Is 2021 a turnaround year for Airbnb?

Airbnb (ABNB), today’s most popular homestay and vacation-rental platform had a staggering Initial Public Offering (IPO) when they went public last December. On the first day of trading, Airbnb’s valuations skyrocketed: their shares opened 115% above their IPO price, with a valuation above $100 billion and may have been the largest debut rally for an American listing in 2020. The company recently announced its second-quarter earnings which reported a revenue increase of 300% due to the travel rebound and beat analysts’ expectations both in terms of revenues and bookings for the quarter. How did they fare with the onset of travel restrictions and the second wave of the global pandemic? Let’s find out.

Key financial highlights during the quarter

• Revenues for the quarter quadrupled to $1.34 billion – up nearly 300% from a year ago, and exceeded Q2 2019 levels by 10% and beat analysts’ forecast of $1.26 billion.
• Gross Booking Value (GBV) of $13.4 billion reported during the quarter more than quadrupled from a year ago, rising above 2019 levels by 37%
• Gross Nights Booked saw the highest number at 83.1 million for the quarter – a 197% increase from 28 million seen a year ago as against analysts’ expectations of 79.2 million Nights and Experiences booked.
• Earnings Per Share reported a loss of 11 cents per share. However, the net loss for the company has drastically reduced to $68 million during the quarter (down 88% year-on-year) from the previous loss of $576 million seen a year ago.
• Average Daily Rates rose to $161 during Q2, (up 41% year-on-year) which reflects the increase in the amount the customers are spending for homes and experiences.

Exhibit 1: Airbnb’s quarterly revenues (2019-2021)

Source: Data taken from company financials, Q2 Earnings, August 2021

What is Airbnb, and how does it work?

Airbnb stands for Air Bed and Breakfast. In 2007, roommates Joe Gebbia and Brian Chesky needed some money and they took advantage of a San Francisco design conference, as people had booked all the local hotels, so they decided to buy three air mattresses and rent them out. They also started a website called AirBedandBreakfast.com and charged about $80 per night for a guest to sleep on an air mattress. Eventually, they took this idea to a larger scale and became the company we know today.

After the 2008 launch, the two founders added another former roommate Nathan Blecharczyk to the operations, shortened the name to Airbnb and expanded their offerings to private rooms, houses, apartments and more. In order to fund this venture, the three of them created special presidential-themed breakfast cereals and sold 800 of these cereal boxes at $40 each in just two months. They used this $30,000 in profits from the cereal box sales to start the Airbnb that we know today. 

Airbnb’s Business Model

The Airbnb website operates as an online marketplace for people looking for accommodations. The platform connects travellers with Airbnb hosts who want to rent out their homes or other properties. For guests, the company gives affordable temporary housing options and at times offer fun activities. For hosts, Airbnb presents an easy way to earn extra money, with minimal capital investments.

What makes Airbnb different from the others?

What sets Airbnb apart from other accommodation platforms are its hosts – mainly the sheer number of them. There are over four million hosts on Airbnb, with 5.6 million listings across more than 200 countries. The number of hosts on Airbnb points to a model that works and resonates with users the world over.

The company also boasts $9.6K annual earnings per host. 79% of Airbnb’s listings are from Individual hosts, as opposed to professional hosts. Individual hosts rent their vacation homes or private rooms as listings. Professional hosts typically host hotel rooms, hostels, or service apartments. 

The company makes money by offering two service fee pathways. The first split service fee charges both: hosts at 3%, and guests up to 14.2% of the booking. Hosts can also opt to pay a ‘host-only fee of 14%-16% of the booking, themselves. Hosts can offer either ‘Experiences’ or ‘Stays’ under listings (Airbnb Experiences are small group activities led by local hosts). Stays amount to the majority of the company’s revenues at 84% of the turnover, while Experiences contribute to 16% of their total revenue. 

Exhibit 2: Segment-wise revenues for the company

Source: Data taken from company financials, August 2021

Exhibit 3: Airbnb’s listings and revenues by region

Data as of August 2021| Source: ipropertymanagement.com

The Pandemic Impact

The pandemic made long-term listings for covid conscious travellers who wanted to stay away from large hotel chains, more appealing. The number of short term-listings fell between 10% – 60% across the US, wherein cities like Oakland, Seattle, Jersey City were the worst hit. At the same time, the average minimum stays (which is set by the host) soared across many markets, in order to lower the risk of infection for guests. New York City had the greatest percentage increase in minimum stay length (237%) from 6.1 days in May 2020, to 20.6 days in March 2021. 

The onset of international travel restrictions across the world prompted guests to travel not only domestically, but also closer to home. 56% of Airbnb’s survey respondents indicated that they would prefer a holiday at a local destination rather than an international trip. This is how guests’ decisions subsequently affected typical host earnings per user during the pandemic. (Graph below).

Exhibit 4: Region-wise average earnings during the pandemic

Source: Data taken from company financials, August 2021

During the pandemic, the management also decided to step away from the transportation and media markets, which they intended to penetrate before the pandemic and refocused their energies into their core business: providing homestays. They also decided to aggressively cut the marketing budget by one billion dollars during the pandemic.

Work-from-home flexibility to see higher demand domestically in 2021

The potential work-from-home culture is likely to convert more demand for short-term rentals for the company. A recent survey by the company indicated that almost 60% of Airbnb users indicated that they plan to travel more as a result of work-from-home flexibility and around 59% of the users indicated that they were likely to extend their vacations given the ability to work- from- home.

Exhibit 5: Travel trends by the Airbnb users once the vaccine has been distributed

Data as of Q1 2021| Source: Deutsche Bank Securities

Added to this uptick in travel trends, the latest quarter saw a significant increase in revenues and higher bookings as there seem to be signs of travel recovery post the vaccinations. and travel restrictions are lifted. A survey conducted by the company indicated that a majority of Americans are ready to travel again, during the second-half of 2021. 54% of respondents indicated that they have already booked, have plans to travel, or are expecting to travel in 2021 which are all positive signs for the company.

Nights and Experiences nearly tripled from a year ago

Nights and Experiences booked are one of the key performance metrics for the company. Airbnb’s latest quarterly report shows that Nights and Experiences booked in Q2 2021 at 83.1 million have almost recovered back to pre-pandemic levels and a 197% increase from the 28.0 million during the same period a year ago (graph below). For the first six months of 2021, the Nights and Experiences booked added to 147.5 million – a 73% increase from the same period in 2020. This increase was largely attributed to the increase in domestic and short-distance travel seen during the first half of 2021 and stronger results in the North American region with more people gravitating towards Airbnb stays within driving distance of their homes. The management confirmed that this growth will only increase in subsequent quarters as vaccinations become more widely available, allowing social distancing norms and travel restrictions to ease.

Exhibit 6: Quarterly trend in Nights and Experiences booked on Airbnb

Source: Data taken from company financials, Q2 Earnings, August 2021

A 320% year-on-year growth in Gross Booking Value (GBV) reflects the ability to attract and retain hosts and guests for Airbnb 

GBV represents the total bookings on the platform during a particular period. (a metric the company tracks host earnings, service fees, cleaning fees and taxes).  The amount of booking is reflected in the GBV whether the guest pays the entire amount of the booking upfront or chooses to use the company’s “Pay Less Upfront Program”. During the quarter, the GBV reported a 320% increase at $13.4 billion from $3.2 billion a year ago which was primarily due to an increase in domestic travel on the platform.   

Competitor Analysis

During the pandemic, Airbnb introduced a host of policies that would encourage guests to make bookings, such as last-minute cancellations and full refund policies. Unfortunately, this turned out to impose huge costs on hosts, who watched their money disappear overnight. In response, Airbnb set up a $10 million relief fund, which hosts found to be inadequate, driving them to competitors like Booking.com. However, on the positive side, Airbnb is on the fastest recovery trajectory to recuperate its 2019 earnings over the next two years as against its competitors. For the year FY2022, they have forecasted to exceed 2019 revenue levels.

Exhibit 7: Revenue growth forecasts as a percentage of annual revenues (2020-2022E)

Data as of Q1 2021| Source: Deutsche Bank Securities

Gross bookings: Airbnb vs. Competitors

It is to be noted that Airbnb is a relatively new platform with fewer listings and gross bookings as compared to Expedia and Booking.com. However, the company is a fast-growing platform, whose gross bookings are estimated to increase by 116% by FY2022.

Exhibit 8: Gross Bookings of Airbnb and its competitors (2017-2022E)

Data as of Q1 2021| Source: Deutsche Bank Securities

Airbnb dominates the Online Travel Agency (OTA) room night share

As per the Deutsche Bank estimates, with regard to non-hotel OTA-booked room nights market share, Airbnb is likely to dominate the market, growing at 12%, with Booking.com and Expedia marked for 5% and 7% growth respectively through 2022E.

Exhibit 9: Non-hotel OTA-booked room nights market share by OTA platform (2017-2022E)

Data as of Q1 2021| Source: Deutsche Bank Securities

Airbnb saw a faster room night recovery than the traditional OTAs during the pandemic

When we look at the graph below, the 2020 room nights recovery by months, we see Airbnb recover faster than both Expedia and Booking.com. This is largely due to the divergent performance of hotels and vacation rentals during the pandemic in 2020.

Exhibit 10: Month-wise room night recovery during the pandemic

Data as of Q1 2021| Source: Deutsche Bank Securities

Risk factors

Some of the key risk factors for the company may include:

• The possibility of further outbreaks of new COVID-19 variants, which in turn affect travel restrictions, limitations on public gatherings, and other measures which have a material impact on the demand for Airbnb’s offerings.
• Though a fast-growing company, Airbnb has incurred net losses since its inception and due to the global disruptions, may take a while to achieve profitability.

Final Thoughts

Despite concerns from the Delta variant of COVID-19, the company is likely to expect its next quarter (Q3 2021) to deliver its strongest quarterly revenues as the mass vaccinations progress and the world recovers from the pandemic. The pent-up demand for travel and leisure are likely to drive Airbnb’s bookings and earnings. 

The management also expressed that the progress in vaccination and containment of new variants are likely variables to impact the company’s performance in the fourth quarter of 2021. Airbnb is adapting quickly to the new world of travel where work and play are blurring, and the company is refining its product strategy to capture and drive more of this behaviour. 

Finally, Airbnb is a platform that holds high consumer awareness and brand perception. People are highly attracted to the idea of ‘living like a local’ at places away from home, aided by Airbnb’s ancillary offering of  ‘Experiences’ which allows local hosts to immerse guests further at vacations. Moreover, ‘Airbnb’, like ‘Google’, is beginning to get that cult brand status of being used even as a verb.