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Reservations Holdings (NASDAQ: BKNG) has long been the dominant player in the online travel industry. With a portfolio of well-known brands including Booking.com, Kayak and Agoda, the company has a commanding presence in the travel market. However, Airbnb (NASDAQ: ABNB), the home-sharing platform that has disrupted the traditional hotel industry, has recently made a push to expand its presence in the broader travel market. The question on many investors’ minds is whether Airbnb can take the travel crown from Booking Holdings.
In the past, we favored investing in Bookings over Airbnb, mainly because of a more attractive valuation. Since then, Booking shares have overtaken Airbnb, and now is the time to reconsider whether perhaps a move to Airbnb is warranted.
Competitive Advantages
To understand the potential for Airbnb to overtake Booking Holdings, it’s important to consider the strengths and weaknesses of both companies. On the one hand, Booking Holdings has strong brands and a massive customer base. Booking Holdings has a diverse portfolio of brands that cater to a number of different segments, including luxury travelers, budget travelers and business travelers. On the other hand, Airbnb has a number of strengths that could give it an edge over Booking Holdings. Airbnb has a much larger inventory of properties available for booking. This gives it a wider range of options for travelers and makes it easier for the company to capture a larger share of the market. The company has also made a number of strategic acquisitions, including Luxury Retreats and HotelTonight, that have helped expand its reach in the travel market.
In terms of competitive levels, both share similarities in that both companies benefit from network effects, economies of scale and intangible assets. Network effects are a result of the fact that both companies are two-way markets, with travelers on one side and accommodation providers on the other. Travelers will tend to go to the platform with the most accommodation options, while property owners will prioritize listing on the platform with the most travelers. Two successfully operate their type of business, scale is critical, which makes it incredibly difficult for smaller companies to compete with them. Finally, their strong brands, applications, user interfaces and technology strongly differentiate both companies from smaller players.
finances
Given their strong competitive levels, it is not surprising that both companies benefit from excellent financials. Both currently have operating margins above 40%, which is a level that few companies manage to exceed.
gROWTH
Booking remains by a large margin the largest company in terms of revenue, and since both are growing at relatively similar rates, it will take a long time for Airbnb to pass Booking, if it ever does. In this sense, Booking’s crown is safe for now.
However, there are reasons to believe that Airbnb’s growth could outpace Booking’s previous growth rate. For example, Airbnb has been very focused on the US market and if it replicates its success outside the US, it could turbo-charge. Its new focus on longer stays is also promising, as is its diversification into luxury accommodations, boutique hotels and experiences. That said, Booking is fighting back and also getting into the alternative accommodation space.
balances
Both companies have strong balance sheets with plenty of liquidity and billions in cash and short-term investments. Airbnb has significantly less leverage, as it has much less total long-term debt.
ASSESSMENT
Through a combination of a lower share price and improved profitability, Airbnb’s valuation has become much more reasonable. Booking now has a higher market cap compared to Airbnb, but in terms of valuation, both trade at relatively similar multiples.
For example, looking at EV/Earnings, they both trade very close to a 5x multiple. Airbnb’s valuation has compressed significantly, given that it traded closer to an EV/Revenue of ~15x a year ago.
The EV/EBITDA multiple has been converging for both companies as well, with Airbnb at ~25x and Bookings at ~18x. These may seem like relatively high multiples, but given the expected earnings growth for both companies, they are still within a reasonable range.
Looking at forward EV/EBITDA, the multiples are even closer together, with Airbnb at ~16x and Bookings at ~15x. We can therefore conclude that valuation is no longer the main factor in deciding which company to invest in and that other aspects of the business should be given much more weight when making a decision.
The Risks
Airbnb still faces a number of challenges as it looks to take the travel crown from Booking Holdings. A key challenge is the issue of trust. Some travelers are still hesitant to book a property on Airbnb, due to concerns about the quality and safety of accommodations. Both companies also face regulatory risks, but these are more important for Airbnb given its greater focus on alternative accommodations. Another important risk is that of new travel restrictions, which had a major impact during the Covid lockdowns.
Conclusion
The last time we compared Airbnb and Booking, it was clear that Booking’s rating was significantly more attractive. This time, the valuations for both companies are quite similar, and deciding which one to choose will depend more on other factors. Booking remains the largest company by revenue and given relatively similar growth rates, it looks set to retain its travel crown for some time to come. We believe there are several reasons that could help accelerate Airbnb’s growth past Booking, which is why we would now favor Airbnb stock. That said, it’s a very close call, and we believe investors will probably do well with both over the long term. Airbnb and Booking Holdings are both high-quality platform businesses that will likely continue to benefit from the growth of online travel bookings, and both will likely continue to be key players in shaping the future of travel.
