Why Airbnb Suddenly Can't Make a Profit

The world’s largest vacation rental company suffered massive losses, turning the profitable company into a struggling one.

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Airbnb has an issue. 

Once putting out profitable quarter after quarter, suddenly it has an issue not only growing, but being profitable. The company has long been unique among fellow unicorns (private companies worth more than $1 billion), due to its profitability. While that is usually the case with Airbnb, this year, everything went downhill. With Airbnb spending big capital following issues with safety, technology and growing their user base, the once green section of their reports has now turned quite red.

According to an exclusive report from the Wall Street Journal, Airbnb has swing from a $200 million profit for the nine months through September to a $322 million net loss a year later.

That’s a huge hit for the once unique unicorn, since Airbnb’s special quality was its profitability. This loss of profit coincides with a roughly 70-80% loss in revenue. Due to these issues, Airbnb joins the growing number of tech IPOs for companies that aren’t profitable, whether falling from profitability or never being profitable.

Airbnb’s choice to IPO with losses puts some pressure on its situation. Wall Street has increasingly been wary of IPOs by companies with losses, like with the cancelled WeWork IPO. With WeWork’s unprofitability, the pressure from Wall Street led to their IPO being removed. These issues have likely put a massive dent in Airbnb’s quite large $30 billion valuation. Recent funding rounds put valuations closer to $18 billion.

Generally, Airbnb makes their revenue from fees placed on rooms/buildings rented out. A percentage of the total renting price is collected as a service fee, which is collected not only from hosts, who rent out places, but also guests, who rent out rooms.

The majority of expenses and work is pushed onto the hosts, who not only own the property and/or pay for it, but also coordinate with guests and clean up after them. All of this occurs while Airbnb collects fees from both sides.

While this form of revenue might not be expected to result in profitability, the method has worked out so far for Airbnb, with their past profits in the hundreds of millions. So why are they losing money now? Large expenses from investing in upgrading tech, safety, new marketing and mergers/acquisitions are eating at their bottom line, while the COVID pandemic has decimated all of their revenue streams.

Airbnb Business Model | Business Model Toolbox

Upgrading technology

Airbnb is essentially a technology company. They provide the ability and platform for hosts to rent out their property, and connect that property to a renting guest. Airbnb doesn’t own any of the properties they provide through their service, making their platform the money maker. Due to Airbnb’s product being their platform, their entire revenue comes from technology. 

The Wall Street Journal reported that due to this necessity for upgrading technology constantly, Airbnb is investing $100 million to upgrade their entire platform. The administrative costs for the company, such as for their headquarters, legal situations, accounting, and HR, have grown to $175 million, at least as of Q3 2019.

Safety

A lot of controversy has happened either with Airbnb as a platform, or Airbnb as a company. Everything from racist hosts to violent weapon situations have happened across Airbnb in the past couple of years. For example, last October, Vice reported on a nationwide scandal that involved changing guest housing last minute and gouging prices.

Following up to whenever Airbnb’s IPO occurs, they have been fixing safety issues on their platform to try to fix any problems and keep their guests safe. According to Vox, not long after the Vice investigation, Airbnb announced $150 million in new safety initiatives, including verifying all 7 million listings on their platform, creating a 24/7 safety hotline, and manually screening high-risk reservations.

With all of these assorted improvements to safety on the platform, Airbnb has made their platform much safer, but at the cost of hundreds of millions.

New marketing

According to the Information, Airbnb doubled their losses from the first quarter of 2018 to 2019. This would mean a loss of $306 million.

During Q1 2019, Airbnb spent $367 million on sales and marketing, which would mean a 58% increase from the year prior.

Mergers and acquisitions

Airbnb has made a few large acquisitions recently, including with Urbandoor, a competitor focused on long business trips and HotelTonight, a competitor focused on booking hotels. Both of these acquisitions are focused on expanding Airbnb’s reach and also turning them from a home rental company to a fully fledged travel company. Airbnb also is reported to be developing a loyalty program as well.

 

US Unicorns with the Most Acquisitions | TechCrunch

These purchases are mostly impacts on short term cash flow, with individual expenses dragging down the top line, and the added revenue helping to hold up the top line.

Overall, the majority of these purchases and investments are made to build Airbnb’s profitability and revenue streams. While these may hurt short term, Airbnb has been proven to be able to provide profit, and while this time is distressing for the company, their expansion, the focus on improving safety, and the upgrade to their technology are helping to build up the company to be bigger than what it was before.