- Airbnb has been hammered by the Covid-19 pandemic, but it is betting on a long-term recovery in the travel market
- Meanwhile, DoorDash is hoping that consumers will still want their food delivered when life returns to ‘normal’
The Covid-19 pandemic has decimated the global travel industry – package tour operators such as Tui (TUI) have swung to heavy losses and hotel owners, including InterContinental Hotels (IHG), have seen occupancy rates plunge. Against that backdrop, it might seem an odd time for home rental platform Airbnb (US:ABNB) to make its market debut. Yet the company has gambled on two things – that international travel will eventually recover and that investors are feeling optimistic about the industry’s prospects as a vaccine is rolled out.
Investors seem willing to take that punt. Airbnb’s shares more than doubled in value from their $68 IPO price during the first day of trading, translating to a market capitalisation of over $86bn (£63.2bn) – that is bigger than the Marriott (US:MAR), Hilton (US:HLT) and InterContinental Hotels combined. It is quite a feat given that Airbnb started out life in 2007 as an air mattress to rent in the founders’ apartment.
It is also a spectacular turnaround from just a few months ago when, as bookings plunged, the company laid off a quarter of its staff and rushed to secure $2bn of financing. Part of that debt came with an interest rate of over 10 per cent, which is usually associated with distressed assets.
There is no escaping that this crisis has hit Airbnb hard – its revenue dropped by almost a third year on year in the nine months to 30 September. However, it has proved more resilient than rivals Expedia (US:EXPE) and Booking (BKNG), whose sales plummeted by over 50 per cent across the same period. Airbnb has benefited from its leading market position and a shift in focus to local travel to capitalise on demand for ‘staycations’.
Thanks to cost-cutting and a summer recovery in activity, the company turned a $219m net profit between July and September. However, while Airbnb has been profitable on an adjusted cash profit basis in the past, it has never generated an annual statutory profit, weighed down by spending on marketing and product development. Yet again, a venture into the black is likely to be short-lived as rising Covid cases hit the fourth quarter.
Yet investors only tolerated losses for previous 'unicorn' debutants Uber (US:UBER) and Lyft (US:LYFT) for so long. Airbnb has come out of the gate even stronger, meaning expectations for it to perform are much higher.
Can DoorDash deliver?
Fellow debutant DoorDash (DASH) faces similar pressure. A blockbuster IPO means that the food delivery platform is more valuable than Yum! Brands (US:YUM), the owner of Pizza Hut and KFC.
The pandemic has been a boon for DoorDash, with sales surging by over 200 per cent year on year in the nine months to 30 September. Lockdowns have spurred demand for takeaways and restaurants have been forced to turn to delivery services to keep themselves afloat. Eating into its rivals’ market share, DoorDash is now the leading player in the US, benefiting from a focus on the suburbs where families typically make larger orders, leading to higher commissions.
Yet this is a highly competitive space with little ‘stickiness’ on either side of the market. For restaurants, there is not yet a network effect from being tied to a particular platform, and for customers the cost of switching to a rival app is low. Food delivery companies are therefore forced to compete on price and invest heavily in marketing, making the path to consistent profitability more difficult.
The key question is whether consumers will maintain their ravenous appetite for food delivery services post-pandemic. Once people are able to go out freely again, it is logical to assume that demand for at-home dining will normalise.
Looking past the euphoria
Initial exuberance for these IPOs has given way to a pullback, with Airbnb and DoorDash’s shares now down 14 per cent and 16 per cent, respectively. Analysts have pointed to potentially overstretched valuations, with Tim White, senior research analyst at DA Davidson, arguing that DoorDash’s valuation leaves “little room for any performance hiccups”.
It has taken a pandemic for DoorDash to see a statutory quarterly profit, although a $23m net profit in the June quarter quickly descended to a $43m loss three months later. There are also regulatory concerns, particularly as some US states cap the fees delivery platforms can charge restaurants.
Airbnb could also be caught out by rising scrutiny of tech companies and moves to curb its influence on housing markets. The UK Treasury is also considering tougher VAT rules for the sharing economy.
Ultimately, Airbnb looks like a smarter long-term bet. DoorDash’s sales growth will likely moderate post-Covid and it is a more easily substitutable platform. Meanwhile, Airbnb has been a real disruptor to the holiday rental industry with its highly differentiated product offering. While the near-term outlook is challenging, international travel will eventually bounce back. However, it is worth waiting for the market froth to settle before checking in.
