AirBnb – an outstanding success, one not as great as many thought

AirBnb recently filed its S-1 as an important step before soon going public. Finally, the curtain on one of the household names and one of the most anticipated IPOs is now pulled back a little. The filing is pretty long. I stuck through it, well most of it. Here is what I found

Background

Unless you have lived under a rock for the past 4-5 years, you should be familiar with AirBnb. It’s that website where you can book a spare room, an air mattress in somebody’s house or the entire house for a period of time. In 2007, two of the founders were trying to make more money to cover the expensive living cost in San Francisco. One time, there was a popular conference in town and all the hotels were booked. So they quickly came up with a website that could let people book for an air mattress at their place. The seed for AirBnb was planted on that day. 13 years later, they are on the verge of going public.

The problems AirBnb solves are two fold. 1/ They increase the efficiency of the travel market. Hosts, whether it’s an individual or a professional management company, have spare resources (rooms) that can be exploited while guests can have an alternative choice in addition to traditional hotels, often at a cheaper price. 2/ Trust. Guests come to stay at traditional hotels because they somewhat trust the safety there. Imagine that you are an individual host. How could you trust a stranger enough to let him or her in your apartment, let alone sleeping a few feet away from you? At its core, AirBnb operates as a middle man between hosts and guests, and facilitates the searching and booking of travel products.

Who does AirBnb compete with? Here is the list of competitors AirBnb detailed in the filing

Online travel agencies (“OTAs”), such as Booking Holdings (including the brands Booking.com, KAYAK, Priceline.com, and Agoda.com); Expedia Group (including the brands Expedia, Vrbo, HomeAway, Hotels.com, Orbitz, and Travelocity); Trip.com Group (including the brands Ctrip.com, Trip.com, Qunar, Tongcheng-eLong, and SkyScanner); Meituan Dianping; Fliggy (a subsidiary of Alibaba) Despegar; MakeMyTrip; and other regional OTAs

Internet search engines, such as Google, including its travel search products; Baidu; and other regional search engines;

Listing and meta search websites, such as TripAdvisor, Trivago, Mafengwo, AllTheRooms.com, and Craigslist

Hotel chains, such as Marriott, Hilton, Accor, Wyndham, InterContinental, OYO, and Huazhu, as well as boutique hotel chains and independent hotels

Chinese short-term rental competitors, such as Tujia, Meituan B&B, and Xiaozhu; and

Online platforms offering experiences, such as Viator, GetYourGuide, Klook, Traveloka, and KKDay.

Source: AirBnb ‘s S-1

The order of this list should tell you which AirBnb considers their fiercest rivals. Not only do those incumbent OTAs offer a marketplace for room nights at traditional hotels, but they also have their own homestay marketplace offerings, similar to what AirBnb is. With an esteemed competition like this, how well has AirBnb performed in the past few years?

Incredible growth in the past 5 years

According to the filing, the number of Nights and Experiences (like a virtual cooking session or a tour to a sight nearby) booked grew at a CAGR of 46% from 72 millions in 2015 to 327 millions in 2019. Meanwhile, the gross booking value (the dollar amount of all Nights and Experiences booked) grew 47% every year from around $8 billion in 2015 to $38 billion in 2019. Those are impressive numbers. Put it this way, in the first 9 months of 2020, 6 of which were amid Covid-19, AirBnb booked more Nights and Experiences and dollars than they did in the entire year of 2016. On this note, I wish AirBnb were a bit more transparent. I’d love to see a breakdown of booked room nights and booked Experiences. Booking.com breaks down their bookings for accommodation, flights and car rentals. I don’t see any reason why AirBnb shouldn’t do the same to help investors understand more the dynamics of their business.

Before the pandemic, AirBnb’s revenue grew 51% every year, from $919 million in 2015 to $4.8 billion in 2019. The first 9 months of 2020, despite the deadly Covid-19, saw the company book almost as much revenue as the entire year of 2017. If we look at the take-rate which is the ratio between revenue and gross bookings, it has been flat at around 11-12% every year between 2015 and 2019. The commission in the first 9 months of 2020 is 14%. Given that AirBnb pushed for virtual Experiences during the pandemic and saw their rental bookings demolished, that’s why I argue for more transparency in the way AirBnb reports their numbers. To really understand the dynamics of their business. Even at 14%, it’s still a bit lower than what Booking.com has globally on average at 15%.

Covid presents a massive challenge and a silver lining

Covid-19 is perhaps the biggest and most damaging crisis to the travel industry. AirBnb isn’t immune to it. Bookings (Nights and Experiences Booked) were up 25% and 17% year-over-year in January and February 2020, before the bottom fell off under AirBnb’s feet. Covid-19 hit. Bookings dropped by 114% and 103% in March and April, respectively. The situation recovered as folks travelled more after April, but as of September 2020, bookings were still down 28%. The decline in bookings leads to a drop in revenue in the first 9 months of 2020 of 32% YoY. Operating loss is almost 4 times bigger than the loss of the same period last year. The damage was so devastating that the company even considered not going public this year.

But why do I say that Covid-19 presents a silver lining?

Before Covid-19, AirBnb showed signs of inefficiency. After being profitable in 2018, every cost item as % of revenue increased in 2019, in comparison to 2018, resulting in the company’s operating loss of 10% of revenue. Even though it still suffers loss in 2020 due to a rise in costs, the cost mix is different. What AirBnb expensed in 2020 is mostly related to Covid-19. The growth in G&A, Operations and Product Development is offset by the decline in Marketing expense. Specifically, the company didn’t spend as much money on marketing, particular online ads as it did a year ago. In fact, for the nine months ending on September 30, 2020, only 9% of their traffic came from paid marketing channels. In an interview a few months ago, CEO Brian Chesky revealed that the company had the same booking in the US market in 2020 up to that time as they did in the same period in 2019, despite NO spending on paid marketing, to the tune of a saving of $1 billion.

Despite all the damages Covid-19 has caused the company, the pandemic looks to be an opportunity for AirBnb to recalibrate and refocus. They might have got carried away with expanding too fast without a tight control of the expenses. At least, they now learned that they could still keep the business in a good shape without wasting money on paid marketing. Whether they can apply the same lesson to other expense items remains to be seen, especially when Covid-19 is still engulfing us around the globe.

Moving forward, I hope that AirBnb will be more transparent with regard to the breakdown of their online and offline marketing expenses. Booking.com did a very good job on that. They have a specific section dedicated to online marketing spending while AirBnb mixes it with brand marketing; which doesn’t let investors and analysts have a true feel of how much the company spends on paid performance marketing, in comparison to its rivals.

Legal threats

Like many other companies, AirBnb has a couple of looming legal threats on the horizon. One significant threat comes from possible restricting local regulations. In their filing, AirBnb wrote:

For example, listings in New York City generated approximately 2% of our revenue in 2019, and when new regulations requiring us to share host data with the city are implemented, our revenue from listings there may be substantially reduced due to the departure from our platform of hosts who do not wish to share their data with the city and related cancellations. A reduction in supply and cancellations could make our platform less attractive to guests, and any reduction in the number of guests could further reduce the number of hosts on our platform.

Source: AirBnb’s S-1

To be honest, I never understand the beef between local authorities and AirBnb. If it’s about tax, then just raise taxes on the company, but I don’t fully support passing regulations that restrict its business and by extension, individual hosts that operate on its platform. Nonetheless, it’s the reality that AirBnb has to deal with. There are a host of legal issues in various forms that AirBnb is encountering. Even though they don’t necessarily threat its existence, it may harm the top and bottom lines.

The second threat comes in the form of a $1.35 billion tax bill. According to AirBnb, they were served in September 2020 with a notice that they would need to pay $1.35 billion in taxes, plus penalties and interest related to their alleged failure to pay enough of their dues in 2013. That figure can amount to 30-33% of total revenue in 2019; which is a significant sum.

My thoughts on AirBnb

AirBnb is a spectacular story in a sense that it opened up a market that had been there before. Before AirBnb, no company had been able to take homestay rentals to the level that it did. Would there have been another company that achieved the same feat? Possible, but the fact and the matter is that it is AirBnb that revolutionized this market and has grown to be a multi-billion dollar company. It warrants nothing but praise and admiration. However, from a financial perspective, the last 18 months haven’t been great. Even before Covid, AirBnb registered a loss while they should have made some profit.

At its core, AirBnb is similar to other OTAs. The difference is that while the incumbent OTAs, the likes of Booking.com and Expedia, rule the world of traditional hotels, AirBnb dominates the homestay world. Yes, the incumbents have their homestay offerings too, but is Vrbo a verb or as popular a noun as AirBnb? Not even close. While the OTA giants are making inroads into AirBnb’s territory, AirBnb also starts to have some hotels listed on their platform. I think in the future AirBnb and OTA giants can co-exist together and thrive in their respective stronghold. AirBnB understands how to manage homestay, but doesn’t have the expertise to deal with hotels, especially chains like Booking.com. On the other hand, OTAs don’t have the brand name in the homestay world like AirBnb nor the expertise.

In the near future, here is what I think will be AirBnb immediate priorities for the next one or two years

• Recover to the pre-covid level of business. Even after travel is opened up again, it won’t be the same as it was for a while. Would travelers be comfortable in a stranger’s house without knowing if it’s clean enough? How about traveling internationally to somewhere that still struggles with Covid? Would business travel recover fast enough?
• Deal with the legal challenges as I mentioned above
• Get used to the scrutiny that comes with being public
• Keep control of the costs. 2019 wasn’t a great example of cost management. Would AirBnb keep up the lesson it learned during Covid?
• What’s next for Virtual Experiences?

In short, once travel industry recovers, however much, from this deadly pandemic, AirBnb will no doubt increase its bookings and revenue. I do have some confidence in their adapting to the new style of travel. What they will be more judged on is their profitability and that remains to be seen. 2019 wasn’t great. 2020 so far has been a year of exception because of Covid-19. Their performance on the stock market will be much affected by whether they can stay disciplined with their expenses.

I do want to make a point about my personal experience with AirBnb. The site is helpful, but it is annoying. What bugs me is that AirBnb isn’t upfront with all the fees. Once you settle on a listing for $100/night, by the time you get to the checkout page, it will be already $150/night with service and cleaning fees. It feels like you were duped, cheated or fooled. I’d much rather know all the fees up front, from the very beginning. I do believe that my experience isn’t unique. Many others share the same view on this issue. Hence, I hope AirBnb will fix it soon.

Interesting facts about AirBnb

Besides the main points above, there are a few other statistics that I think are pretty interesting.

• As of September 2020, AirBnb had 4 million hosts over the world, 55% of who are women and 86% are outside of the US
• In 2019, 23% of new added hosts were guests first. 50% received a booking within 4 days of becoming available and 75% within 16 days
• During 2019, 69% of revenue came from repeat guests
• AirBnb’s debt as of September 2020 stood around $2 billion
• AirBnb committed to $1.2 billion for a single cloud vendor (AWS, I think) through 2024
• Twelve months ended September 30, 2020, the average annual earning per host with at least one check-in was $7,900.
• As of September 30, 2020, 21% of all hosts were Superhosts
• In 2019, 68% of guests left reviews
• Chargebacks in the year ended December 31, 2019 and nine months ended September 30, 2020 were $92 and $95 million respectively
• By my calculation and data provided by AirBnb, their average merchant fee rate was 1.85% in 2019 and 2% in the nine months ended September 30, 2020
• Nights and Experiences booked in the Top 20 cities made up less than 5% of the total every month
• Nights and Experiences booked for 28 nights or longer made up between 3.5% and 6% of the total every month
• As of December 31, 2019, 90% of all hosts were individual and 72% of bookings were with individual hosts. “Of the reviews they received in 2019, 83% of ratings for individual hosts and 75% of ratings for professional hosts were 5-star.”
• “In 2019, the average number of guests on an Airbnb stay was 3 people, and 77% of nights were booked for entire homes”
• “14% of nights booked in 2019 and 24% for the nine months ended September 30, 2020 were for long-term stays”