The AirBnB Valuation – Assets are the New Liabilities

Airbnb has announced they are raising capital at a $30 billion valuation.  Yep.  That’s Billion with a “b”, as in “bananas”.  Boy band Backstreet Boys.  Bazinga.  B-b-b-Benny and the Jets.   The valuation itself isn’t so surprising.  There are plenty of unicorns and mega-unicorns around.  Airbnb is plenty popular and they seem here to stay (even though, personally, I’m willing to pay extra to not feel like an awkward house guest).

However, the valuations, and the financial and (presumably) consumer successes of the AirBnB’s, the Ubers, etc. illustrate a much more significant, overarching point about economic and social transformation.  As a society, we are moving away from the need for each of us to own our own stuff.  From a venture capital perspective, we have been drilled over and over about how less capital intensity is more desirable from an investment standpoint.  You need to commit a smaller amount of cash to a given investment, consume less working capital, suffer potentially less future dilution, because you don’t have to finance purchases like factories, machinery, buildings, or cars.  For the most part these were decisions based on capital efficiency and attractive business models.

The new wave of ventures is different.  Thanks to these new consumption models, the economy is evolving from separating capital-intensive and capital-light businesses (and thus those likely to be financed by equity vs. debt), to capital-leveraged businesses, where the company doesn’t own any capital, or (much) labor for that matter.  Instead, the new company puts in infrastructure to allow existing capital to connect to those who can use it at a given point in time.

The asset sharing concept makes so much sense from an economic standpoint that it makes one wonder why it took quite so long for asset-sharing businesses to catch on.   To an extent, we have been abandoning assets in subtle ways before the advent of the home and ride sharing platforms.  Netflix, Amazon, and Hulu have been making owning movies obsolete.  Pandora, Spotify, and Apple Radio have turned compact discs into drink coasters.  We even share those services by sharing passwords.  Amazon allows the sharing of Kindle books.  Of course, there has been private jet-sharing for quite a long time, but unless your spectator sport of choice is The America’s Cup or your favorite show is “Polo Night in America”, that really doesn’t hit home to the common consumer experience.

Time share lodging represents a sort of halfway house between assets that were purpose built for sharing and those assets that we already have and choose to monetize, but because they are so unmarketable (and you can’t simply abandon them), they are financially about as attractive as the “before” picture on a face transplant surgery brochure…

Those assets are ones that are purpose-built to replace assets that others might own individually.  The new shift is to utilize more fully the assets that we already own.   Americans spend an average of 1 hour, 41 minutes a day in their cars.  That’s 22 hours, 19 minutes a day when the car is simply unused, or roughly 93.7% of the time, when our car is unused.  How do you feel about that $400/month car payment now?  Theoretically, a car could serve the needs of 14 people in a 24 hour period, and not require rationing.  Owning a car is massively capital inefficient, which is part of the reason they cost so much to rent – you are not just paying for the time you use the car, but for the time nobody uses it.  Second home ownership is nearly as bad.  Assuming that you have to work for a living, and you get 4 weeks of vacation, your second home is unused an average 93.4% of the time.  Some second homes are rented when the owners aren’t using them, but Airbnb has, of course, made that much easier.  Compare the 6.6% occupancy rate of the second home to the 65.6% occupancy rate of U.S. hotels in 2015.  Guess who the more “motivated seller” is.  William Shatner, I love you, man, but you can’t compete with that…  Like Star Trek:  The Motion Picture, it wasn’t your fault (but Star Trek V was…)

The result, of course, is the remarkable valuation of companies that are disrupting the models of similar companies that are saddled with the albatross of asset ownership.  Airbnb’s business model is about exploiting the fact that many of us suckers own a second home or apartment that we only use a fraction of the time and pay for regardless. Check out the market capitalizations of publicly-traded hotel/motel companies in the U.S. ($ thousands) (Source: Pitchbook)

Las Vegas Sands 41,808,619
Hilton Worldwide 23,836,050
Marriott International 18,763,570
Loews 14,361,372
Host Hotels & Resorts 13,746,730
MGM Resorts International 13,680,482
Starwood Hotels & Resorts Worldwide 13,179,600
Wynn Resorts 9,835,987
Wyndham Worldwide 8,161,260
Hyatt 7,392,093
   

At a $30 billion valuation, Airbnb is worth more than every publicly-traded hotel company in America except Las Vegas Sands.  And it doesn’t own a single hotel, motel, or even a trailer.  Instead of building additional lodging capacity, Airbnb simply allows us as an economy and a society to make more efficient use of the lodging capacity we have already built.  Airbnb’s risk wasn’t about hoping that they can generate a good return on investment on investments in assets.  It was about whether we could make the cultural shift of letting strangers into our homes or stay as paid houseguests on strangers’ properties.

An analysis of Uber is not quite as straightforward, but is fairly illustrative.  There are no publicly traded cab companies, but there are publicly traded car rental companies – a decent, albeit imperfect proxy.  Here is a list of the publicly-traded auto rental companies in the U.S.  ($ thousands) (Source: Pitchbook)

Amerco 6,874,412
The Hertz 4,431,780
Avis Budget Group 3,634,605
Ryder System 3,460,891
Hertz Rental 973,300
SP Plus 559,012
Crowd Shares AfterMarket (Acquired on 11/21/2008) 9,477
Peartrack Security Systems 2,635

Uber’s valuation of $60+ billion over over three times the market caps of every company on this list combined.  Again, I’m sure Uber doesn’t own a single car (it’s hard to imagine Uber offering their executives “company cars”, isn’t it?).  Fewer assets means higher value.

What’s more, the asset-sharing services survive value by collecting “economic rents”.  Economic rents is a term academics use to describe profits that accrue due to structural market inefficiencies – the inability of buyers and sellers to achieve a free-market clearing price.  While economic rents are usually invoked when describing tax and regulation policies, they exist here as well.  The reason is that, at the moment, Uber drivers and Airbnb hosts see fees as 100% marginal.  Their owners own these assets anyway, and they were prepared to absorb the full cost of ownership, but the services allow the owners to recover costs in such a way that every marginal dollar goes straight to the (mental) bottom line – every car and house is priced like an empty seat on an airplane about to push back from the gate.  Hoteliers and auto rental companies don’t (and can’t due to GAAP) think that way.  They must factor in depreciation, financing costs, maintenance, etc and the whole concept of profit is different, and leaves the established, old economy firms at a structural disadvantage to the disruptors. By valuing Uber and Airbnb as highly as it does, the market is betting that these economic rents will not disappear anytime soon – and in fact, they are the harbinger of a shift to a new cost paradigm to which the established players have no response.  Checkmate.

There are broader social and economic implications that we are only starting to contemplate – and they are jarring.  America has lost many, many jobs to technology (automated teller machines, increasingly sophisticated vending machines, computer-building robots, 3-dimensional printing, and so on) over the years – really, the centuries.  We are going to lose many more as the sharing economy takes hold and broadens in scope.  More shared Uber cars means reduced need for cars to be built, and driverless cars (is it me, or are they arriving waaaaaay sooner than we thought?) may put the very car owners themselves up against the wall.  More Airbnb locations means fewer hotels to be built and operated.  Which means that, in the modern economy, as much of a disadvantage as it is to own assets in the business world, being labor is even worse.  We are a capitalist society, after all, so we do kind of have an implicit understanding the capital is inherently advantaged relative to labor, because when you flip it around you get “worker paradises” such as North Korea, Cuba and the U.S.S.R.  That transition will make losing jobs to NAFTA and China look like an economic speed bump.  A happy outcome of this should also be better environmental outcomes – less demand for raw materials, less wasted energy and concomitant carbon emissions.  That doesn’t make your day if you’ve lost your job, or career, but for what it’s worth, the social good is there.  Economists think in terms of net job losses – not the loss of your job.

We are witnessing the dawn of post-industrialism right before out eyes.  We have long had massive surpluses of capital, but nobody had figured out a model (or had the technology) to make the surpluses efficiently available to would-be users.  It makes sense that the companies that have figured out how to collect economic rents on those surpluses should achieve massive financial success.  The asset-sharing companies are the economic future.  More efficient capital utilization. Less building, more using.  It’s a strange world now.  Less is more.  Night is day.  Assets are liabilities.

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2 Comments

  1. Another to add to your list: data centers. Massive consolidation in that space and, in essence, MSFT and AMZN are the homeowners with lots of extra bedrooms to rent. That has been good for their business, too, so those assets must make sense at a certain scale.

    Also, in some countries, rich people own a fleet of cars that they lease to poorer people so they can be professional Uber drivers. Seems like a compounding of the sharing effect.

  2. Services like Uber and Airbnb are highly overvalued. Why? They lack proprietary assets…save the software algorithms which can (and have) been replicated by others. Without owning the assets, their markets have no barriers to entry…and they will soon find themselves under extreme pricing pressures…and their competitors will offer better features and services! Let’s also not forget that the age of “time-sharing” is not new. The computer got its start in the 70’s and 80’s by connecting people (via “dumb terminals”) to massive computer centers. It was a huge business for companies like General Electric. Customers used (and paid for) only the minutes they needed. However, in contrast to Uber and Airbnb, these companies owned the central computer centers, and the profits flowed for years. Barriers to entry were large. Despite their longevity, not even these business were destined to survive forever…..their ultimate demise was the introduction and explosive growth of “smart” terminals…..followed by laptops, iPads, etc..etc.. We now have more power in our smart phones than an IBM 360 had in 1974! Oddly enough, the “cloud” is now returning us back to this old business model…albeit with far greater offerings and power.

    What’s my point? Absent a major change in their business models, these lofty valuations will not last long! Nothing last forever, but their life span is even shorter!

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