Sonder Holdings: Sizing Up An Airbnb-Like Small Cap Stock (NASDAQ:SOND)

“A book is the cheapest ticket you will ever hold.” – Stefanos Livos

Today, we take our first look at an interesting small-cap name. Like so many firms that came public via a SPAC, during that craze in 2021, the stock has found itself deep in official ‘Busted IPO‘ territory. Can the shares rebound in the second half of 2022? We will try to determine the answer to that question via the analysis below.

Company Overview:

Sonder Holdings (NASDAQ:SOND) is headquartered in San Francisco. The company operates and manages properties comprising 1, 2, and 3+ bedrooms, and studio apartments, as well as 1-bedroom hotel rooms for leisure travelers and families and professionals. It currently has some 7,700 live units across 38 markets, 10 countries, in approximately 250 live properties.

This Airbnb (ABNB)-like Busted IPO currently trades at just under $2.50 a share and sports an approximate market capitalization of $530 million. Sonder came public via SPAC in the spring of last year with a pro forma equity value of approximately $2.9 billion.

Sonder is different than Airbnb in that it signs multi-year fixed leases, mixed leases, or revenue shares with its property owners. A typical example would be Sonder entering into an agreement with an apartment or hotel REIT in which it signs a lease for an unfinished property. The agreement gives Sonder the right to renovate and operate the building and the REIT predictable and consistent cash flow.

Sonder rents its property units to customers through its own website and app as well as online travel agencies.

Sonder provides a state-of-the-art mobile app interface. This platform enables guests to book a place, check-in, access the WiFi in the abode, contact customer service, and check-out.

First Quarter Results:

On May 11th, the company reported first quarter revenues rose over 150% on a year-over-year basis to $80.5 million, nicely above analyst consensus expectations. RevPAR (Revenue per available room) rose 52% from 1Q 2021 to $117 as the hotel industry recovers from the pandemic. The overall occupancy rate rose 700 bps to 73%.

Some other key data points from the first quarter earnings report. Net income was $22 million for the quarter. However, that appears to be on a non-GAAP basis. Free cash flow for the quarter was a negative $65 million and adjusted EBITDA was a negative $83 million. It should be noted that the company is investing heavily to convert properties as its live and contracted units are up to 19,300 as of the end of the first quarter. That is up 48% from the same period a year ago and live units rose 54% to 7,700 over that time as well. Bookable nights rose 68% in the quarter to 689,000. The company has rapidly signed up 250 corporate traveler accounts after just launching that offering in the second half of 2022.

Analyst Commentary & Balance Sheet:

Since March, three analyst firms including Citigroup and Oppenheimer have either initiated the shares or reissued Buy ratings on the stock. Albeit, one of these contained downward price target revision. Price targets proffered range from $7 to $9 a share. Goldman Sachs recently maintained its Hold rating on SOND and lowered its price target to $4 from $6 previously.

There has been no insider buying in this stock since it came public despite the pullback in the shares since the IPO. Short interest in the stock is only around one percent. The company ended the first quarter with just over $400 million in cash and marketable securities against just over $150 million of long-term debt on its balance sheet.

Verdict:

The current analyst consensus has the company losing roughly 85 cents a share in FY2022 as revenues more than double to over $480 million.

Sonder is obviously targeting a very large market. This is an interesting growth name. I do have several concerns around it. First, if cash flow continues to be as negative as it has been as the company builds out units, another capital raise seems likely on the near/medium-term horizon. Leadership also mentioned ‘Supply chain disruptions and labor shortages have caused some property openings originally scheduled for early this year to be delayed to subsequent quarters‘ during its earnings call.

In addition, growth names have been punished by the market in 2022, especially unprofitable ones. When this ends is anybody’s guess. Finally, both the domestic and global economies have been cooling significantly so far this year. Energy prices continue to soar. If this continues, global travel demand is obviously going to take a hit.

I would like to see some insider buying in this stock given the shares are about 80% lower than when they debuted. That being said, this high risk/high reward name probably merits a small ‘watch item‘ holding for aggressive investors given the potential of its business model.

“Anyone who needs more than one suitcase is a tourist, not a traveler” – Ira Levin