels can't really negotiate too much with booking because they control so much of the market.
• 8:02
  SPEAKER_00: Not being on booking is basically not possible for hotels for now.
• 8:07
  SPEAKER_00: Especially with the parity clauses, hotels are not allowed to redirect traffic to their own websites or have lower prices on their own website.
• 8:17
  SPEAKER_00: And although booking's parity clause is not illegal in some countries, you still cannot lower booking's price on your own website.
• 8:26
  SPEAKER_00: Booking will penalize if you do this.
• 8:28
  SPEAKER_00: It may even result in you being pushed to page 20 of the search results, rendering you virtually untraceable for the majority of visitors.
• 8:38
  SPEAKER_00: That's a huge problem for hotels and a huge strength for booking.
• 8:43
  SPEAKER_00: But as you might understand, if these clauses disappear, yeah, pretty big risk for booking.
• 8:51
  SPEAKER_00: Then we have Airbnb's mode, and the first is brand loyalty.
• 8:57
  SPEAKER_00: Over 90% of bookings come directly through Airbnb's app.
• 9:03
  SPEAKER_00: Meaning they don't rely on Google Ads as much as booking does.
• 9:08
  SPEAKER_00: This does tell me that they have a stronger brand than booking, and although 67% of Airbnb's accommodations are not unique to their own platform, they do have a pretty unique offering and platform.
• 9:22
  SPEAKER_00: Well it lasts.
• 9:24
  SPEAKER_00: The other mode are also global network effects, perhaps just as strong as bookings.
• 9:30
  SPEAKER_00: Airbnb has millions of independent hosts, a model that is very hard to replicate.
• 9:36
  SPEAKER_00: And while economies of scale also support Airbnb's success, they do play a secondary role, primarily enhancing the strength of their network effect and brand.
• 9:48
  SPEAKER_00: Airbnb's asset-light model enables fast growth without capital-intensive burden of owning properties.
• 9:56
  SPEAKER_00: This approach allows the company to focus on expanding its user base and this reinforce their network effect.
• 10:04
  SPEAKER_00: So, who has the stronger competitive advantage?
• 10:07
  SPEAKER_00: Booking has scale and an extremely strong and a reliable global network effect.
• 10:13
  SPEAKER_00: Airbnb also has a strong global network effect and brand loyalty.
• 10:19
  SPEAKER_00: But I'd argue that booking's mode is stronger because they have much more pricing power.
• 10:25
  SPEAKER_00: Which is perhaps way more important than a strong brand.
• 10:29
  SPEAKER_00: Because if you can't ask for premiums or raise prices because of your brand, what is the purpose of having a good brand?
• 10:37
  SPEAKER_00: Booking edges it out because of this pricing power, so it's 3-0 for booking if you ask me.
• 10:44
  SPEAKER_00: Next up, risks.
• 10:47
  SPEAKER_00: Because every business has risks, and both of these companies have some serious challenges ahead.
• 10:53
  SPEAKER_00: Booking faces several risks that could impact their dominance in the travel industry.
• 10:59
  SPEAKER_00: Google's increasing presence in travel search poses a threat, as more users may book directly through Google rather than visiting booking.com.
• 11:10
  SPEAKER_00: Additionally, booking relies heavily on paid advertising, meaning higher ad costs can really eat into their profit margins.
• 11:19
  SPEAKER_00: Finally, switching costs are also a concern, since travelers can easily book hotels through competitors like Xpedia, Google, Airbnb, or directly on hotel websites, and booking must work hard to retain their market share.
• 11:36
  SPEAKER_00: Airbnb on the other hand faces a different set of challenges.
• 11:41
  SPEAKER_00: Regulatory pressure is a major issue, with cities worldwide imposing stricter rules, higher taxes, and even outright bans on short-term rentals.
• 11:54
  SPEAKER_00: Supply constraints also pose a risk, because Airbnb doesn't own any properties, because Airbnb doesn't own any properties.
• 12:04
  SPEAKER_00: If hosts decide to leave the platform, available listings shrink fast.
• 12:10
  SPEAKER_00: Network effects are perhaps the strongest mode out there, but they can also turn just as hard.
• 12:17
  SPEAKER_00: Lastly, guest experience on Airbnb varies widely.
• 12:23
  SPEAKER_00: Unlike hotels where quality is standardized, Airbnb stays can be pretty unpredictable.
• 12:30
  SPEAKER_00: Some are fantastic, while others fall short.
• 12:34
  SPEAKER_00: This can damage the brand's reputation over time.
• 12:38
  SPEAKER_00: Both companies face some headwinds, but I'd argue Airbnb's regulatory risk is the biggest wildcard, and they also have more risks to worry about.
• 12:49
  SPEAKER_00: So it's 4-0 for booking.
• 12:53
  SPEAKER_00: After breaking down the business models, financials, modes, and risks, what is our final verdict?
• 13:01
  SPEAKER_00: Before I give you my verdict, we go much deeper in our premium fundamental analysis of both Airbnb and booking holdings.
• 13:11
  SPEAKER_00: We talk about the sector and industry, we go much more in depth about the management, the incentives, we talk about the valuation, we talk about the opportunities, and we give you our thoughts on both companies.
• 13:25
  SPEAKER_00: And if you're interested, head on over to thedutchinvestors.com and just check them out for yourself.
• 13:32
  SPEAKER_00: Okay, our final verdict.
• 13:34
  SPEAKER_00: Let's begin with the key takeaways of booking.
• 13:37
  SPEAKER_00: Booking holdings is the dominant force in the OTA industry, online travel agencies.
• 13:45
  SPEAKER_00: They hold over 35% market share, and over the past decade they have grown over 10% annually, benefiting both from the travel sector faster than global economy growth.
• 13:58
  SPEAKER_00: More travelers now book directly through its app, reducing reliance on paid ads mostly to Google, and this can boost profitability.
• 14:08
  SPEAKER_00: Their loyalty programs help them keep customers engaged, hopefully negating the pretty low switching costs for consumers and travelers.
• 14:19
  SPEAKER_00: As booking scales further, profit margins can rise even more.
• 14:25
  SPEAKER_00: The company also buys back shares, and this will increase earnings per share, and in the long run, as profits grow, the stock price is likely to follow.
• 14:35
  SPEAKER_00: Booking is built to last.
• 14:38
  SPEAKER_00: Ultimately, Airbnb's success depends on its uniqueness, affordability, and quality.
• 14:45
  SPEAKER_00: Currently, 67% of its accommodations are also listed on other platforms, so the more distinctive and exclusive Airbnb stays, the stronger their competitive edge.
• 14:58
  SPEAKER_00: And although the opposite is also true.
• 15:01
  SPEAKER_00: Since the uniqueness appears to be fading a bit, Airbnb is struggling a lot more than booking.
• 15:07
  SPEAKER_00: Just look at the different stock charts over the past year.
• 15:11
  SPEAKER_00: I do like the fact that Airbnb is still led by its founders and they have a lot of skin in the game.
• 15:18
  SPEAKER_00: However, 90% of compensation comes from stock-based compensation.
• 15:24
  SPEAKER_00: Which I believe is a huge problem for Airbnb in the long run.
• 15:30
  SPEAKER_00: Leaving aside devaluation, if I had to pick one today, based on the fundamentals, I'd have to go with booking holdings.
• 15:39
  SPEAKER_00: The company has been consistently profitable, has a much wider mode, and just appears more predictable with a longer and more flexible runway.
• 15:49
  SPEAKER_00: But what do you think?
• 15:51
  SPEAKER_00: Would you rather invest in booking or Airbnb?
• 15:54
  SPEAKER_00: We'd love to hear your thoughts.
• 15:56
  SPEAKER_00: Send us a message over on X or Instagram, or even email us at infotutchinvestors.com.
• 16:04
  SPEAKER_00: Until next time, stay curious, keep learning, and happy investing!