By Maggie Overfelt, CNBC.com
Airbnb is unusual among privately held start-ups in that it's already profitable.
The No. 1 company on the 2017 CNBC Disruptor 50 list has reportedly said it can reach $3 billion in profit by 2020. It was valued at $31 billion last year, meaning that only Marriott's $39 billion valuation is greater in the lodging industry.
But after forcing the biggest changes in travel since Priceline and Expedia, it's running out of easy room to grow against the lodging companies. To keep up its rapid growth, Airbnb needs to upend the entire travel experience.
Airbnb's recent $1 billion round of financing was huge, but also showed its lowest valuation step-up — a measure of valuation increase from financing round to round — in the history of the company. In its 2014 Series D, Airbnb's valuation increased at almost three times the rate of the median start-up at that stage. In its first quarter 2017 Series F, Airbnb's valuation increase was barely above the median rate, according to data from venture capital research firm PitchBook.
Dan Cook, a PitchBook senior analyst, said when growth stops accelerating and begins to level off, it's harder to maintain huge valuation step-ups.
"Airbnb supply is still growing aggressively, and there is a lot more demand today, but [hotel investors] were more freaked out in 2014 and 2015," said Jared Shojaian, leisure, gaming and lodging analyst at Wolfe Research.
Brian Chesky, co-founder and CEO of Airbnb
"They are not Amazon to retail," Shojaian said. "It won't destroy the hotel industry. Maybe hotels can't drive the same type of rate growth that they have had historically because of this new competitor, but who knows how big it will continue to get," he said.
That's why Airbnb CEO and co-founder Brian Chesky recently told Fortune magazine that its core Homes business will account for less than half of Airbnb's revenue someday. He also said that by 2021 the majority of Airbnb's offerings "will be the new things that we are doing as of 2017 on."
Flight booking is a tough market
Airbnb has hinted since last November about taking its travel touch to the online flight-booking space. That would put Airbnb in direct competition with Expedia and Priceline Group, the two largest players in the traditional online travel agency industry, where overall bookings grew 10 percent last year, to $62.5 billion, according to research firm Phocuswright.
In a March appearance at Oxford Union, Chesky said he wants Airbnb "to one day redefine how we fly." Then he added, "The funny thing about flying is, no matter how successful you are in life, you are reminded how much of a mere mortal you are, [so] that's another area we really want to invest in."
The flight-booking space is tough, with lower margins than hotel and car rentals, and airlines tightly controlling inventory. But it could be a natural stepping stone to the greater online travel agency market, where Airbnb can try to preserve its incredibly fast growth story as it pursues an eventual IPO.
"In the flight-booking area in general, the obvious [thing missing] is also one that plagues hotels, which is, everything is the same; there is no differentiator," said Douglas Quinby, senior vice president of research at Phocuswright. "The airlines have tried hard to differentiate by adding different types of fare bundles or services, but right now the shopping experience across airlines is commoditized and price-driven."
Big online travel agencies are moving in on Airbnb's turf as well. In the most recent quarter, Priceline's Booking.com offered roughly 650,000 "alternative lodging" properties — many which include multiple listings — an increase of more than 50 percent from a year before. Priceline's valuation of $89 billion is bigger than both Marriott and Airbnb combined.
Expedia said its alternative lodging subsidiary, HomeAway, experienced 30 percent growth in the most recent quarter. It has 1.4 million listings.
Airbnb is considering different options for breaking into the market, including acquiring an online travel agency.
"They bring their massive base of users to the arena — that's big," said Dennis Schaal, executive editor of Skift, an online hub for travel news and research. "They could bring a local flavor to flights, combining them with a stay at an Airbnb, but the flight business is hard. You have to build a customer service department, deal with canceled flights and rebooking passengers. Does Airbnb really want to get into that? It'll take their focus off their core business as well."
Experiences could be hard to scale
Airbnb is also tapping into the idea that travelers want a more unique experience than hopping a tour bus to the Eiffel Tower. Under its new Trips platform, Airbnb launched its Experiences initiative last year in 12 cities, allowing guests to take part in unusual events.
For instance, visitors to Miami can spend $120 to spend four hours learning about leatherworking, which includes lunch, wine and a hands-on workshop on stitching and soldering. Airbnb takes a 20 percent commission on each Experience.
While Experiences marks an easy extension of Airbnb's travel-like-a-local brand, analysts are unsure of how it can scale to ever become more than a single-digit share of the company's business.
"There is definitely a market for this authentic, local experience, but a fundamental problem is scaling this thing," said Phocuswright's Quinby.
"If I have a home, it's always there and I can rent it out, but if I'm a professional photographer and I want to make some extra money doing a photography tour of L.A., I have to take time out to do it; I can only scale so much unless I build a business or hire other photographers," Quinby said.
He added, "Once I start doing that, I'm no longer a peer-to-peer experience. I've become a tour company."
"Eight in 10 millennials say the best way to learn about a place is to live like the locals do, so we know there's a healthy market for these types of local-led immersions," said Andrea La Mesa, Airbnb's director of Trips. "Early indicators are that this could even surpass our Homes business. We're growing much faster than we did at a comparable point in the early days of Homes," La Mesa said.
Airbnb says 6,000 people have completed Experience submissions (40,000 have started the process). More than 800 hosts have met Airbnb requirements for the service, and the platform now has over 1,100 active Experiences available to book in 24 cities. More than half of the Experiences are under $200; the typical price paid for an Experience so far has been $91 per person.
Hotels are catching up
The hotel industry, with its millions of physical properties around the world, hasn't been as nimble as Airbnb to adapting to the millennial crowd. But it has played a good game of catch-up.
As an example, John Hach, senior industry analyst at TravelClick, pointed to Marriott placing timeshare units — a better match for Airbnb listings than hotel rooms — into its general inventory in markets like Orlando. "Hotels have done creative things," he said.
Morgan Housel, a partner at Collaborative Fund, which has invested in sharing-economy start-ups like Kickstarter and Lyft (but not Airbnb), said that "2016 was a great year for traditional hotels in terms of revenue per room, so much of their response is likely looking at what can happen in five to 10 years."
He added, "When you have something like Airbnb that has grown as quickly as it has, if you're a senior manager of a global hotel brand, you have to be looking at it, saying, 'What can I copy from these models and trends before [an Airbnb] catches up to us one way or another?'"
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