If your company’s valuations are growing leaps and bounds year after year, your revenue and profit projections, too, had better keep pace. In the case of SoftBank-backed Oyo Hotels and Homes, the company expects the contribution margin from its property business to rise 80 times in the next five years to $18.275 billion. In the twelve months till December 2019, the company expects a contribution margin of only $232 million, which puts the required growth rate at 140% each year for the next five years.
Contribution margin is the difference between revenue and variable costs. Oyo hasn’t provided its projection for revenue growth as part of a valuation report filed with regulators, although it’s safe to assume that some of the generous growth estimates are aided by a drop in projected variable expenses as a percentage of revenue.
And compared to a net loss of $460 million estimated in the twelve months till December 2019, Oyo expects a net profit of $5.1 billion in 2024. The valuation report put Oyo’s post-money valuation at $5.3 billion, which ends up looking low in light of the high growth supposedly lying ahead.
The expected growth drivers are interesting, too. While China’s share on the total contribution margin is expected to remain intact at about 25% five years from now, India’s share is estimated to drop to less than 12%, down from as high as 53% currently.
The United States is estimated to become the second largest market, with an estimated contribution margin of $2.6 billion in 2024. Joining these three in the top five are Japan and UK, with an estimated contribution margin of $1.8 billion and $1.6 billion respectively. Currently, revenues from the US, Japan and UK markets stand at $18.2 million, $9.9 million and $5.6 million respectively.
Research by NYU professor Pankaj Ghemawat shows that differences between countries – be it geographic, cultural, administrative or economic – matter to a firm’s performance in different regions in significant, predictable ways. The greater the distance, the relatively weaker the subsidiary’s performance the research showed, citing Walmart Inc.’s performance in different countries.
In this backdrop, it’s interesting that Oyo’s 2024 vision is largely dependent on markets that are geographically, culturally, and economically vastly different from the market it started operations in.
Aggressive projections can not only result in a hole in the pockets of investors who believe them, but can also result in other problems. In Japan, the Nikkei Asian Review reported last month that some of Oyo’s employees in Japan were asked to take a pay cut, and that it reneged on some employment contracts, after it fell short of initial projections for the Japanese market. Oyo denied anything was amiss.
For now, its investors, led by Softbank, would rather believe in the projections, rather than worry about things that could come in the way of Oyo raking in a $5 billion profit in 2024.