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Airbnb: total addressable market fantasies set travel company up for a fall

Airbnb Inc updates

Setting high expectations can mean leaving your audience underwhelmed by reality. On Thursday, Airbnb presented a set of quarterly results that blew past forecasts. Bookings exceeded both those of last year and 2019. Airbnb’s resilience in a pandemic that has hammered the travel industry is impressive. Yet shares fell 5 per cent in after-hours trading.

This dip is partly the result of worries about the impact of the highly infectious Delta variant. Rising cases are a reminder that recovery is not a done deal. Corporate travel in particular remains quiet. Overseas conferences do not yet offer a good enough reason to endure nose swabs and quarantines. Overall, Airbnb expects bookings for both overnight stays and experiences to be down on 2019 in the current quarter.

Yet Airbnb’s problem is not simply pandemic uncertainty but the fact that the company presents itself as poised for enormous growth. Look at the outrageous $3.4tn figure it put into its listing prospectus as its potential “total addressable market”. This was outsized even by the standards of the hyped-up tech sector. Palantir, which went public in the same year, put its TAM at $119bn. This was 7.5 times the size of the data analytics company’s equity value when it listed. Airbnb’s TAM dwarfs its market value by 72 times. 

Many of the assumptions made in the TAM calculation reveal Airbnb’s business plans. It has talked about the possibility of expanding from quick holiday lets into longer stays and suggests it might win the equivalent of 10 per cent of the global residential real estate market. In Experiences, the business used by tourists to book tours and other outings, Airbnb thinks its market can stretch to $1.4tn if it can convince locals to also use the platform. 

Gains in both markets are feasible. The trouble is that even before the pandemic its revenue growth had slowed for three consecutive years. Homestays are popular and travel demand has picked up but Airbnb’s optimistic hopes are a drag.

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