Harsh cost reduction.. Airbnb came back from hell
Shall we quell customer dissatisfaction and continue growth with new policies?
I’m standing in front of Airbnb’s headquarters in San Francisco. Airbnb came back from the hell of the corona pandemic and posted record-high earnings in the third quarter. Can they sustain this growth during the peak holiday season, starting with Thanksgiving this week?
Brian Chesky, CEO of Airbnb, recently had a series of interviews with the US media to explain the outlook for travel demand and new policies in preparation for the winter peak season. Let’s take a look at that.
“When you enter a recession, the most important thing for guests is going to be price,” Chesky CEO told CNBC last week. Airbnb started out as a cheaper alternative to hotels, so we’re focused on that.” It was explained that reasonable price was the most important factor.
He also expressed his thoughts on the recession. In an interview with Yahoo Finance yesterday (20th), CEO Chesky said, “It is a situation similar to the 2008 financial crisis (when we started),” and “a lot of people who had not considered home sharing are now thinking about it.”
As you are well aware, Airbnb was founded in San Francisco in 2008, at the height of the global financial crisis originating from the United States. With job layoffs and rising prices thinning their wallets, people looking to earn extra income started sharing parts of their homes.
Now, 14 years later, Airbnb has grown rapidly based on its network of hosts and guests. As of last year, it has grown significantly to more than 300 million annual reservations and 6 million properties provided by 4 million hosts worldwide. Airbnb like this was listed on NASDAQ in the second half of 2020. According to Apptopia, Airbnb’s global accommodation market share is estimated at 25.97%, second only to Booking.com (34.57%).
There are two main business models. These are fees you get for accommodations and tours that share space, or EXPERIENCEs that provide local experiences. It is a typical platform company. Accommodation hosts are typically known to pay ~3% of the room rate, and experience hosts ~20% as a commission. Guests who use these services pay a commission of 6-12% of the reservation amount.
Back in the present, Airbnb announced some important policy changes this month. In these interviews, Chesky explained the new policy. He introduced a system called Airbnb Setup. He paired new would-be hosts with experienced, highly rated Superhosts to make sharing arrangements easier. Through this, it is an attempt to lead the supply of more accommodations.
Air Cover is a kind of insurance, but the coverage has been further increased than last year. It is a system that protects guests from damage to their home or space after using the accommodation, and the insurance limit has tripled from $1 million last year to $3 million this year. Through this, we plan to lead more hosts to share their homes with peace of mind.
To encourage accommodation sharing, Chesky himself even put a room in his house on Airbnb. She shared it under the name ‘Beyond the Air Bed’. It is actually his house. “I wanted to show people that if I can do it, they can do it. It’s accessible. It’s my real home,” he said in an interview.
Along with this, we have introduced a new system for guests who are expressing their dissatisfaction with the ever-rising prices. Anyone who has made a reservation through Airbnb will agree. First of all, when you search, the cost for a night’s accommodation comes up, but when you go in and try to make a reservation, the hidden cleaning fee is larger than the daily accommodation fee.
The average price per night for an Airbnb stay has risen by 40% from before the pandemic, and as of the last two quarters, the average cost per night is said to total $156. If converted into won, the amount is over 200,000 won, so it is no longer just a cheap accommodation. In particular, the cleaning cost I just mentioned has skyrocketed. According to AirDNA, the average cost of cleaning shared accommodations last month increased by nearly 30% compared to the same period in 2019.
To address this concern, Airbnb has improved its search ranking algorithm by prioritizing the total price, excluding taxes, for guests instead of just showing the cost per night. In fact, it was fishing in a way, but I went in the direction of solving it.
“It allows the top-rated space with the most reasonable total price to rank higher in search results,” Chesky explains. Maintaining economy is of the utmost importance.
In addition, clear guidelines have been revealed for cleaning issues that have recently been controversial. Even after paying an expensive cleaning fee, some hosts have reported that they have asked to remove the bed sheets or tidy up the house. “You don’t have to clean when you leave,” says Chesky. He tells hosts not to make unreasonable requests, and plans to establish standards for what they can ask for before checkout.
Airbnb’s financials have been good this year. Thanks to the explosion of travel demand, which had been restrained since the pandemic, Airbnb’s third-quarter performance recorded an all-time high. July to September is the peak summer season, including the summer vacation period. Third-quarter revenue reached an all-time high of $2.884 billion, up 29% year-over-year. (Consensus $2.85 billion) Net income rose 42% to $1.214 billion, surpassing $1 billion for the first time ever. (Consensus $1.03 billion)
However, its own forecast for the fourth quarter disappointed the market. It expected fourth-quarter revenue to be between $1.8 billion and $1.88 billion. On an average basis, this is below Wall Street’s forecast of $1.87 billion. “While the impact of COVID-19 is waning, macroeconomic uncertainty persists,” the company said. Overseas travel has not recovered evenly, but we expect it to continue to recover,” he explained.
Due to its own fourth-quarter forecast, which fell short of market expectations, the stock price declined despite record-high earnings. The day after the earnings release, the stock fell more than 10% and is still trading below $100.
But is there really only such a negative outlook? There are also positive reviews. It is a very profitable company. Looking at the third quarter results, net income increased 200% year-over-year to $1.2 billion. The net profit margin is as high as 42%.
The secret is thanks to a harsh cost diet during the corona pandemic. During the pandemic, 25% of the employees were laid off, and the CEO of Chesky said, “Regardless of the economic situation, we will reduce operating costs and increase profitability through organizational slimming.” It has fewer employees than its competitors, generating $1.3 million in revenue per employee.
In particular, while reducing variable costs, we have recently drastically reduced marketing costs. Sales and marketing costs are the lowest compared to competitors. (Airbnb explanation) Airbnb is 13%, compared to Booking.com’s 39%, Expedia’s 46%, and TripAdvisor’s 51%.
Then, how does Wall Street view Airbnb like this? A total of 25 financial investment companies are covering Airbnb, with 13 buying, 11 neutral, and 1 selling. The buy rating is slightly over half. As you can see, the target price fell until March, then rebounded in April, followed a downward trend, and then rose again in August. Since then, the slope has decreased, but continues to decline. Our target price average is $130.55. Based on the closing price, there is 37% upside potential. It ranges from the lowest of $98 to the highest of $165.
Shall we look at the latest report? Citigroup’s report that came out five days ago caught my eye. The upgrades released for this winter season have been positively reviewed. The Airbnb set-up has made it easier for new hosts to start room sharing, so they expect supply to continue growing. The outlook for 2023 is mixed with positives and negatives, but the movement of travel demand until the third quarter will continue into the fourth quarter. We maintain our Buy rating and $140 price target. I saw a 47% upside potential.
Most of the rest are reports that came out before or after the third quarter earnings announcement. We maintain our ratings on most of our stocks, but revise down our target prices. Only Goldman Sachs has issued a sell recommendation. We lowered our price target from $100 to $98.
Of course, Airbnb’s changes this time around won’t satisfy both hosts and guests. However, Chesky’s efforts to raise profitability to the highest level in the industry through cost-cutting costs deserve recognition. Let’s see if Airbnb, which is trying to increase the supply of hosts in order to continue its continued growth, can overcome the recession with its strong stamina and stand tall as a travel leader.
Silicon Valley = Seo Gi-yeol Correspondent [email protected]