Airbnb, Inc.

A public recovery.

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At the beginning of this year Brian Chesky and his executive team were putting the final touches on Airbnb’s prospectus. The Y Combinator graduate had built a category changing business that upended an industry and changed the way we think about travel and accommodation. Airbnb became a verb, much like what Uber had become to riding in a taxi.

Meanwhile at a similar time the coronavirus had escaped China and made its way into south east Asia. Once it hit Singapore, Chesky began to rightfully worry. By March, much of the western world was in lockdown. Borders were closed and international travel plummeted overnight. Airbnb’s business went from being unstoppable, to finding itself in an existential crisis in a matter of weeks. And with that, the planned IPO was put on pause, and the business went into survival mode.

The impact of the pandemic on Airbnb is most evident in the bookings data. In February, 33 million bookings were made on the platform, with a little under 5 million bookings being altered or cancelled. Two months on in April, when the pandemic had truly taken hold of the west, monthly bookings fell by over 70% to less than 9 million, while cancellations and alterations doubled to over 9 million. There were more guests cancelling or delaying bookings than actually making new bookings on the platform, crippling the platform’s stream of revenue.

Monthly gross bookings on Airbnb. Source: Airbnb Inc. Form S-1

Now, only seven months on from that horror Easter period for Airbnb, and still without a vaccine in production, the business has reported a Q3 profit of $218 million and is weeks away from going public. It’s­­­ a truly remarkable effort. On Monday November 16 Airbnb published its S-1, a prospectus for potential investors and a requirement for Airbnb to list on the Nasdaq. Within the 350 pages we’re finally able to see the financial story behind Airbnb and form a view of whether the estimated $30 billion valuation appears fair value.

So how did Airbnb turn things around so quickly? Well, they made some brutally tough decisions. They let go of a quarter of their people, cut sales and marketing spend dramatically, and pivoted their strategy to focus on domestic stays, as come the northern hemisphere summer people were looking to escape cities and find new environments to work “from home”.

Over 1,800 staff were let go from Airbnb in the spring. One in every four employees, many of whom were based in San Francisco, finding themselves in a difficult job market as peers at similar companies like Uber and Lyft also made deep cuts into their payroll. No CEO enjoys making people redundant, and no doubt that will have weighed heavy on Chesky and is team.

In 2019 Airbnb spent $1.6 billion on sales and marketing, making this their biggest expenses line item. This was the obvious area to cut costs, and so they did by over 50%. The result is that now 91% of bookings come direct, without incurring paid online advertising costs. Chesky and the team were confident their brand was now strong enough that guests would find their way to Airbnb anyway, and the booking recovery seen in the summer proved that to be correct. This is an incredible luxury that few online platforms can expect to benefit from. The question now remains as to whether Airbnb will ramp up online acquisition spending following their IPO, or will they remain prudent on marketing spend?

Following the layoffs, Chesky directed his leaner team to divest themselves of new initiatives, and to double down on their core business of overnight stays. Airbnb re-designed its application to present users’ options within 500 miles of their home. If you live in London and go to the Airbnb app today, you are far more likely to be suggested places to stay in Cornwall or the Lake District rather than Paris or Rome. Working professionals sought space, and Airbnb made it incredibly easy to find properties that provided reliable WIFI and a backyard.

Gross nights and experiences booked, split by domestic and international. Source: Airbnb Inc. Form S-1

After a horror spring of cancellations, staff layoffs, and cost reductions, things started to turn around by the summer. By June, bookings only trailed 2019 levels by 30%, and remained 28% short of last year throughout the autumn quarter. Remarkably, Airbnb was profitable in the third quarter, although it should be said the business has yet to report a full year profit, with net aggregate losses exceeding $1 billion over the past five years. It requires a lot of venture capital to build a business of Airbnb’s scale in a single decade!

Meanwhile no less than 74 pages of the prospectus is dedicated to the calling out of risks to Airbnb’s ability to be successful long term. While this is a usual section of an IPO prospectus, Airbnb, much like Uber, face some unique challenges. Notably regulation, as cities continue to implement new laws that reduce Airbnb’s flexibility as a platform and increase governance and operations costs. The uncertainty of the pandemic also paints reasonable uncertainty over the whole travel sector in years to come. However, I’m bullish on Airbnb long term. Let me explain a few reasons why.

First, because Airbnb has built incredible scale. There are now 4 million hosts, with 7.4 million listings on the platform. That’s more supply than any hotel conglomerate on earth. While on the demand side, Airbnb boasts 54 million bookers and nearly 250 million total guests. This scale, along with its brand equity, is what has allowed the business to cut sales and marketing costs by over 50% in 2020, because guests will find their way directly to Airbnb without paid advertising. Equally Airbnb customers have brand loyalty, with Airbnb retaining nearly half the annual revenue of customers acquired five years ago. Airbnb does not need to pay to acquire those customers again, and yet those they won in 2014 continue to show up and contribute 40-50% of their 2014 revenue contribution each year.

Guest cohort revenue contribution, 2014-2018. Source: Airbnb Inc. Form S-1

The second reason is that Airbnb’s supply is unique. Many guests enjoy staying in an Airbnb over a hotel, particularly for longer stays, as it often comes with the quaint comfort of a home rather than a sterile hotel room. So while Airbnb is not without its competitors in online travel aggregation, such as Google and Booking.com, they have a high level of supply exclusivity, which creates a moat. This is something Uber now struggles with, as their drivers operate on many platforms, and are lured away with higher driver commission and riders are incentivised with discounts. I can order a car from Uber or Ola or Bolt and in all cases potentially get the same driver and car. The same can’t be said about Airbnb.   

And also, Airbnb has spread its density risk with broad geographical coverage. Last year 63% of Airbnb’s revenue came from outside the United States. This is in contrast with social media apps like Facebook and Twitter, who make the bulk of their revenue in America, and will be heavily impacted by any change to American laws. It is now easier to name the countries that Airbnb does not operate in, rather than those that it does. So as lockdowns are implemented in select countries, or city regulations change, Airbnb are impacted, but at a smaller percentage of overall revenue. Much like a diversified stock portfolio, rather than putting all your money in one company you spread the risk around.

It is by far a fait accompli for Airbnb though. Firstly, they will need to show financial discipline as revenue growth slows. In 2019 YOY revenue growth dipped under 30%, and naturally this trend will continue as the baseline grows, however operational costs in 2019 accelerated. 2020 is a forced experiment in running the business on lower sales and marketing budgets, and 25% less staff. It may be that Airbnb finds efficiencies through this period which they can sustain following a vaccine and when travel volume increases.

Results of operations, 2017 to 2020. Source: Airbnb Inc. Form S-1

It is also unproven that Airbnb can cross sell other products. Experiences, which has had a number of years to find its feet, seems unable to generate enough revenue for the business to warrant its own revenue line in the financial report. While wine tours and cooking classes clearly aren’t happening in 2020, Airbnb has created a platform for hosts to run virtual events and classes. We should give this some time, but right now there is no evidence that Airbnb is anything but an accommodation platform.

So, does Airbnb warrant the $30 billion valuation many are reporting? The market will tell us soon enough, as the IPO is due before the end of the year. There are no doubt bumps along the road to come, as Airbnb’s stock price will rise and fall with every new coronavirus headline and government enforced travel restriction, however what can be relied upon is their brand equity, quality product and human nature’s inner desire to explore the world. 


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