Airbnb and Uber: All Set to Take Off?

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Few stocks exemplify the gig economy as much as the likes of Airbnb and Uber. Airbnb challenges the near-exclusivity of large hotel chains while Uber has almost completely diminished the monopoly of heavily-organised taxi operators.

The pandemic, however, was a challenging time for certain sections of the economy: travel restrictions and reduced commutes spelt an ominous time for these rising stars. In this article, we highlight the latest goings-on that a shrewd investor would be sure to take into consideration.

Airbnb: Up Until the Pandemic

Prior to its IPO on December 10 of last year, Airbnb went from strength to strength in its yearly valuations by private investors. In 2015, it was the first company to enter Cuba after the Obama Administration’s easing of restrictions. Its roster of investors – both past and present – included the likes of venture capital firm Andreessen Horowitz, Hollywood actor Ashton Kutcher, Google Capital and Technology Crossover Ventures (TCV).

In terms of economic impact measured in terms of both host earnings as well as other expenses borne by users, the company’s biggest beneficiary was estimated to be the U.S., with mostly other Western countries making up the rest of the Top 10 list.

But then the pandemic hit. The company laid off 25% of its workforce – around 1,900 employees – in May 2020. The company lowered its internal valuation from $31 billion to $26 billion, and considered delaying plans for an IPO – before going public in December to raise $3.5 billion of capital.

The number of bookings vis-à-vis revenues painted a similarly grim picture.

In terms of competitive landscape, the company –as of 2019 – was the junior-most but growing competitor to other travel portals in terms of gross bookings. However, it is no stretch to assume that 2020 was a bad year for both Airbnb and its competitors.

Comparative Market Share of Gross Bookings in 2019

Uber: Up Until the Pandemic

Starting off as UberCab in 2009, Uber became the brand most people associate with ride-hailing after it took the U.S. by storm and expanded into Europe, Asia and South America. The company has three arms: Eats (a food delivery service), Freight (a logistics service) and an autonomous vehicle unit (Advanced Technologies Group or “ATG”).

On May 10, 2019, the company went public with an IPO following which the share price dropped 11%, resulting in the biggest IPO first-day dollar loss in US history. Doing a side-by-side comparison of the company’s performance versus its perception and growth reveals that high revenues do not necessarily translate to high profits.

To understand why, it’s important to note that Uber is actively at war with the organised personal transportation sector. To draw customers towards it, the company expends a vast sum of money on administrative expenses to continuously draw in a large pool of drivers as well as on marketing and promotions to keep users hooked. The charges levied on a user does not go very far in keeping the drivers interested and are too low to translate to a high profit for the company. In other words, every ride on Uber actually costs the company money.

After the pandemic hit, the company announced plans to lay off around 14% of its workforce – 3,700 employees – followed by an announcement a fortnight later that a further 3,000 employees would be laid off and 45 office locations would be closed.

As a whole, North America was and remains its major revenue earner.

The company’s Eats and Freights arms weren’t historically a major revenue earner. However, the Eats arm proved to be a lifesaver for the company during the pandemic when food delivery orders skyrocketed.

In fact, in terms of revenues earned, Uber bounced back from the effects of the pandemic very quickly and built an upward momentum from Q3 2020 onwards.

But, we reiterate, whether high revenues translates to profits passed down to Uber’s shareholders is a question mark.

Another key feature of the company has been its active acquisition/partnership spree. In 2016, the company sold its China operations to DiDi in exchange for an 18% stake in DiDi and a commitment from the latter to invest $1 billion in Uber. In 2018, Uber combined its operations in Russia and some CIS countries with those of Yandex.Taxi and invested $225 million in the joint venture. It did the same with Southeast Asia-based Uber clone Grab in exchange for a 27.5% ownership stake. In 2020, it acquired Careem – an Uber clone in the Middle East and North Africa – and sold its Eats operation in India to Zomato in exchange for a 9.99% stake.

Interestingly, in these current times, the company acquired U.S. delivery service Postmates for $2.65 billion in December of last year. In January of this year, Uber ATG was sold to self-driving startup Aurora Innovation for $4 billion while Uber invested $400 million into Aurora to take a 26% stake. In February, the company announced the purchase of U.S. alcohol delivery service Drizly for $1.1 billion in cash and stock.

All of these investments will be additional sources of market value impact for the company’s stock.

Airbnb and Uber: Where They Stand Today

In many respects, the two companies are quite similar despite being in different areas of the economy: their primary market is North America, they’re both champions of the “gig economy”, they’ve both had a grim 2020, and they both started off 2021 with a bang by outperforming the S&P 500 in Q1 2021.

In Q2 2021, however, the difference in outlook between the two becomes apparent. Airbnb is widely expected – even by Reddit’s avid stock-watching crowds – to become a highly-valued stock. Airbnb CEO Brian Chesky stated during the Q1 2021 update that the company expects the return of urban and cross-border travel to give the company significant tailwinds in the coming quarters. On top of that, as remote work becomes more and more prominent, this will likely boost the company’s home-sharing segment.

Meanwhile, Uber – like most Western ride-sharing companies – has been battling lack of driver availability, many of whom sought other avenues of work during the pandemic. As a result, fares in the U.S. have risen by an average of 40% in the month of June. But the company does have a ray of light in in the East – its stake in DiDi Chuxing (presently diluted to 15.4%) is bound to add an estimated $9-12.8 billion in value to Uber after the Chinese ride-sharing behemoth goes public later this year. DiDi also owns the largest electric vehicle charging network in China, with over 30% market share of total public charging volume in the first quarter of 2021. This, too, will prove to be an indirect means of shoring up Uber’s profits since China is the world’s largest market for electric vehicles.

However, in the immediate short term, Uber’s investee is in hot water: less than a week after DiDi listed on the New York Stock Exchange, the Chinese government announced on July 2nd that new users would not be able to download the company’s ride-hailing app due to an ongoing review after the Cyberspace Administration of China (CAC) reported that the app illegally collected users’ personal data. By July 6th, the company’s newly-listed shares fell more than 19% and lost $15 billion of market value on that day alone. The company also faces two lawsuits in US federal courts alleging that the company failed to disclose ongoing talks with Chinese authorities on this matter. For Uber, this is a cause for concern: the perceived diversification benefits from its investment doesn’t seem to be bearing fruit just yet. However, in the long run – barring DiDi’s complete closure by the Chinese government – it is still likely that investment benefits would materialize after the matter at hand is satisfactorily resolved.

Of course, the direction in which the stock is supposed to go is a matter of intense conjecture. Whether up or down, the price trajectory can be reasonably expected to be quite bumpy. For such scenarios, we offer the shrewd investor several products built around these two companies with a variety of leverage factors: Airbnb is available with a 3X factor (3ABN) as well as an inverse -1x Short version (SABN). Uber is available with a 3X factor (3UBR), a 2X factor (2UBR) as well as an inverse/short (SUBR).

Investors should also review our full list of short & leveraged ETPs as well as trackers to supplement their portfolios in other sectors and subscribe to our mailing list to keep in touch with everything happening at Leverage Shares.

Your capital is at risk if you invest. You could lose all of your investment.

Education Series: Single-Stock ETPs

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