Summary

We believe Sonder ($SOND) has the potential to generate >1,000% return in the next 5 years. Sonder aims to have the aesthetics of a magazine home, the quality consistency of hotels, and the operational efficiency of Amazon.

Disclosure: Volt Equity's CEO/CIO was an early Sonder Engineer. Volt has a long position in Sonder. Not investment advice. Investors should do their own research. See expanded disclosures below.

Comps / Grounding Stats

In 2019, the global lodging market was ~$800 billion dollars. 

Today’s big box hotels have revenue multiples ranging from 2x (Hyatt) – 8.6x (Hilton), as of February 9, 2022.

In Sonder’s 2021 November investor presentation, they conservatively projected their revenue to grow to ~$4B in 2025. 

If their 2025 revenue projections are close, using the 2x – 8.6x revenue multiples, their market cap growth from their ~$2B baseline today would be 300% – 1,620% in 4 years time.

While we believe these projections to be within reason (a topic for a future post), this post aims to give a quick and dirty overview of (1) Sonder’s value proposition, (2) superior business model, and (3) strategic position relative to hotels. In subsequent posts, we’ll go deeper on Sonder, including how they compare to Airbnb.

Sonder’s Customer Value Prop

Sonder provides stays that have the vibe of magazine homes with the quality and consistency of hotels at approachable rates. 

Sonder’s Business Model

While Sonder’s modern design aesthetic elevates the value of their properties above the monotony of big box hotel rooms, the company’s tech-native DNA allows it to cut costs and operate more efficiently.  The increased value and reduced cost creates the potential for higher margins than your traditional hotel.

Example of cost-cutting tech: the functionality of a traditional hotel concierge and front desk is replaced with Sonder’s app that lets guests check-in/check-out, get curated local recommendations, access 24/7 customer service, and more. 

Tech not only reduces operational cost during a guest’s stay, but also creates efficiencies in backend operations (e.g. logistics to take a building from signed-lease to opening, room pricing, room assignment, etc). Having the backend tech built in-house allows Sonder to vertically integrate and pass on savings to customers and increase margins.

Sonder’s Strategic Advantage

Though theoretically a superior approach in the long run, big box hotel names would be hard-pressed to mimic Sonder’s approach for a number of reasons:

1. Sonder’s team is tech-native, while traditional hotel companies are not. Besides the technical skills/talent that would need to be hired to pull off Sonder’s approach, the agile/disruptive culture of tech-native companies is not something that can just be purchased. Leadership would likely need to be switched out.
2. Little incentive to convert existing hotels. Major hotels like Hilton get the majority of their revenue from franchise-driven fees (which are a % of gross room revenue).¹ Since fees are gross revenue-based (vs. net revenue-based)², it doesn’t matter as much whether the operations cost is cut; Hilton gets the same amount.
3. Converting existing hotels face massive headwinds. Even if there were a strong incentive to cut costs, there are a lot of other barriers to convert existing hotels — 10-20+ years-long signed franchise terms, franchisee alignment/sentiment, upfront capital costs for conversion, having to let go of unionized hotel staff, vacancy that would be required during remodeling, etc.
4. Creating new hotels with this approach would cannibalize existing hotels. To sidestep the massive obstacles of converting existing properties, hotels can try to open up new tech-enabled properties. Opening up a new sub-brand is a common move with big box hotels, and likely a hotel's most viable approach to compete, but there are significant obstacles with this approach as well:First of all, Sonder has a decade of operational optimizations to bring costs down in the new tech-enabled model (which is a significantly different operating model requiring new supporting infrastructure). Underdeveloped infrastructure coupled with lower economies of scale at the outset would likely make the cost-cutting benefits of a sub-brand's tech-enabled hotel negligible when considering the opportunity cost of opening a “tried-and-true” traditional hotel.Second, in locations with supply saturation or limited demand, opening up new hotels would likely compete against their already existing legacy hotels in the same territory, cannibalizing revenue.

For all these reasons (and more), hotels will likely be slow to adapt, giving Sonder the window of opportunity to establish a strong foothold and become a dominant name in the hospitality industry.

Next Up — Sonder vs. Airbnb

Sonder has a clear value prop and strategic advantage when compared to big box hotels.  But what about Airbnb?  We’ll dive into Sonder’s strategic positioning in that context in our next post.

Disclosures

Volt Equity holds a long position in Sonder.

Forward-looking statements, including but not limited to statements related to future expectations, are based on Volt’s current outlook and assumptions. However known and unknown risks and uncertainties may cause actual results to materially differ from what is expressed in such statements. Any and all subjective claims and statements made on this site regarding companies or securities are strictly the beliefs and views held by Volt and are in no way meant to be an endorsement by Volt of any company or security and nor is it meant to be a recommendation by Volt to buy, sell, or hold any security.

Past performance is no guarantee of future returns.

Investing involves risk and possible loss of principal capital.

This content is not intended to serve as financial advice nor should it be the sole basis for any investment decisions. Volt does not purport to provide any legal, tax, or accounting advice. Investors should be aware of the inherent risks involved in investing in the markets and that past performance is not an indication of future results. Investors should also understand that there is no guarantee that Volt’s investment strategies or decisions will prove to be profitable. For full disclosures, please go to our Terms & Conditions page.

Footnotes

¹ In Hilton's 2022 February investor presentation, Hilton's 2nd major point for their investment case is that 90% of their Adj. EBITDA comes from fees, 75% of which are franchise driven.

² Source: franchisedirect.com & Hilton franchise disclosure documents