The Decline and Fall of Online Travel: Airbnb (ABNB)

Photo: Andrea Piaquadio via Pexels.

a look at Airbnb pre-ipo disclosures shows the operation faces a long haul to true productivity.

In many ways, the first few months of Airbnb’s public life feels a bit like Hampton Fincher’s written screenplay for the 1981 SciFi classic , Blade Runner. 

Lots of smoke. A strange interview with irrelevant disclosures about turtles and deserts.

Then it’s 120 some-odd pages of metaphysics, mayhem, and attack ships on fire off the shoulder of Orion. Followed by the realization that the written bones of Blade Runner were so much better than the finished movie. 

So it is with Airbnb. The company’s pre-IPO disclosures paint a dazzling Blade-Runner scale SciFi epic. Back in 2007, founders “Brian and Joe” were merely trying to pay their rent. Now, the operation works in 220 countries, serving 825 million guest arrivals, and grossed something like $110 billion in sales over its life as a private company. 

But when that blistering performance comes under public scrutiny, a different story emerges. Once the implicit costs are factored into its most recent financial reports, we estimate true economic losses were about $1.50 per share. That’s a full $1.00 less in $2.50 per-share loss reported by the company. 

Airbnb is probably more productive than its public statements give it credit for. 

But that unexpected productivity is still not enough to generate a meaningful return for the money invested in the firm. Its return on invested capital is far too small. Round number, the value of the money invested in Airbnb shrank by 19.5% in 2019. 

AirBnb is simply not generating enough cash to grow out of this lack of productivity. Cash flow from operations seemed like a reasonable $222.7 million for the full year of 2019. But back out the capital costs and the other obligations needed to make that money, and a darker picture emerges. In its first quarter as a public operation, AirBnb burned $490 million in operating cash flow. Add in company purchases in property and equipment, and tangible free cash probably vaporized at a rate of more than half a billion dollars!

AirBnb also faces brutal competition from larger integrated travel companies like Booking.com and Expedia. It’s being pressured by its greatest advertising partner: Google, whose travel portal is a powerful low cost solution. Most importantly, there is the drumbeat of negative pandemic sentiment surrounding demand in the travel sector. When we spoke with Arne Sorenson, CEO of Marriott International, he did not expect his sector to return to pre-pandemic levels until mid-2023. 

Where will the growth come from for AirBnb to grow as fast as it's currently being valued?

A Travel Unicorn Still. 

All that bad news is not to say Airbnb can’t eventually tell the glitzy sci-fi story of a full-scale Web technology company. Long term, Airbnb probably has the global reach and brand to be a dominant player. The volatility in this stock alone, will be enough to attract some classes of investors. 

But in the short term, at least until travel recovers, the consensus is that Airbnb will be plagued by turbulence. A turbulence that will weigh the operation down. It seems the opportunity, for the clever and well-positioned, will be to work the contraction of online travel, in general, and Airbnb, in particular. 

Making this stock just like the end of Blade Runner, where Harrison Ford and Sean Young confront a police investigator called Gaff.

“I wouldn't wait too long. I wouldn't fool around,” warns Gaff. “I'd get my little panocha and get the hell outta here.” 

“It's too bad she don't last, eh! But who does?”