The ‘sharing economy’ was seen as the future only a few months ago, with digital platforms acting as intermediaries to match supply and demand for just about anything. Need somewhere to stay? Book an Airbnb. Need a ride? Call an Uber (US:UBER). Need someone to assemble your IKEA furniture? Turn to TaskRabbit. Fuelled by smartphones, ‘gig’ workers and generous doses of venture capital, these services offered consumers a cheap and convenient alternative to the traditional way of doing things.
Yet with the arrival of Covid-19, the sharing economy has gone into isolation, giving way to the social distancing economy. Demand has not only been hit by lockdowns and travel restrictions, but also a hesitance to come into contact with things other people have touched. The idea of sharing something with a stranger in the middle of a global pandemic is somewhat less appealing than before.
From sunny vista to cloudy outlook
Airbnb has been one of the leaders of the sharing economy. Founded in 2008 amid the global financial crisis, the company has a relatively simple business model – its platform connects hosts with guests, and it earns a services fee from each booking. It has now amassed more than 7m listings across over 100,000 cities.
2020 was billed as a golden year for the company amid a hotly anticipated initial public offering (IPO). Following years of speculation, it finally announced last September that it intended to go public this year. Trailing a long list of ‘unicorns’, what sets Airbnb apart is the fact that it has already proven its ability to turn a profit – it was profitable on a cash profit-basis in both 2017 and 2018, although last year was a different story. Given that Airbnb is still a private enterprise, access to its financials is limited. But citing “people familiar with the company’s accounts”, Bloomberg reported that Airbnb swung to a loss in 2019 with $267m (£201m) of cash losses in the final quarter. This came amid mounting costs such as marketing expenditure.
Nonetheless, its IPO ambitions remained on track until a global pandemic arrived, bringing international travel to a grinding halt. New bookings plunged as demand for short-term leisure and business stays dried up, and chief executive Brian Chesky says the company saw over $1bn-worth of cancellations. Following much anger from hosts over a new refund policy, Airbnb also set up a $250m fund from which hosts would receive 25 per cent of the value of their cancelled bookings.
Coming under pressure, Airbnb rushed to secure $2bn of financing in April – $1bn from institutional investors and a further $1bn cash injection from private-equity firms Silver Lake and Sixth Street Partners. The latter loan came with a steep interest rate of more than 10 per cent, something that is usually associated with distressed assets. If these loans were converted to stock, Airbnb would be valued at just $18bn, well short of the $31bn valuation it achieved in 2017.
Alongside announcing plans to lay off a quarter of its staff, Mr Chesky revealed in May that revenue this year is likely to be less than half of the $4.8bn seen in 2019. But it’s not just demand-side woes – there are worries that Airbnb landlords are shifting their properties to the long-term rental market to salvage their income. According to a May survey conducted by IPX1031 – a subsidiary of Fidelity National Financial (US:FNF) – more than a fifth of US hosts interviewed have listed their properties on the long-term rental market and another 20 per cent are considering it.
Dan Parker, a director at Savills (SVS), is cautious about overstating the scale of this repositioning in the UK. “Nationally it has been a small shift,” says Mr Parker. “We think that Airbnb landlords only accounted for around 7 per cent of the extra stock coming out of lockdown.” However, he notes there has been a larger influx of properties in Central London.
The question is whether these listings will migrate back to Airbnb. While returns in the long-term rental market are lower, landlords may opt for the safety of locking in a tenant now, particularly when faced with an economic downturn. “It would be a brave person in a recession who stuck all their eggs in Airbnb or the short-let market,” says Mr Parker.
In addition, landlords may be put off by the costs and extra work to implement Airbnb’s enhanced cleaning guidelines or the forgone income from the 72-hour “booking buffer” between stays.
Keep calm and carry on
It might seem like any hopes of going public this year have been dashed. But earlier this month, Airbnb filed confidential paperwork with the Securities and Exchange Commission (SEC), signalling its intention to forge ahead with an IPO. The recovery in new bookings has been fairly swift since hitting a floor in April. Airbnb announced that on 8 July, guests booked more than 1m nights of future stays at its listings around the world, a level last seen at the beginning of March. This was driven by a rise in demand for rural ‘staycations’ as people opt for domestic rather than international holidays.
But while demand is returning, Airbnb is not out of the woods. Travel is unlikely to return to normal until a Covid-19 vaccine becomes widely available, and until then there remains the risk of additional waves of infections.
Expedia’s (US:EXPE) Vrbo platform and Booking Holdings’ (US:BKNG) website Booking.com are perhaps Airbnb’s closest listed competitors. Looking at their share prices, it is evident their fortunes are linked to the trajectory of air travel, tracking the number of passengers passing through US airports each day.
Leading a unicorn stampede?
So why list the shares now? Airbnb is under a certain amount of pressure from employees as many valuable stock options are set to expire later this year. But even if it were to rush to go public on this basis, it’s not exactly a bad market to join. “We don’t value companies based on what the economy is doing, we value them based on how the market is doing,” says Professor Aswath Damodaran of New York University’s Stern School of Business – known as the ‘Dean of Valuation’. “The economy might be doing badly, but the market is doing really well.”
Indeed, with the S&P 500 recently reaching a new record high and Apple’s (US:APPL) market cap surpassing $2 trillion, the seemingly boundless appetite for all things ‘tech’ continues. There have already been some successful tech IPOs this year – including insurance specialist Lemonade (US:LMND) – and others such as software company Palantir are also hoping to cash in on the enthusiasm.
While the number of shares Airbnb will offer and their pricing have yet to be determined, Professor Damodaran believes they should be able to get the top end of their desired range. This is based on how the company stacks up against its brick-and-mortar competition. “If you look at companies like Marriott and Hilton, these companies are going to come out of this crisis much more damaged than Airbnb ever will,” says Professor Damodaran. “So, in a strange way, these capital-light companies are being rewarded because their competition is being so badly punished by this crisis.”
Not the only one in the hot seat
Elsewhere in the sharing economy, you have the likes of ride-hailing apps Uber and Lyft (US:LYFT) that have entered the market and upset the traditional taxi business model. But neither have been strong performers since going public last year. Amid questions over when (or whether) they will actually achieve profitability, both companies were already struggling to retain investor confidence pre-pandemic.
Now, Covid-19 is threatening the ecosystem they depend on as fewer people need to be ferried to offices, restaurants and airports. Uber saw ‘gross bookings’ from its rides – revenue collected before paying drivers – fall by around three-quarters year on year in the three months to 30 June, to $3bn. Chief executive Dara Khosrowshahi described the rides business as a “tale of 10,000 cities”. While ride bookings in Hong Kong and New Zealand were at times above pre-pandemic highs, in the US gross bookings in some locations were down by as much as 85 per cent. In response to the pandemic, the group is looking to cut more than $1bn in fixed costs.
Meanwhile, Uber Eats has proved a bright spot – Mr Khosrowshahi says “the Covid crisis has moved food delivery from a luxury to utility”. Indeed, gross bookings for the Eats segment more than doubled year on year in the second quarter, advancing by 49 per cent from the first three months of the year. It should further benefit from the $2.7bn all-share deal to purchase rival Postmates, which will bring its market share in the US to 35 per cent, closer to leader DoorDash. The tie-up will also help fulfil Uber’s ambitions of expanding into the delivery of groceries and other consumer goods, although it will find itself up against bigger players such as Amazon (US:AMZN).
Yet for all its promise, the Eats business remains loss-making while despite plummeting ridership, the Rides business still generated $50m of adjusted cash profits in the second quarter. Alongside $382m of restructuring charges, this meant Uber as a whole stayed in the red with $837m of adjusted cash losses. The group is aiming to swing to an overall adjusted cash profit in 2021 and it does have $7.8bn of cash on hand to weather the storm.
Unlike Uber, Lyft is more of a one-trick transportation pony. While it has made a small foray into delivering essential products during the pandemic, these activities will not be contributing to the bottom line any time soon. Its number of active riders plunged by 60 per cent year on year in the second quarter, to 8.7m, translating to a similar drop in revenue. While ride volumes have improved since bottoming out in April, they were still down more than 50 per cent year on year in August. Despite adjusted cash losses widening to $280m, the company believes that by cutting costs and improving its unit economics it can generate cash profits by the end of next year.
Chief executive Logan Green remains confident in Lyft’s long-term prospects: “We think we're still at the very beginning of a long-term secular shift away from car ownership and towards adopting a broader transportation-as-a-service type product.”
But Scott Galloway, professor of marketing at NYU Stern, is less optimistic. “After the coronavirus, I think Uber survives. Lyft goes away or gets acquired. Maybe Uber consolidates them, but Uber is going to survive,” says Professor Galloway. “Lyft has all of the calories but not the great taste of Uber...It doesn’t have the global brand, it doesn’t have the scale, it doesn’t have Uber Eats.”
