24.03 Liontrust Global Innovation Report - The Rise of AI 04.24 - Flipbook - Page 27
generating impressive profits
‘The hotel company without any hotels’, Airbnb is often cited as
emblematic of technology-led, capital-light businesses disrupting the
old guard. Yet over the 14 years since it was founded, it has also
often been used as an example of how, for all of their innovation,
such businesses can still be lacking when it comes to profits.
Things change. On the eve of Covid, Airbnb generated around
$5 billion of annual revenue and was barely breaking even. Out
of necessity due to the devastating impact of lockdowns on the
business in 2020 and 2021, effectively all but outlawing the
business temporarily, Airbnb dramatically cut costs to keep the
lights on, including halting all marketing expenses. Many of these
cuts were kept as the business rebounded strongly on reopening,
unleashing a meaner and leaner company. Today, Airbnb generates
around $9 billion of annual revenue and around $4 billion of free
cash flow, a phenomenal 40%-plus free cash flow margin. This is
what capital-light innovation looks like at scale, and it is a thing
of beauty.
Uber has long been a disruptive force in the transportation industry,
revolutionising the way we think about getting from point A to point
B. Its technology-driven, on-demand model has made it a household
name in over 900 metropolitan areas worldwide. We have all
experienced the convenience of Uber’s value proposition yet Uber
did not make a profit for a long time. Then Covid struck and the
world stopped moving. Fast forward and we are confronted by a
very different picture. The company has reported profits capturing
the attention of investors who see long-term value in its transformative
business model and ceaseless focus on innovation.
At its core, Uber’s business model is an amalgamation of brilliant
simplicity and intricate logistics. The company is a classic example
of a platform business that connects riders and drivers through an
accessible, user-friendly mobile app. The genius lies in its scalability:
without owning a single vehicle, Uber expands by acquiring more
users and drivers, who are essentially the assets that make the
model so lucrative. This asset-light strategy has enabled it to rapidly
enter new markets and diversify its services, which now range from
food delivery (Uber Eats) to freight logistics (Uber Freight).
Uber’s recent profitability is particularly remarkable given its
historical cash burn. A combination of driving efficiencies across
its organisation, scaling back on less profitable endeavours, and
increasing revenue from high-margin services have contributed to
this positive financial turnaround. The shift to profitability is not
merely a short-term achievement; it’s a fundamental change in
business dynamics that enhances the company’s viability and we
believe makes it an increasingly appealing investment option.
Past performance does not predict future returns.
The rise of AI: Technology and Innovation Report - 27
