$ABNB · The Intrinsic Value Podcast · 2026-11-01

During the pandemic, Airbnb shut off the vast majority of its advertising spend to save cash. Most businesses would have watched their customers vanish into thin air. Instead, Airbnb barely even noticed with about nine out of 10 visitors continuing to use their service anyways.

That's the kind of advantage that helped turn this company, which specializes in helping people find a place to sleep each night while not owning a single bed, into our second largest position in our intrinsic value portfolio.

But lately, growth has cooled off and cash flow had barely budged and a new threat had seemed to be released into the market with AI agents that want to be the default for helping you plan your next vacation.

So, is Airbnb slow down the first crack in the thesis or is it just a business preparing itself for the next phase of growth? That's what we'll find out today.

Today, we're going to be revisiting a business, Airbnb. So, Airbnb interests me a lot because aside from the odd hotels that I do stay in, mostly for work, it's probably my most used alternative accommodation service.

So, I know many people have had kind of a mixture of good and bad experiences, but mine thus far have basically always been quite good. So, I'm pretty excited here to finally get my hands onto this business and just better understand its inner workings.

So, the last time that I stayed at an Airbnb was in May of this year. I ended up going with my wife and son to celebrate my 40th birthday in Otter Rock, Oregon, which means I've officially reached the age where a well stocked kitchen and good water pressure are the highlights of my vacation.

And even though my best explanation of the Oregon coast is kind of British Columbia mixed with Hawaii, which is an incredible mix, the house that we actually got to stay in was no slouch either.

We were less than a 5-minute walk from two beautiful beaches. And even though we got caught in a torrential downpour at the beach when we first got there, we were very well prepared as my son had his full rain suit on.

But the Airbnb was incredibly nice. It was spacious. It had great lighting. It had a great view. And it had all the amenities that we could possibly want. The only issue was that the dryer wouldn't open at one point, and the host immediately came over to fix it for us.

So, they definitely got a fivestar rating from us.

Yeah, I got to get out to Oregon. It sounds sounds absolutely beautiful and like a really wholesome family experience. So, yeah, happy 40th to you, Kyle. Or belated 40th. But uh yeah,

another big milestone for Airbnb was the World Cup this past summer with 150,000 new homes being listed on Airbnb for that alone and hosts earned hundreds of millions of dollars while guests from 196 countries came to the 16 different host cities across North America.

So, I continue to see Airbnb as having a long runway ahead of it. As the world travels more and more and as alternative accommodations, which is really just anywhere you stay besides a traditional hotel, makes up a greater percentage of bookings and takes market share from hotels.

And so in terms of flexibility with pets to having a shared space with family or friends in one place, I just find Airbnbs to be my preferred option for really all of my discretionary travel at this point.

But you know, I definitely have my biases because I say this as someone who literally received an Airbnb gift card as a wedding gift from friends, which by the way, I should say is an excellent gift to give somebody.

And actually just before we hopped on here, we booked some tickets for a concert at the Sphere in Las Vegas and we booked an Airbnb just a couple minutes from there to go to the show.

So yeah, I wouldn't say I'm a super user cuz I don't feel like I travel a ton, but majority of my travel definitely goes through Airbnb. And point being, unless I'm traveling to maybe New York for work, finding an Airbnb is really my default choice for accommodations.

And you know, hotels just feel so generic and stuffy to me compared with the really unique experiences you can find on an Airbnb that let you feel like you're truly staying in a community and getting a feel for life there rather than simply occupying a bed at a major hotel chain in the most commercialized district of the city.

Yeah, I think I'm right with you there. But I think my main push back and maybe something that we'll be going over a lot today is what exactly has happened to the company's growth.

So a year is obviously a pretty short time to evaluate a business and really anything can happen to a business over the course of a year and temporary headwinds doesn't necessarily mean that a thesis is broken.

But when I compare you know Airbnb's growth metrics since the fiscal 2024 the numbers suggest that things have actually slowed pretty considerably.

So if we go back to Airbnb's IPO their growth rates have actually been fantastic right revenue has compounded 19%. Cash from operations have compounded even faster at 39%. And you know that's really operating leverage at work.

Think of Visa. Once the payment network is built, handling one more swipe costs Visa almost nothing. So almost every other transaction then drops to the bottom line. An Airbnb works a lot in the same way.

The app, the search engine, the review system, they're already built out. So each extra booking adds a lot of revenue at a very very low cost.

The problem that I'm seeing when I look at the numbers from 2024 until now is revenue is just growing at 9% while cash from operations has drastically slowed to nearly 4%. Now that kind of slowdown kind of scares me.

So I'm excited to dive more into this with you Sean and figure out why this has happened and if it's something that we should be worried about or not as this is obviously a position inside of the intrinsic value portfolio.

Yeah, absolutely. And before we get into my original thesis on Airbnb, I think it's probably worth giving our listeners who might not be as familiar with the company, sort of just a basic primer on the business model.

You know, it's still worth, I think, going back to listen to my initial episode on the company for folks who are really interested, but just to kind of give you a quick breakdown.

At its core, Airbnb is what we call a two-sided marketplace. And so on one side, you have the hosts. They're the suppliers of housing on the network. And this could be me as a homeowner or anyone with nothing more than just a spare bedroom to list.

Or it can of course be someone who owns a cabin or vacation home that they only use a few weeks of the year or even a professional property manager that has dozens of their own units that they're listing.

And so on the other side of this marketplace are the users or the guests who bring the demand and they're looking for somewhere to stay. And so they're willing to pay really good money typically to stay in a space that might otherwise be vacant.

And what's so good about Airbnb's business model is that they don't have to worry about the costs associated with home ownership. Right? Airbnb owns the storefront, the search engine, the payments, the reviews, and probably most importantly, the trust between hosts and guests, but it's not like they're buying up homes as the basis for the inventory that they offer.

And uh just like how Uber doesn't own any cars. >> Yeah, it's a really really simple business. You know, Airbnb has expanded its services more towards these kind of experiences, which I know that was something that you were touching on in your initial thesis.

So allowing users to kind of book these activities based around the locations that they're staying in has been quite a big bo for the business. So that's a really really nice bonus for the core business as well.

But the numbers that listeners would really focus on is probably the gross booking value. So gross booking value is the total dollar value of everything that's booked on Airbnb.

That includes things like the nightly rate, cleaning fees, taxes, and Airbnb's own service fees. So in the second quarter of 2026 alone, gross booking value was over $27 billion.

And the average nightly rate has gone up about $20 since Sean's first pitch. But gross booking value is not Airbnb's revenue. It's like when we looked at Domino's and their system sales.

It's obviously the sales that kind of flow through the entirety of Domino's around the world. But obviously a large percentage of that revenue doesn't actually belong to Domino's.

They just get a cut of it. And with Airbnb they get a really really nice cut.

>> They do. And you know for four years Airbnb ran two fee models. So under the split fee the host paid about 3% of the booking subtotal and the guest paid a service fee of roughly 14% on top of that.

And then under the host only fee, the host paid the whole thing about 15 and a. 5% and then the guests saw one clear price and hosts using property management software were moved to this hostonly fee model in late 2025.

And then this fall Airbnb is finishing that switch with as of September 15th. Every host outside of Europe is now on the single 15 12% fee with European hosts moving over by October 13th.

So the separate guest service fee is essentially going away.

And across all of this, Airbnb's take rate, meaning their revenue as a share of the gross booking value that they facilitate, has held around at about 13%. So if you rent a nice luxury house for the weekend for a,000 bucks, Airbnb is going to keep about $130 of that as revenue with the rest of that money going toward the hosts and to taxes. Yeah.

And that's really the beauty of Airbnb right there. You know, $130 made on a $1,000 booking without buying a bed or lifting a pinky to clean anything. I think that's a pretty good business model.

And just for a second, just think about what a hotel chain has to do to earn that kind of money. They have to own the property or they have to lease it from someone else. They have to have a welcome staff.

They need to have a cleaning staff. They need to pay for all of the cleaning supplies and deal with the utilities and elevators and all that fun stuff. Additionally, when a room is vacant, they still have to pay their staff to work whether the hotel's at 100% capacity, 50% capacity, 25% capacity.

So on Airbnb, the hosts take care of all those separately from Airbnb. And that means that Airbnb is a pretty capital-like business. So Airbnb barely takes any capital to run with capex making just 27% of the revenue.

Now with them spending hardly anything on capex though, where are the bulk of their expenses coming from? >> So they have a few big buckets. You've got payment processing, customer support, and then these trust and safety programs like air cover.

And so what air cover does is it helps protects the guests in host sort of acting as an insurance coverage. And then they have to pay their engineers as well to build their app and maintain it.

And then they also have to spend a certain amount of money on acquiring customers, especially as they push deeper into new markets beyond the US.

And I just have to say I love the Airbnb commercials on TV. And maybe it's because I'm I'm a shareholder and I have my own biases. I'm always excited to see them. They just look so beautifully done.

It's such a great uh design and marketing team at Airbnb. And so yeah, I think marketing is really an interesting area of differentiation for them.

Beyond the quality of the ads, what's interesting is that during co they shut off most of their performance marketing to save cash. And so they actually still had roughly 90% of their total traffic return.

So they still get about 90% of current customers coming directly from their platform or through unpaid channels. And this is really a big competitive advantage for them versus a company like Booking.com which reportedly spends somewhere around 5 to7 billion dollars per year on advertising you know namely on Google to get clicks to their website. and they're spending a much higher percentage of their revenues on acquiring customers through paid marketing.

>> Yeah. And Sean, I think I would echo your points on Airbnb's advertisements. They're they're just incredibly done. I think as just a general design services, just Airbnb, they just have it.

And if you compare it with some of their competitors, it's really hard to say that their competitors are doing a better job of it. And it's hard to say why Airbnb has it, but they just do. And I think it is a true competitive advantage.

So getting back to that point there just on how little percentage of revenue Airbnb has to spend compared to some of its competitors. So in 2025 they just spend about 15th of their revenue on marketing expenses which is obviously very very low compared to you know a third for Booking. com and about half for Expedia.

So I think that gives them the ability to acquire customers for a much cheaper price and then they can just spend money elsewhere such as you know making their app more and more beautiful.

And so I think I can really appreciate how nice, you know, outside of advertisements, just the Airbnb platform, if you go to airbnb. com or if you use their app, and I mean, if you compare it with Booking.com or Expedia, they look pretty much the exact same.

I mean, if you took out some of the branding or the colors and you showed them both to me, I probably wouldn't know which one has a difference. Whereas Airbnb, it's very clear that when you're on the Airbnb app, it just it looks really good.

And they do a very, very good job of explaining what they're doing. And I'm not a shareholder, but I'm just coming as a customer. I just think that Airbnb has a very, very good product.

Now, there's another interesting part of Airbnb that I think is worth discussing here, and that's that it has a float, which is kind of surprising for a business that's not in insurance.

So, I'm not going to try and make it out like this is Bergkshire's insurance float worth billions and billions of dollars. So, if we're using a Buffett style reference, it's probably closer to one of his more historical investments in blue chip stamps.

So, Blue Chip stamps operated as kind of an early version of a customer loyalty program where a retailer would purchase these physical trading stamps up front and then they would hand them out to shoppers based on how much money they spent.

Shoppers would then collect those stamps, put them in books, and they could later redeem them for merchandise from a catalog. But there was a catch that Buffett really liked here, and that was that there was a lag time between the sales of the stamps and then when they were redeemed.

And to make things even better, many stamps were either just lost or never redeemed. And that lag provided Blue Chip with this really nice float that it could then be used to invest, turning that cash on the balance sheet into interest- free cash that they could then invest and make a higher and higher return from.

Now, circling back to Airbnb, when someone buys something like that gift card that Sean got for his wedding present, Airbnb gets that cash upfront, but the gift card won't be redeemed until a later date.

Or when a guest is maybe planning a trip, they might pay months in advance. That means the cash can then be invested into things like short-term bonds. And we'll touch more on this a little bit later, but that interest income has fluctuated a bit lately, but it is still producing hundreds of millions of dollars worth of income for Airbnb.

So, it's pretty meaningful. And I do treat that part of the business though as really being as bonus. It's not a core revenue generator.

And so, the core business still really comes down to their homes and to a lesser extent the experiences that they're able to offer. So in May 2025, after my initial pitch of the company, they actually relaunched experiences and added something called services, which basically allows you to do everything from, you know, booking a private chef to a massage or even photographer right inside the app.

And as of this last quarter, they added 1,000 new experiences, which increased the supply of experiences available to book by over 80% year-over-year. Yeah, it's pretty impressive.

And I think just to boil all this down, Airbnb is kind of a toll booth on travel. You know, they kind of act here as an intermediary between the hosts and the guests. And they have that take rate again of about 13%.

And because of the Airbnb brand, they don't need to just spend that much money on marketing simply because users will default to using their app over competitors, Sean and myself included.

And I know I personally prefer Airbnb's app to booking.com or Expedia. And if I wanted to book an alternative accommodation, I'm going to instantly default to using Airbnb over either of those two competitors simply because the app just offers a much better experience.

So since Airbnb doesn't have to spend so much money on advertising, they then get to spend that money elsewhere. This allows them to continue improving their service, growing their network, and then just getting those incredible network benefits that investors seem to love.

Now, on top of that, because of their business model, they also get a lot of these prepayment which they can invest for a short duration, but you know, still produce some income.

Maybe it's not as meaningful, of course, as the core business, but it's a nice little addition.

So, you know, I think now we're kind of all up to speed on Airbnb's business model. So, let's see how your original thesis held up, Sean. >> Yeah. Yeah. Happy to dive into that a little bit.

I I will say that so far the stock has clearly worked out pretty well for us. And, you know, Airbnb, as you mentioned, is the second largest position in our intrinsic value portfolio.

And the main reason for that is we already had made it a pretty big holding. and then it gained over 33% above our average cost basis since then. But as we know when it comes to investing a stock working or not working does not always mean the business is working or not or at least that intrinsic value is mapped on perfectly to the stock price.

And so if we were to try and use like maybe a scorecard and assess some of my assumptions, I would highlight kind of the the following levers. So firstly, gross booking volume.

I assume this would grow at a low double-digit rate for about five years. And so far, they seem to be on on very much on track with that. And on the second point, I talked about their take rate, which I assumed would continue to increase over time due to sponsored listings, even though that is now something in hindsight that they have not really tapped yet.

And then thirdly was this idea of them having further margin expansion as those gross bookings and that higher take rate kicked in to spread growing revenues over the same fixed costs base.

Yeah. And I think Airbnb has done very very well on your first assumption. You know gross booking volume since the last quarter of 2024 has compounded at 34%. So you just nailed that assumption. So for the

So the take rate, as you mentioned there, Sean, hasn't really moved that much. Sean did mention that the increase in take rate would be marginally higher. So I feel we can't really judge him on this quite yet, but you know, as of the second quarter of 2026, the take rate was about 13.2%.

So this is a slight decrease from the previous number, but you know, not by very much.

And I think part of the thesis was that Airbnb would launch ads and as Sean mentioned already there, it hasn't happened yet. So that's kind of a missing growth lever which could help impact their take rate in the coming years.

And then for margin expansion, this one was a little tougher to wrap my head around and hopefully maybe you can clear these things up a little for me. So it looks like their operating margin on a quarterly basis fluctuated quite a bit.

So I would say you are looking for the quarter overquarter margins to be higher and higher and not expect these to rise up in kind of a straight line. So if you look at the last two quarters, they are higher versus the previous year's quarters, which is clearly a good thing.

Just to go back to that point on take rates too quickly, you know, when we talk about advertising and advertising improving take rates, I think it's important to clarify that, you know, we're not talking about banner ads for other types of products being shown in the Airbnb app, similar to the types of advertising that Uber has.

We're talking about sponsored listings in particular.

And again, it just feels like really a no-brainer or lowhanging fruit where if I were to input three-bedroom Airbnbs in Hawaii, right, on this certain set of dates that basically hosts in that area could bid on those keywords to have their property ranked first in the recommendations algorithm.

And so that to me is sort of the opportunity that Airbnb could pretty easily tap. And I think we'll talk a bit more probably about why maybe they haven't.

But overall, I think it's actually been pretty impressive that despite geopolitical uncertainty globally and elevated oil costs feeding into especially much higher flight costs, but just also, you know, higher inflation overall, that gross booking volumes have been able to keep on compounding pretty steadily.

And so, a more interconnected world is is a good thing for Airbnb. And so, even though there have been some headwinds on that front, I think it's validating to see that their business model has continued to work.

And with all that said, how about we we spend a little bit more time on that take rate compression point. And as mentioned, the big question was in ads. And it looks like that whole ads opportunity is just taking a lot longer than expected.

And so ads for sponsored listings have not been actually discussed at all in the last two earnings calls. So I have a little less conviction that we'll see them soon, but it's still a lever they can eventually pull, I'm sure.

Yeah, I think so. So, I went back and looked at some of their latest earnings calls in their presentations, and it doesn't really look like ads have been discussed at all in the past few quarters.

I don't think they've even fielded any questions regarding them either.

So, in their Q4 2025 earnings call, they were asked about ads and how AI search was impacting part of the business. And here's what Brian Chesy had to say.

>> Yeah. Yeah. And then on the um AI search and how would it impact sponsor listings, you know, I've been asked uh you know quite a few earning calls about sponsor listings and one of the things that made really clear um with the after launch to checkp was that traditional search was going to become essentially conversational AI search and that what we wanted to do is really design AI search really see how that works and then if we are going to do fontal listings we design that ad unit in that form factor.

Um so we're focused first and foremost on the most perishable opportunity which is AI search. Actually funny enough um we are doing test as we speak. So AI search is live so a very small percent of traffic right now.

Um we're doing a lot of experimentation. The way we do things with AI is much more rapid iteration not big launches. And over time we're going to be experimenting with making AI search more conversational integrating it into more the trip.

And eventually we will be looking at sponsor listings as a result of that. But we want to first nail AI search.

What feels like a really classic answer from Chesy and you know he's basically saying that they were testing it out. But with there being really no mentions of it more recently.

It's just really hard to say whether they have sheld the idea or if they have plans for maybe some kind of grand unveiling that they're just keeping under wraps.

And while I felt it seemed like pretty lowhanging fruit to just go after sponsored listings, perhaps I was wrong in assuming that we would see them sooner than has happened in reality.

And for Airbnb though to be a decent investment for us, it clearly never depended entirely on the exact timing of them leaning into ads. But it was more about recognizing that it could be a big business for them down the road amongst all of their other opportunities to sort of show why generally I feel that their growth runway is not at risk of running out of space anytime soon.

And since Airbnb is is really quite famous for having an almost flawless user interface, as we've both attested to now, perhaps they feel like maybe they haven't quite figured out how to integrate sponsored listings into their current setup without subtracting from the customer experience even marginally, right?

Yeah, I think that makes a lot of sense. I think the downside to the initial thesis is that the take rate lever which you know maybe was expected to continue rising it's just been delayed a little bit and kind of to your point there you know it's not integral I think there's tons of other points parts of this business that are growing where even if they don't have that part of the business take off here in the next year or two it's not like the thesis is broken

but I will say you know if they can't rely on getting some of that extra revenue from these sponsor listings to help increase their take rate you know we're just maybe going to see a little more stagnation just on that general take rate number which somewhat changes the risk profile.

I mean not really. I don't think it makes the business more risky but maybe it doesn't decrease the risk of that because obviously if that number were to go up without necessarily making the customer experience any worse and while not bothering the people hosting it would probably be a really really good thing to have that but we'll see how ends up happening.

So if we compare the current quarter's take rate to prior years it's dropped a little bit from that kind of 13.6% 6% in 2024 and then in 2025 it was kind of the first year dropped more than the year immediately after COVID which I would say was kind of an outlier year.

and part of the weakness of the sponsored listings kind of stems from the role that AI agents will play in finding places to book. For instance, if I were to use an AI agent and look for somewhere to stay, let's say in Manhattan, where I'll be heading back to shortly, the agent would not care one bit if the listing is sponsored or not.

It'll simply assess things like the ratings, reviews, price, and maybe the amenities.

But as of right now, the idea of running everything through an agent, especially shopping decisions, I think really remains an unproven concept despite the hype around it. And so perhaps there's another angle that Airbnb is seeing where it can improve its take rate without being overly disrupted by AI.

And so Airbnb, I think, has a long-term tailwind generally. So, I'm okay with them taking their time to figure out the best ways to position themselves. And so, there are also some other levers that I think they can pull as well that and that seem to be working well, even though they are still admittedly smaller revenue producers at the moment.

And so, for instance, their insurance business is only offered in 12 countries, but it's growing revenue by 60% year-over-year. So, even if that doesn't move the needle a ton, it does seem like something that could very much be scaled up and would further help with margins. And I find that to be pretty promising.

>> Yeah. So for any folks out there keeping score, I think gross booking value has been a clear win here. You know, take rate seems to be kind of a push for now. And then when it comes to margins, it's kind of hard to tell.

The margin profile has clearly improved. If you look back far enough, but since 2022, gross profit margin hasn't really moved while the share of revenue they keep as cash has kind of slipped a little bit.

But I think what made me feel a little bit better about Airbnb doesn't actually have anything to do with any of these three indicators. it was what actually happened to one of their biggest competitors.

when you compare that with Airbnb's growth of 10% year-over-year in nights and seats booked, it does appear that Airbnb is still taking market share from them.

>> Yeah, and I think that's a pretty nice tailwind for Airbnb and really just highlights Airbnb's advantages over Booking.com. So, if supply alone determines the winner of alternative accommodations, well, then yes, Booking.com is the winner in that race.

But with Airbnb growing that section of their business at a higher rate, you know, it's pretty hard not to tip your hat to Airbnb over Booking.com.

And then getting to another advantage that I think Airbnb would have over a business like Booking.com or even Expedia. I think that's just the different products that they tend to focus on.

But, you know, for people who are looking for a house, well, then chances are I'm going to use Airbnb and so is the general market. Although, I will say I have used some verbos as well.

And one stat that I found really impressive for Airbnb was just the record number of bedroom nights that have been booked over the last year. So, bedroom nights multiply nights booked by bedroom count.

And this is growing faster than just the nights and seats booked. And this actually shows that customers are utilizing larger and larger houses more and more frequently.

And if I think back to my trip with my wife and son in Oregon, yes, we probably could have gotten away with staying in a hotel room for just the three of us. But if we'd brought the grandparents along, you know, a hotel means booking additional rooms on different floors and maybe just eating crappy buffet style breakfast, which isn't really that personal.

So on Airbnb, you get one house, one kitchen, and everyone around the same table. That's an experience that I personally find myself increasingly drawn to.

The group travel is really part of the original thesis that I think is still very defensible. Airbnb has done such a great job basically creating their own version of group travel that hotels just really cannot compete with.

The other advantage I'd mentioned too is trust, which I think is becoming increasingly important with this growing world of AI chat bots, right? Earlier this year, Chesy was asked about whether he thought AI chatbots would officially cut Airbnb from the booking process as a middleman.

His answer was simply, quote, "A chatbot does not have our 200 million verified identities or our 500 million proprietary reviews and it can't message the hosts, which 90% of our guests do."

So I think that whole part about the AI chatbot is really really interesting and it matters a lot. Having that kind of persontoperson connection is really, really important, especially in a service that is really important, especially to the quality of your trip.

So, I think that this whole part about having that human connection is kind of an underrated part of Airbnb's mode.

I think when most people think of a network, they think, you know, more hosts bring more guests and more guests bring more hosts. And I still think that's totally true, but there's some additional nuance to it that as well.

So, Chesy is describing more of an accumulated asset. So, every new night book adds another review, another verified identity, and another relationship between the guest and the host.

And I think that's a massive reason that I'm completely comfortable with walking my family into a stranger's house into a city or a town that I've never stepped foot in in the past.

When I first pitched Airbnb, about 70% of the listings on the platform were exclusive. many could only find them on Airbnb and they haven't really updated this number, but my assumption is that has probably not changed much.

Maybe it's dropped a little bit, but but definitely not a ton. And and most hosts are are regular people with just one property. They're not running a a multiplatform operation with fancy property management software or anything like that.

They just default to listing on the platform they're most familiar with, where the guests are, and that's much more often than not on Airbnb. So you can see the network effects of Airbnb's app work on really both the demand and the supply side.

Yeah. And I'll just play devil's advocate a little bit here because there is kind of a soft spot in the competitive advantage for Airbnb. That did really get me thinking. So theoretically hosts who list on multiple platforms use property management software and they run multiple units.

They tend to have the nicest and most consistent properties. But let's just say that they are the people who are also the most price sensitive. I think that's partly why Airbnb has been moving everyone to this 15.5% fixed fee.

So, if Airbnb were ever to get greedy, those operators could easily shift their businesses to something like Verbbo or with booking without really incurring any real switching cost penalty other than having, you know, one fewer listing.

So, I'd say that Airbnb's mode is probably stronger with guests and kind of the smaller hosts, but maybe most weakest with the professionals. Would you agree with that?

>> I would probably mostly agree with that. The professionals are the one group of hosts who can multihome without much friction. And their property management software really pushes the same listing to Airbnb, Verbbo, and booking with a few clicks.

So, their switching costs are very low. And if I'm running 30 units, I'm not going to be loyal to any particular platform. I'm loyal to whichever one fills my calendar on that day at the best net rate.

And you're right that the fee change is partly about keeping those operators happy.

The last earnings call, Airbnb CFO Ellie Mertz explained that a lot of API connected hosts, which are mostly professional property managers, were accidentally overpricing on Airbnb.

And just kind of quickly for anyone who doesn't know what API stands for, it's an abbreviation for application programming interface. And basically, you can imagine it as being like a waiter at a restaurant that goes back and forth from taking your restaurant to the kitchen with the kitchen sort of being a metaphor for the computer server that's holding the data you're looking for.

And so anyways, for API connected hosts on Airbnb, this basically allows them to set one price across every platform that they list their property on and then Airbnb's guest fee gets stacked on top at checkout.

And so actually the same home was looking more expensive on Airbnb than on Verbbo or Booking. And under the single fee model, the price the host sets is the price that guests see.

And since Airbnb's take rate has stayed roughly flat, this isn't a squeeze on the professionals. It's just Airbnb making it easier for them to compete on its own platform.

But I think I would probably push back a little bit on the idea that the moat is weak with professionals. What keeps them on Airbnb isn't the supply side, but it's the robustness of the demand.

And a property manager can pull their listings off of Airbnb tomorrow, but they can't take Airbnb's guests with them. So, the real question is whether guests are loyal to Airbnb.

And I think that's where the moat is and is actually getting stronger over time.

And there's some interesting data about this, too. In the second quarter, 64% of all nights were booked through the Airbnb app, up from 59% a year ago. and nights booked on the app grew 23% year-over-year compared to 10% growth in total nights and seats booked.

So app bookings are growing twice as fast as the business overall. And someone who opens the Airbnb app to plan a trip isn't comparison shopping on Google typically. They're going straight to Airbnb.

And as long as that's where guests start their vacation planning journey, the professionals have every reason to stay, even if they're listed elsewhere, too.

Yeah, and this improvement in kind of the use of their app kind of confused me when I compared it with their financials. So, if Airbnb's mode is still strong and growth appears to be more or less likely on track with your original thesis, then why are the operating cash flows really budging?

If if I were to judge the business just quantitatively, I'd assume there'd be some pretty big problems here. So, I really wanted to dig into what they were.

>> Yeah, I mean, I don't think anything on the business side has suffered too much. So, maybe you can take us through what you found or what you're referring to.

>> Yeah. So, while the numbers haven't been as impressive as I might have hoped, I'm not sure it's really a real signal of anything broken inside of the business. So, earlier in today's episode, I mentioned that revenue has been growing more than twice as fast as cash from operations just since the year of 2024.

And there are a few reasons for this. So, the first reason is that they've simply been spending more money over the last few years. So, growth in expenses like sales and marketing and product development from new hires has grown a little bit faster than revenue, which has caused some of that margin compression that I think we've seen. and it shouldn't really come as all that much of a surprise.

So in a management call in early 2025, they told the market that their adjusted EBA margins would likely be a little bit lower just to fuel their next leg of growth.

So I also spoke about the investment income from their float a little bit earlier and this figure has dipped a little bit this year as well. So interest rates have just started to go up after a period of them falling.

So we should probably see this number to start creeping up again sometime in the future. But interest rates of course are completely out of their control. So that part of the business will always have some sort of embedded volatility inside of it.

But what they can control to a higher degree is just how much funds are being held on behalf of their customers. And that has increased from 7 billion at the end of 2025 to over 12 billion by the end of Q2 this year.

So I think they're doing a pretty good job on this.

Well, as for the increased spending, I'm really glad to see them investing back into the product and customer acquisitions. So really no concerns for me on that front. And since Brian Chesy has talked a lot about the benefits of AI and streamlining both the customer experience and internal efficiencies, I would eventually like to see AI increasing their productivity to get more out of their workforce without hiring more people by, for example, figuring out how to maybe automate much of the customer service experience.

But I also don't want to see them doing more harm than good by being overly keen to adopt AI, especially with something as sensitive as customer service. So there's very much a juggling act to it.

And and one of the potential tailwinds that they've introduced now is a reserve now, pay later function. And so this is an area of the business that I didn't even have a chance to mention in my original pitch because it didn't exist. and it was launched in mid 2025 and offered internationally starting in early 2026.

But it's also has some negative effects on cash flow because if customers are paying later, that reduces the amount of float that Airbnb is holding and earning interest on which explains why their interest income has probably fallen even though interest rates have risen.

But it is really just a great feature from a customer perspective. And so I think the the net benefit will be clear over time.

>> Yeah, it's really a cool feature. So I'm sure many listeners have at least heard of something like buy now pay later. It's an offering that customers are seeing more and more across multiple apps and industries.

So Airbnb basically offers this to its customers just to allow for more flexibility in its booking. This means customers who may not have access to funds at a specific time can still book a room into the future. or if maybe they just want to defer payment to a later date, they can then also book further and further in advance.

So, this feature shows up on Airbnb's balance sheet, just not maybe in the exact way that you'd expect. So, unearned fees, which is the service fee that Airbnb collects before your stay, jumped about 60% this year to $2.8 billion.

Now, that sounds great, but the big jump is definitely seasonal. It basically happens every spring as people book their summer trips. So, the better comparison to look at is June to June.

And on that basis, unearned fees were basically flat, even though bookings grew at 18%. So that gap is a reserve now pay later system at work because the guests can book without paying anything.

The booking counts, but Airbnb doesn't record the fee until the money actually comes in. And you can see that effect on the cash flow statement as well. And it does mess with their free cash flows a bit.

But overall, I would say nothing is actually being lost here. the cash is arriving closer to the booking date rather than months in advance. And that matters for Airbnb because collecting cash before delivering the service had historically always been part of the business model.

So every booking that moves to pay later is a little less potential float sitting on their balance sheet. But again, if that ends up, you know, driving more bookings because people feel more comfortable booking things further out in advance, I think ultimately at least it kind of nets out or maybe slightly favors a net positive, right?

And then just looking at the income statement, the effect is a little more subtle. So Airbnb only books revenue when the guest actually checks in regardless of when they paid. So management says the feature is helping by encouraging users to book further in advance and has the added effect of lifting the average nightly rate.

So, I guess customers feel a little richer when they don't have to actually pay anything. The catch here, though, is in cancellations. Guests who haven't put money down are also more likely to cancel.

And Airbnb has definitely called this exact feature out. So, that means that bookings, which have been historically a pretty reliable preview of future revenue, are now maybe a little bit less reliable now.

So, I see this kind of as a trade. You know, Airbnb is giving up some of its cash timing and some certainty in exchange for even more bookings. So, as long as the cancellations stay manageable, I still think it's a reasonable trade, but it's definitely a number that I'll be watching more closely over the next few quarters and years.

Well, >> how about we uh circle this all back into talking about one of your favorite topics, Kyle? Capital efficiency. We know that Airbnb has had a few issues over the past couple years, but overall, I don't think there's anything too concerning from my vantage point.

And if anything, the money spent on improving the business should result in continued growth. I think the ROIs on that spending is very attractive. But how about you tell me more about the return on invested capital because it's not really an area that I spent a ton of time detailing when I first looked at the company.

Yeah, and I assume you probably didn't discuss it because the numbers really don't have much of a use case. So, let me expand on that here. So, Airbnb holds a lot of customer cash as both of us just discussed and it needs very little money tied to continue running the business.

So when you add it all up, the invested capital figure you normally divide by actually goes negative. And that means that the return on invested capital number just doesn't work.

So it's like trying to calculate the return on a lemonade stand where your customer paid you in advance for the table, the cups, the lemon, the sugar, the water, and the ice all up front.

So you never actually put your own money in. So there's really nothing to measure that return against.

So perhaps the better number though would be return on equity. So this number currently sits at about 35%. So it's really really strong. I think this just speaks to the fact that Airbnb is a compounder and if they can continue to grow their equity base through reinvestment, they should be able to continue compounding for many many more years to come.

>> I think that was a big part of it and you know ROIC is really meant to answer one question and how much capital does a business have to tie up to generate its profits and so for a railroad or a retailer that is a really critical question and ROIC is very helpful but for Airbnb the answer is close to nothing.

So the hosts own the homes. Most guests pay before they travel. And Airbnb holds that cash before paying out the host. So the business is largely funded by its own customers. And once the denominator goes to zero or negative correspondingly, the ratio actually ends up really telling you very little.

And so that's why in my first pitch, I lean on free cash flow and operating margins instead as being better reflections of the business. And so those are the numbers where the capital light model they have actually kind of flexes its muscles a bit.

Right? Airbnb turned 38% of its revenue into free cash for the last year which is very very good without needing really much capital at all to grow. And so that just at a high level tells you more than any ROIC figure would.

And I'd add one caveat to the points on return on equity. Airbnb has been buying back so much stock that its equity base is actually shrinking when you repurchase stock. It shrinks the equity on the balance sheet.

That's just sort of an accounting law. And it fell from about $ 8.2 billion at the end of last year to 7.8 billion by June. And when equity shrinks, basically the ROE goes up even if the business itself doesn't improve.

So, I'd read that 35% as a sign of a very profitable business, but I wouldn't lean on it too heavily by itself.

You made a good point there as well regarding their reinvestment. The main idea being that they can't continue to reinvest into the business because there are only so many engineers that you can hire to improve the product.

And because of that, they've chosen to prioritize share buybacks. And I feel like that's for the most part the right call to have made because the stockbased compensation for Airbnb is very

Yeah, I think it's a really great thing to see the share count actually drifting down now over the last few years. But of course, stockbased compensation will continue to be a drag.

When you do need these incredibly talented software engineers, that's just really the price you have to pay. And unfortunately, it's just a really competitive market. And with the hyperscalers like Alphabet and Microsoft among many others, they're just always on the hunt for the best people out there and they're willing to pay.

So with Airbnb, you know, I guess you could call it the tech tax, that's something that I just don't really see going away anytime soon. And yes, they have economies of scale, but if they continue to scale, I'll assume they'll continue to add more and more talent over time, which means that the stockbased compensation number is more likely to go up over the next few years rather than going down.

Now, Sean mentioned in his first pitch that stockbased comp rose about 25% year-over-year in 2024. So, I thought this would be kind of an interesting exercise just to see what that number looks like today.

And the good news is that the increase seems to be leveling off. So, between 2025 and 2024, it increased by about 13%. But over the last 6 months, the increase is pretty much in line with this number as well. So, that's very promising.

I think we're really only just at the beginning of seeing operating leverage kick into effect for Airbnb. For three straight years, stockbased comp grew faster than revenue, creeping up from about 11% of revenue in 2022, but management has said the 2025 increase was driven simply by headcount growth.

So just hiring more people faster than the business was growing. But 2026 is the first year where that dynamic has flipped. And so in the first half, revenue grew 17% while stockbased comp grew about 15%.

And management has said both stockbased comp and headcount growth will slow this year. And so we are at the first real sign of operating leverage kicking in.

And the share count is the more encouraging part. Diluted shares are down about 5% in the last year alone. But I'd keep in mind that a big chunk of those buybacks are just mopping up the stockbased comp and its dilutive effects.

So last year they spent $3.8 billion on buybacks versus $1.6 billion in total stockbased comp. So roughly 40% of the buyback budget went toward just offsetting dilution before shareholders saw any net benefit.

And over the next five years, I'd expect the stockbased comp dollar figure to keep going up. And so like you said, the competition for engineers of course is not going away. But as a percentage of revenue, I think it will drift lower, maybe back toward 11%. if revenue keeps growing at these really impressive double-digit rates and AI allows them to maybe help keep the headcount flatter than they would have needed to in the past and with four to5 billion in annual free cash flow going largely to buybacks I'd expect share counts to keep shrinking by a few% a year

and if you take the view that operating cash flow or free cash flow should not add back stockbased compensation then it significantly changes their cash flow numbers stockbased comp in fiscal year 2025 made 13% of revenue.

And luckily though, from a debt perspective, it doesn't really affect how they service it.

But Airbnb does have a very nice balance sheet. though long-term debt was zero at the end of 2025 and is only $2.5 billion today. Now, much of that debt was used to pay down some older debt.

So, short-term debt is zero. Now, the current long-term debt is due to a few installments with maturity dates that go all the way out to 2036. But with all that cash on the balance sheet, I do wonder why they're bothering with adding any new debt.

No, it's a really good point. I think the answer really comes down to capital allocation and buybacks. Since they started being much more aggressive in buybacks, a lot of the cash they're generating from operations is being pumped into reducing the share count.

In just the last 12 months, they deployed 4.7 billion into buybacks with only $4.8 billion in cash flow generation. So the debt really just gives them a little more freedom to continue to increase the buybacks and try to lower their costs of capital and extend their debt maturities out further so they don't have to worry about removing cash from their buyback program to pay back debt.

And their profits cover their interest bill more than 90 times over. So the risk of them getting into trouble with their debt is incredibly low at this point.

Yeah, with that number you just shared, I mean, I'm not really concerned at all about Airbnb going out of business anytime soon. So, it's still definitely a market leader, and if that status changes, we will be sure to let the audience know.

But in that case, I think a sale to a competitor would probably make more sense than this business disappearing entirely. But I don't want to get too off track here because I think they are years and years away from anything like this happening, if it ever even does.

Now, another potential use for debt for a business like Airbnb would be in mergers and acquisitions. So, I know that M&A has always been kind of a small and opportunistic area for Airbnb, and I think this speaks a lot about how their founder and CEO, Brian Chesy, likes to run the company.

I really respect the fact that he just hasn't gone out there and done any big M&A deals just to, you know, build an empire. I think it really feels like he's been very, very focused on just taking more of a conservative approach and just building Airbnb up at a very reasonable pace.

So in 2024, he gave a talk to a room of founders at Y Combinator about how he specifically ran Airbnb after the pandemic. So the conventional advice that he'd received was simply to just go out, hire great people, and then give them room to do their job.

But he told the room that that advice nearly ruined Airbnb. So he actually just went out and did the exact opposite. He got back into the details. He reviewed product work himself, and he ran the company like a founder instead of a professional manager.

But Airbnb ended 2025 with about 8,200 employees, which is somewhere around the same number as before the pandemic. So, it does show that there was probably uh some extra heads at the company previously.

And the key really has been getting more out of each employee. So, even with the headcount essentially remaining the same, the revenue has more than doubled. So his ability to, you know, let's call it maybe micromanage at a key inflection point really helped Airbnb from at least a shareholders perspective.

And then even this year, management says they're still improving efficiency by cutting the time from idea to launch on key projects by up to 60%. All while launching nearly 80% more features than the previous year.

But Airbnb shows that you don't have to be decentralized for a business to prosper. I think if you're running a business incredibly efficiently like Airbnb or even apploving, then founder mode makes a lot of sense.

But it really all starts at the top with Chesky. So since 2021, Chesky's base salary has just been $1. It's great to see CEOs still doing things like this because it shows that they are focused on a whole lot more than just showing up for a paycheck clearly, but they're really there to create shareholder value, not just for everybody else, but right usually you only would do this if you have significant skin in the game.

And sort of on that point, speaking of alignment, I mean, Chesy still owns a very large stake in the business. So he has a lot of skin in the game and he's really working for himself as much as he is working for everybody.

And you know it's harder than you'd think to actually specifically estimate his economic stake because Airbnb has what feels like a dozen classes of shares. But based on my estimates, Chesy along with his two co-founders own over a quarter of Airbnb shares from an economic standpoint.

And then to ensure they control the business, the three of them also hold over 80% of the voting rights.

The fact that they have such a strong financial interest in Airbnb share price means that they're willing to go out there and pretty much do anything they can to improve the business.

And the buyback program is a great example as it meaningfully increased their own ownership stake as the share count went down as well. A manager for hire may not take the same strategy if they have just negligible ownership or zero or.1%.

So I think Chesky has a really nice compensation package as well. It's based purely on stock price appreciation which I generally do not like because far too often I see price targets that are just set far too low.

In that case, management is nearly guaranteed to make money even if the share price goes absolutely nowhere. But with Chesky's plan, he basically will get 1.2 million shares vested annually over a 10-year time period, which began a few years ago.

But in order for those options to vest, he has to meet certain market cap thresholds that range between $125 all the way up to $465. So in the 2026 proxy, it actually looks like he only met the first two hurdles, but basically from 2023 all the way to 2025, the hurdles were not met and he hasn't had those shares vest yet.

And this plan is super aggressive. So, the numbers here assume a 30% annual return on the share price, which seems very difficult to do. Also of note, Chesky plans on donating the awards proceeds to charity.

I do agree it's aggressive and for the most part, I do like that too many CEO packages are set up so the executive just gets paid for showing up, gets a little participation trophy to the cost of shareholders.

And this is clearly not one of those situations. But any plan that pays out purely on the share price does create some temptations for management. If you're a CEO looking at a hurdle that's far above where the stock trades today, you might be tempted to swing for the fences with maybe a big acquisition or taking on a lot of debt to juice buybacks or chasing growth at the expense of profitability just to get the stock moving toward that target.

And that's actually not always a good thing for shareholders in the long run. at least it's not usually the spirit in which these stock targets are configured. So my view is is that it could encourage really unnecessary risk-taking, but so far it hasn't.

And if anything, Chesy has gone the other way. And so like you said, he's avoided big M&A. The balance sheet still has far more cash than debt, and he's been willing to accept slightly lower margins to reinvest into the business.

And that's really not how you would behave if you were trying to manage the company around a given stock price target.

And the plan also has a few guard rails, too. So, the hurdles are measured on a 60-day average. So, a short spike in the stock does not count toward meeting the target. And each tunch has its own eligibility date.

So, the later ones can't vest early no matter how high the stock goes. So you can't unlock the maximum target down the road just by having, you know, the stock do really well over the next 6 months.

And it's about lasting value creation. And then also the shares aren't delivered until 2 years after they vest. So there's sort of a a forced lag between when you actually earn the compensation and when the shares are delivered.

And so on top of that, the award is pretty small compared to the stake that Chesy already owns. So his biggest financial incentive is still to do what's in the best interest of the long-term value of the business and not just prioritizing hitting the next hurdle at all costs.

And outside of Chesy though, executives are incentivized based on a few different performance metrics, right? And they're actually pretty good. So they include things like nights and experience booked, revenue growth, and evida margins, as well as international nights booked.

Then they have a few more subjective measures such as booking conversion, trip quality, and customer service satisfaction. So in my view, I think there's a really good mix of both business specific performance metrics that should help continue to increase shareholder value.

So if they're booking more nights, booking more experiences, and doing it without spending a lot more money, well, you know, chances are executing going to own their bonuses. Yes.

But I also think shareholders are going to see value in the value of their share prices going up.

So the three founders have something like $22 billion of their net worth in the stock. So they're very very well aligned with making sure that Airbnb succeeds. And then in Chesy's case, even though his options have invested over the last four years, I think it's just great that he hasn't asked for the package parameters to change so that he can actually be paid that bonus.

Yeah. And at a high level, I think it's one of the better incentive setups out there. The founder owns a huge stake. Chesky takes a dollar salary literally and his upside only kicks in if the stock goes up a lot, not a little bit.

And so the board actually simplified the executive bonus for 2026 too. And it's now based 75% on revenue growth and then 25% on adjusted EBIT margins and they dropped the more subjective measures which are the easiest ones to gain.

But you know my one quibble still is that adjusted EBITA portion of things. He's suggested ITA excludes stockbased compensation. So the executives are partly paid on a margin that ignores the cost of their own awards.

And then given everything we've said about stockbased compensation, I would love to see something like free cash flow per share in there since the per share part captures the effects of dilution, right? An increased share count.

And so overall, the corporate governance is pretty good. And as a shareholder, I mean, none of this is keeping me up at night whatsoever. And so if I had to pick something that I was going to be more focused on, it would probably be AI.

And even though I think they are much less likely to be disrupted by some of the other companies we've talked about out there, I do think it raises some fundamental uncertainties around things for them.

Now, Airbnb has mostly avoided paying this tax simply because people will type in a location followed by Airbnb directly into search. But there's a chance, and again, we don't really know this for sure, but there is a chance that the next generation of travelers may start their trip differently.

I don't think it's inconceivable to think maybe my son for instance when he's 20 years old and wants to go traveling with some friends maybe he'll just ask Chachi Bet or Claude where to stay and then have an AI agent that looks at the starting point not Google and not Airbnb.

So when you think of the business models of Airbnb booking or Expedia, whoever kind of owns the starting point is the one that gets to charge the rent. And luckily for Airbnb, they for the most part own the starting point compared to a lot of their competitors.

>> Yeah. the AI angle probably poses a risk to Airbnb's ability to acquire customers at a much lower price than competitors which has been an advantage for them previously.

And so if Airbnb at some point has to pay open AAI or claude to divert customers to them and sort of their supply and inventory has has been commoditized to some extent by a gentic search that would dramatically weaken their position from where they are today where most users are directly coming from their own app or search for Airbnb directly on Google by name.

And so at this point, we're four years past the release of Chad Tribute. And still roughly 2/3 of nights booked are booked within their Airbnb app. And that share, as mentioned earlier, is actually only continuing to rise.

And so the more bookings that flow through the app, the less Airbnb has to rely on on everyone else and the more autonomous they are.

And and while everyone is concerned about AI being a threat, it's actually been somewhat of a tailwind for Airbnb in some ways is they now have AI resolving 45% of customer service issues without any human needing to be involved.

And that is I think all around just improving the customer experience and then hopefully saving Airbnb on some costs as well.

>> Yeah, I pretty much agree with that. I think the whole AI is a disruptor to nearly every business I think was stretched to its absolute limits recently. And while I do think that AI will disrupt businesses, I think many investors kind of underestimate the positive effects that will have on many businesses, Airbnb kind of being included here.

So AI has made many software businesses better because they can go and get the same or even higher output out of fewer people. So to me, that's an incredible tailwind. And I think watching this just means that you watch the numbers that are based around the app.

If we're seeing more and more users using the app, well great. there's probably nothing to worry about. But if maybe it stalls or decreases, then that's a whole different conversation.

So the next risk that I'd highlight is regulation, which Sean you covered in quite a bit of detail in your pitch. So just to provide an update, New York City bans remain in place.

The EU implemented some short-term rental regulations earlier in 2026. The regulations add additional registration, data sharing requirements, as well as tax transparency. Then if you're looking in Spain, there's been a pretty big backlash against Airbnb.

So Barcelona, for instance, plans on completely banning short-term rentals in the residential area over the next few years.

So, you know, Airbnb does have some regulatory things that they have to worry about and work through, but it doesn't seem to be a gigantic headwind against their business. Yeah, I don't think my view has changed a ton, which is not to say that nothing has changed, but the way I see it is that regulation is a real risk sort of acutely because it's more of a series of local headwinds than a chronic threat to the whole business.

And so New York is really the best test case we have for that. Before the ban, the city was estimated to bring in about $85 million a year for Airbnb, which was barely 1% of revenue at the time.

And then short-term listings fell there because of regulations by more than 80% in that first year. And yet you would have struggled to find any sign of that impact in Airbnb's overall results.

And that is the benefit of having more than 9 million listings in over 220 countries. And the places that tend to crack down are big dense tourist cities where housing is already tight like New York, Barcelona, or Amsterdam.

But much of Airbnb's supply sits in places where short-term rentals don't cause the same backlash like beach towns or mountain cabins or just smaller cities that are more thirsty for those tourism dollars.

And where I would pay closer attention is if it starts to spread from individual cities to entire countries banning Airbnb and Spain would be one to watch there.

And so last year, the Spanish government ordered Airbnb to pull roughly 65,000 listings that didn't meet its rules. And the EU's new registration and data sharing rules also just took effect in May.

And so on their own, those rules mostly force hosts to register and give cities more data, which is, you know, not a terrible thing for Airbnb longterm, but they also give governments a much easier tool to enforce stricter limits generally.

So, it's definitely something to keep monitoring what's going on in Spain.

>> Yeah, absolutely. And then I think you also have to kind of think about the second order effects of banning short-term rentals. You know, chances are demand will continue to remain high and people will continue to visit these tourist destinations.

So, maybe it just means that people will end up just using Airbnbs in adjacent cities or maybe using more hotels inside of the city. But since Airbnb is now listing in hotels, I think they're actually pretty well protected from this on that front.

>> I agree with you on that. And really uh the only other major risk I'd want to mention for the sake of thoroughess for anybody who's thinking about Airbnb as an investment, the business of travel is a cyclical one and I don't think that will ever not be true.

It's always going to some extent come down to where we are in the economic cycle unless the cost of travel just comes to a point where it would be crazy not to travel. But you know until teleportation is developed I won't be holding my breath for that.

So until that comes in a recession, the reality is that people are more likely to take fewer trips and they're operating on tighter budgets of course. And if they do take a trip and it's not, you know, business travel, they may look for cheaper travel options.

And so how that impacts Airbnb is that their nights booked declines and then also the nightly rate. So the price per night that's booked would also likely fall at the same time as there's a decline in demand.

And what you get is there's a double whammy to the business.

And because Airbnb has a lot of fixed costs with things like engineers maintaining the app and their marketing expenses, that has been a great thing as revenues have grown because it's allowed margins to expand dramatically.

But it has the opposite effect when revenues sharply decline. And this is known as deleveraging with the point being that operating leverage works in both directions. And when things are going good, they're going really good.

And when they're going bad, they can go really bad.

Yeah, I mean it's certainly a risk, but I think luckily for Airbnb, it's a risk that's not just focused just on Airbnb. It's a risk that exists for all of its competitors as well.

And since they have this really nice balance sheet, and since they're generating, you know, billions of dollars in cash per year, I think they're pretty well set up to at least weather those kinds of storms if they eventually hit.

And the fact that they spend way less on advertising as well is another way that they're just more resilient versus some of their competitors.

Airbnb is such an interesting business because it shows how operating leverage can make just a huge difference. And I think that switch pretty much happened in 2021. And oddly enough, Airbnb's share price had its all-time high just while it was inflecting at this point.

So nearly 6 years later, their share price hasn't gotten quite back to that point, despite the revenue compounding and the business clearly being much more profitable now than it was then.

Part of this growth has been from arguably their largest growth lever, which was just geographic expansion. Sean, when you first pitched Airbnb, you said that Airbnb only had deep penetration in about five countries.

You mentioned that if they could get countries like Brazil, Germany, or Japan to have similar penetration rates to my home country of Canada, that could easily be worth tens of billions of dollars.

>> It's something I'm really excited about that does seem to be working out. Expansion markets overall are growing at double the rate in terms of nights booked versus these more traditional core markets.

And so, in the latest quarter, Brazil grew by over 30% year-over-year, which is incredible. And perhaps even more impressive is that firsttime bookers in Brazil increased by 40% over the same period.

And so in Japan they saw high teens growth year-over-year, which is an added tailwind. But maybe the best geographic growth lever is the one I didn't expect. India in India growth accelerated phenomenally to 60% year-over-year.

>> Yeah, India is the country that really jumped out to me when looking at their geographic performance in their shareholder letter. It's a country with nearly 1.5 billion people which is just a massive massive number.

But I think the real tailwind is just how the demographics of that country are continuing to change and improve.

So I'm looking at a chart from macro trends right now and the GDP per capita growth has been explosive especially since the early 2000s. So what this means is that more Indians will have more disposable income to do things like travel.

And if even a small number of them begin using Airbnb in India, well, that's a market that could provide a massive tailwind for honestly multiple decades. And as the numbers show, it's getting a lot of traction.

So, what I like most about these expansion markets is that Airbnb, you know, they don't really have to deliver a brand new product. It's the same app, it's the same model, it's the same take rate, just in different countries.

Sure, there may be some differences and subtle nuances in the marketing, but they're not required to design or really innovate brand new products to enter a new large market. I think that's one of the best growth levers pretty much any business can have.

One thing worth clarifying on those country numbers is that Airbnb reports them on an origin basis, meaning based on where the guest lives, not necessarily where they're staying.

So when India grows 60%, that's Indians booking more trips on Airbnbs either home or abroad. And that's exactly what you want to see because it means Airbnb is winning over new customers in those countries and not just adding listings there.

And it also add a little nuance to the same product point. The core product is the same, but a lot of the wins in these markets have come from small local tweaks. So in Brazil and Mexico, guests can now pay in interest free installments, which is how a lot of people in those countries are used to paying for bigger purchases.

And then they've been running local marketing campaigns on a country bycountry basis rather than one global ad campaign. And so it's not exactly a brand new product, but it's not pure copy and paste either.

And the other thing I'd point out is that it's not just the expansion markets that are carrying a lot of the growth. Latin America grew about 20% in the latest quarter and Asia Pacific grew in the high teens, but North America also had its best growth in three years, and Europe accelerated, too.

So that matters because a majority of Airbnb's business is so concentrated in those five core markets. And the expansion markets are growing twice as fast. But of course, that's off a much smaller base.

So it will take them years to catch up before they really move the overall growth rate in a big way. But still impressive nevertheless. And if the core markets can keep growing in the high single digits while those newer markets compound on top, that's just a really nice setup for investors.

And another growth lever that I want to mention is hotels, which we touched on a little bit earlier. And hotel nights booked are still just a singledigit share of total nights booked for the company, but they are growing three times as fast as home bookings in the last quarter.

And it's a bit funny to think of booking a hotel on Airbnb, but actually my wife and I that when we just booked our trip to Vegas to go to the sphere, we ended up booking not a traditional Airbnb, but a hotel through Airbnb.

And what's promising is that 35% of firsttime hotel guests on Airbnb then end up going to purchase a home through Airbnb within a year. And they did this very intentionally, I think, with a price match guarantee and by offering Airbnb credits that could be then used for future bookings.

And so that's really the funnel that Airbnb is using to pull people in that are, you know, looking for more traditional experiences and then encouraging them to try something new with Airbnb.

And so while the the hotel growth isn't as impressive as growth in the international markets, I do think it's really functioning as a customer acquisition channel that can be funneled throughout the company and and someone who may have never tried staying at a home.

They book a hotel on Airbnb. They gain trust with the brand. They get some credits that can be used toward future booking and then they come back again for a house. That's basically the idea.

Yeah, I think it's a really really clever way to get new customers. So I have to tip my hat to them. Airbnb basically figured that hotels have this kind of empty inventory and let's just find a way to fill that for the hotels while also incentivizing these new customers to increase brand awareness of their core product.

And I'd say this strategy as well as geographic expansion and a few of their other ones have also worked out really really well. So because firsttime Bookers grew by 11% the fastest growth rate that Airbnb has had in the last four years.

I think it's a really strong signal that what Airbnb is doing around just finding these new customers is working really really well.

And once you are in the Airbnb ecosystem, it's really hard to get out simply because in my view at least, the product is just a lot better than their competitors or even doing a Google search.

Yeah, I agree with you there. And Airbnb's ability to layer in experiences and services into trips has been an and still is one of the things I'm most excited about. Airbnb grew its supply by nearly 80% over the last year.

Like I mentioned earlier for experiences. And then seats booked are accelerating both year-over-year and quarter over quarter.

But the stata I find most interesting is that at the end of the last year almost half of experience bookings weren't attached to a stay. So people are coming to Airbnb just to book an experience which creates another customer acquisition channel similar to the hotels.

And on the services side, they've gone beyond just private chefs and massages. And they've added more practical services like grocery delivery, car rentals, airport pickups, luggage storage, and even day passes to amenities at high-end hotels.

And each one is just a small add-on, but together they make using an Airbnb something that you want to do throughout a trip, not just when you book, when you're staying.

Airbnb set aside 200 to $250 million last year to get these new businesses off the ground. And Chesy himself describes it as a multi-year effort that's going to get rolled out one city at a time.

So I see it as a long-term option rather than something that really moves the numbers in the next 12 to 18 months.

I also think of insurance similarly. It's a really small bet, but guest travel insurance revenue grew 60% last quarter, and they've started piloting new types of insurance products for both guests and hosts.

And with all these growth drivers running pretty well, you can see why management has guided to a mid- teens revenue growth. After researching this episode, you know, my main conclusion is that I'm not nearly as concerned with the slower growth rates in 2024 and 2025.

I think before researching, I was a lot more focused on why this business had slowed down to that singledigit growth. But with all the growth levers they currently have and with all the growth rebounding here in the last few quarters back up to the mid- teens, I think the thesis is quite well on track.

On a pretty high level, I would say the business is definitely in better shape than when I first pitched it. And the biggest positive surprise has been the reaceleration in gross bookings, especially in its core markets.

revenue grew 10% last year. And after growing 18% and 17% in the first two quarters of this year, management now expects at least mid- teens growth for the full year, which is really great.

And so far, AI has maybe been a tailwind, but certainly not a headwind. And the biggest negative surprise though is that the faster growth has not fully flowed through to margins yet, which makes sense because they're investing to drive that growth.

Operating margin actually slipped from 23% in 2024 to about 21% last year. And stockbased compensation has kept climbing too. And the last couple of quarters though have been better, but still margin expansion is taking longer than I expected.

And then on take rates, this is held around 13%. Rather than rising like I'd assumed after they've changed the way that they apply their fees. And I still think the missing piece here is sponsored listings.

And so Chesy has called ads a pretty easy path to $1 billion in incremental high margin revenue for them. But he's clearly decided to nail AI first and design an ad format around that.

So given how quickly search is changing, I do think that is the right call, even if it means waiting a bit longer than I'd hoped to see how people are are still searching for things in 2 or 3 years from now.

And in terms of the intrinsic value of the company, my original model put Airbnb's intrinsic value at about $150 a share. And so using an enterprise value to EBIT approach with an exit multiple in the low to mid20s, that was how I came up with that valuation.

And with the stock trading in the mid to high 150s today, it caught up to that estimate. Uh and it took about a little over a year to do so. And that has been reflected in the share price gains that we've enjoyed.

And if I were going to update my model today, I would probably make two changes. And firstly, I'd have to reflect the take rate not having increased in the way I thought it would have and take that out of my base case probably.

And I would at least assume a flat take rate and then treat sponsored listings as maybe just pure upside in a bull case rather than being something to factor into my base case.

And then secondly, I think I'd be more patient on margin expansion since management is clearly choosing to reinvest right now. And so maybe you could have more aggressive assumptions on growth, but you're not going to be able to expect higher growth and higher margins at the same time.

And netting it all out, I don't think my intrinsic value estimate of the company has moved dramatically. Faster growth sort of roughly offsets the delay in the ads and the slower margin expansion.

But I still think it's a wonderful company that is operating very very well and the price is more than fair for shares in it.

So you mentioned that the share count would move and that SBC would be matched by share purchases kind of keeping the share count the exact same. But you know as we mentioned a little bit earlier if we look at the diluted share count since 2022 it's actually shrunk by nearly 3% a year.

And if they can continue buying back shares at prices that are below intrinsic value, then chances are the long-term value per share is actually going to be maybe even a little bit higher than what you mentioned.

So, we still own Airbnb and our intrinsic value portfolio at about a 13% waiting. And I still think that this business is quite compelling over the next few years, but you know, given the size of the position, I think my preference would be to just do the same strategy that we took with Alphabet, which was just in action.

I think just leaving the shares alone and letting the thesis play out is probably our best move here.

I'm a very satisfied shareholder and I I continue to have a lot of faith in Brian Chesy and and just as importantly I continue to absolutely love the product as a consumer and I don't see that changing because of AI agents or anything like that.

And so I see no reason to want to sell out of owning the business long term.