Commentary: Is Airbnb’s IPO listing this week worth your investment?
The travel experience company has its fair share of knocks over the years but it has some solid fundamentals, say Howard Yu and Angelo Boutalikakis of IMD Business School.
Both companies represent the future - one in travel experience and the other in food delivery.
Arguably, DoorDash got a boost because of COVID-19, while Airbnb has taken a hit. That hit had been reflected in the company’s valuation which fell from a peak of US$38 billion in 2019 to US$18 billion this year.
Even though Airbnb restored profitability by the third quarter, when it was reported that Airbnb’s IPO would value the company at US$35 billion, it raised the obvious question: Is it worth the price?
The short answer is yes. Because Airbnb is the Amazon of travel. COVID-19 is to the hospitality industry in 2020 as the dot-com bubble was to the Internet in 2000. Jeff Bezos emerged from the crisis stronger than ever. So will Brian Chesky – co-founder and CEO of Airbnb.
It’s the inherent strength of its operations that Airbnb will roar back before anyone else in the industry.
GLOBAL NETWORK EFFECT
The importance of network effects on platforms is well-known. Whether you are Uber, Airbnb, DoorDash, or Grab, being big gets you bigger. The more drivers there are on Uber, the more riders it will attract, and vice versa.
But the difference is that most platforms are confined within a local network. Drivers in Singapore care mostly about the number of riders in Singapore, and riders in Singapore care mostly about drivers in Singapore.
Contrast this with Airbnb. A New Yorker cares little about the number of Airbnb hosts in New York City; instead, they care about how many there are in the cities they plan to visit. That means Airbnb’s network has been global from day one.
Any copycat competitor would have to enter the market on a global scale. That’s a far harder thing to do. That’s why you see lots of competition in food delivery and ridesharing, but almost no one copying Airbnb. The company offers listings in more 190 countries today.
A NICE MONOPOLY
That global network effect will translate into a “natural monopoly.” Airbnb can easily be seen as a bad player. After all, its global supply boasts over 7 million listings worldwide.
That’s more than Marriott International, Hilton Worldwide, InterContinental Hotels Group, Wyndham Hotel Group, and Hyatt Hotels combined.
But the co-founders of Airbnb - Chesky, Nate Blecharczyk and Joe Gebbia - are nice, low-key, friendly people. They have avoided the public and private confrontations and scandals of other CEOs like Uber’s Travis Kalanick and WeWork’s Adam Neumann.
And the best way to avoid anti-trust sentiment is to gather public trust and stakeholders’ approval. Chesky showers the company’s host community with profit-sharing benefits.
Airbnb has created a new "host endowment" and allotted 9.2 million shares to fund it. The endowment may fund grants for educational workshops or annual pay-outs to groups of hosts.
The company has also created a host advisory board, 15 VIP Airbnb hosts whose input is heard by the management team. Chesky promises this advisory board will be “as diverse as the host community itself” - that is, with a fair proportion of women and hosts outside the US.
Just pause for a second. Can you imagine Uber ever creating an advisory board comprised of its drivers?
Facebook has finally set up an ethics board – a high-powered 20-person oversights panel of thought leaders and eminent personalities that includes former Danish prime minister Helle Thorning-Schmidt and Yemeni Nobel Prize winner Tawakkol Karman. But it was done 15 years after its founding.
All companies experience crises, so minimising mistakes is not the right approach; learning from them is. Airbnb is moving fast to mend things.
When hosts were horrified at their apartments being trashed by partygoers, Airbnb rolled out insurance policies at no additional cost. When COVID-19 continued to rage, it pulled the plug on parties altogether.
But Airbnb isn’t only moving fast in areas that need mitigation. It’s also a company obsessed with constant innovation.
There are experiments like the Backyard initiative, a project that devises fresh ways to design and build shared homes. Then there are big winners like “tours and events.”
And in today’s environment, there’s Online Experience. You can learn to “Dance Like a K-pop Star” live with a local guide in South Korea. Or you can take part in “Cooking with a Moroccan Family.” There’s even a “Day in the Life of a Shark Scientist” from South Africa.
Airbnb probably makes little money from all these. The average price per person is about US$10, and you might pay as little as US$2. But that’s beside the point. Every dollar it saves by not paying for ads on Google and Facebook, Airbnb is investing in differentiation.
Today people are not traveling, but they are reminded of their yearnings. Want to visit Alaska and go salmon fishing? Want to visit Italy and do a wine tasting?
Now, you ask, who in the travel industry will be ready to consolidate everyone else when demand comes back?
The winner will be a franchise that is asset-light and scalable. It won’t be a franchise that squeezes suppliers to death. It won’t be a franchise that sells your attention to the highest-bidding advertiser.
When hotel chains have to thrive for a level of standardisation, Airbnb’s varying listings will always be quirky and unique. It’ll be one that’s loved by customers and its community.
A KIND OF ITS OWN
Given all these factors, it’s no wonder analysts might struggle to nail down “comparable” competitors for pricing evaluation. The closest ones could be the online travel agencies (OTAs): Expedia and Booking.com.
But OTAs pay their way to growth. They grow by acquisitions. Booking.com bought Priceline.com, KAYAK, agoda.com, Rentalcars.com, and OpenTable. Expedia bought Pillow, HomeAway, Orbitz, Travelocity, and trivago.
They are also two of the largest spenders on paid ads on Google.
Airbnb did none of that. It slashed its ad spending and saved US$800 million during the pandemic. It generates direct traffic through better customer experience.
In 2019, Booking.com made a booking revenue of US$15 billion. It commands a market capitalisation of US$84 billion.
During the same period, Airbnb made US$4.7 billion. Applying the same market cap/revenue ratio would give Airbnb a US$26 billion valuation.
But given the four reasons you saw above, US$35 billion is all too reasonable for a ground-up, innovative and global model.
Howard Yu is the LEGO professor of management and innovation and director of the Center for Future Readiness at IMD Business School. Angelo Boutalikakis is a research associate at Center for Future Readiness at IMD Business School in Switzerland and Singapore.