Uber (NYSE: UBER) and Airbnb (NASDAQ: ABNB) are two particular companies in the sense that they were the first to massively disrupt taxi and hotel activities respectively, creating two-sided marketplaces with strong competitive advantages. We were wondering which of the two has a stronger competitive gap, and whether either of them is a buy at current prices. We will explore this in this article and also talk about their valuations, growth and risks.
As with most marketplaces, Airbnb and Uber’s biggest competitive advantage is their network effect.
The more hosts that register with Airbnb, the more guests it will get, and the more guests that book through Airbnb, the more hosts it will get. Two-sided markets are very difficult to start, but once they have some momentum, it is even more difficult to reverse them. The same logic applies to Uber, where more drivers mean better service because you get a faster ride, which means more users, and therefore more drivers want to join the Uber platform.
In general, the network effect occurs when the value of a particular good or service increases to new and existing users as more customers use that good or service. The network effect is a virtuous circle that allows strong companies to become even stronger.
Airbnb and Uber benefit the most from the network effect because they have the largest networks, but their competitors also benefit to a lesser extent. In the case of Uber, its competitors DoorDash (DASH) in deliveries and Lyft (LYFT) in rides have also managed to achieve critical mass with their networks allowing them to benefit from this competitive advantage. In the case of Airbnb, all of its main competitors, Booking (BKNG), Expedia (EXPE) and Tripadvisor (TRIP) have also reached sufficient scale to benefit to some extent from the network effect. Huge volumes of booking transactions are executed through Booking and Expedia every year, making these platforms coveted distribution channels for travel providers like hotels and airlines. This reinforces the attractiveness of booking sites to travellers, thus triggering the virtuous circle. In the case of Tripadvisor, it has the most hotel reviews, so users go there to search for hotels, and the more users visit the site, the more new reviews are added.
Although the source of network effect moats is the most important for Airbnb and Uber, there are other important sources of competitive advantages for each. As innovators, pioneers and largest corresponding networks, their strong brands have become an important intangible asset. They’ve both become both a noun and a verb, with people saying things like “let’s take Uber to the party” and “let’s book an Airbnb for this vacation.” The fact that the two companies have become so well known reduces their sales and marketing costs because people are more likely to try them if they hear that others are using them as well. People also feel safer using well-known companies and are willing to pay a little more to ensure they are safe.
The third main source of competitive moats for Uber and Airbnb is switching costs. Switching costs are the one-time inconvenience or expense a customer incurs in switching from one product to another. Companies whose customers have high switching costs can charge higher prices without risking losing customers. Therefore, customers simply tend not to change, which gives these companies pricing power. Uber and Airbnb both have switching costs for users, such as downloading a new app and entering payment information if they want to switch to a competitor. These switching costs are not as high on the demand side of the market. Switching costs are greater on the supply side of the market, where someone with a 5-star rated property on Airbnb will be very hesitant to move to a new platform where they have to start earning reviews again from zero. While an owner can register on multiple platforms, this quickly becomes a hassle and calendar management becomes more complicated. This source of moats is less important to Uber because people only want to take a ride and don’t typically compare driver ratings when ordering a ride. Uber tries to increase switching costs for customers by offering a rewards program, trying to increase user loyalty and reduce price comparison.
Beyond the main sources of competitive advantage, there are a few additional nuances that make Uber and Airbnb better than average companies.
In the case of Uber, it enjoys the greatest international coverage. As a result, its customers are less likely to have to download a local app when traveling. This might make some users prefer Uber over Lyft if they travel often and don’t want to have multiple apps. Uber’s service also lends itself well to offering a subscription service to users who use its shopping or delivery apps very often. One of Uber’s weaknesses is that the network effect is especially important at the local level. If you don’t travel often, you’ll likely favor the ridesharing app with the most drivers in your city, even if Uber has the most drivers and coverage nationally and internationally.
Likewise, there are a few differentiating benefits that Airbnb achieves through its focus on entire properties rather than hotel rooms. This puts it ahead of competitors Booking, Expedia, and Tripadvisor when it comes to group travel and isolated destinations, as well as long-term stays.
Airbnb clearly has stronger margins, with impressive gross margins of around 80% compared to around 46% for Uber. Airbnb has also already achieved positive operating margins, while Uber continues to operate below break-even.
Both companies are growing dramatically, with Uber growing around 82% year-over-year and Airbnb around 78%. This moderated from the extremely high growth that was the result of the recovery from the Covid pandemic period.
Airbnb has a much stronger balance sheet, with net cash of around $6 billion, while Uber has net debt of around $5 billion.
Neither company is cheap, with both trading at very high forward EV/EBITDA multiples. Surprisingly, Uber is the most expensive despite lower profit margins and a weaker balance sheet. Investors may value loss-making delivery service separately from ride-sharing business.
Compared to its main competitors, Uber appears more expensive than Lyft but cheaper than DoorDash and JustEatTakeAway which is still not profitable on an adjusted EBITDA basis. As far as Lyft is concerned, this is a wide valuation gap, since Lyft trades around half the valuation of Uber.
In the case of Airbnb, it trades for significantly more than its top three competitors, at more than twice the forward EV/EBITDA ratio of Booking, and more than three times that of Expedia and Tripadvisor.
Airbnb has a stronger moat, and this is proven by its higher margins compared to Uber. Both companies enjoy competitive advantages, but we believe Airbnb has a much stronger competitive moat compared to Uber and most companies. That said, Airbnb is currently one of the most expensive companies out there.
Both companies have significant regulatory risks, and each has a specific risk for its business model. Contrary to what some investors believe, self-driving cars would be a disaster for Uber’s two-sided market, as competitors could simply buy a fleet of self-driving cars and launch a competing app. This would greatly weaken the network effect enjoyed by Uber. Deliveries are also an issue, as it has proven to be a hyper-competitive market with very low margins, and there are strong competitors like DoorDash.
Uber also has a relatively weak financial profile with an Altman Z score of just 1.59.
Airbnb’s main risk is regulatory, followed by its reputation. Should the company’s brand suffer due to controversy/scandal, this could lead to an opening for a competitor like Booking to significantly expand its home offerings. Airbnb has a high Altman score of 7.29 thanks to its high profit margins and strong balance sheet.
Uber and Airbnb are very interesting companies with strong competitive advantages. We believe Airbnb has a stronger competitive moat, which is reflected in its higher profit margins that rival those of SaaS software companies. Both companies are growing rapidly, but they are both very expensive in absolute terms and relative to their competitors. We recommend that you keep an eye on both, adding them to the watch list, hoping that at some point they will increase their valuations or undergo a correction in the share price that will make them attractive investments. It is important that investors also keep an eye on regulatory risks, which are important for both companies.