Sonder Holdings, the tech-driven hospitality disruptor, has been on a roller coaster ride since going public in early 2022. The company, known for its stylish, apartment-style accommodations targeted towards millennial travelers, has faced headwinds from a volatile travel market and a hesitant real estate development landscape. Yet, buried deep within its recent Q3 2023 earnings call transcript (Source: Sonder Holdings Q3 2023 Earnings Call Transcript) [https://seekingalpha.com/symbol/SOND] lies a potential game-changer, a profitability engine that could propel Sonder towards its long-awaited goal of sustainable positive free cash flow.

The engine isn't a new app feature or a flashy marketing campaign. It's something far more fundamental: Sonder's strategic shift towards hotel properties.

On the surface, this might seem like a simple diversification tactic. But the numbers tell a far more compelling story.

RevPAR Growth by Property Type (Comparable Properties)

Reference: (Source: Sonder Holdings Q3 2023 Earnings Call Transcript) [https://seekingalpha.com/symbol/SOND]

While Sonder's overall RevPAR declined 3% year-over-year, comparable properties (those live since before January 2022) showed 3% growth. Digging deeper, we see a stark difference based on property type: hotel properties witnessed an 8% RevPAR growth, while apartment-style properties grew by a mere 1%.

Why is this significant? Because hotels, while typically boasting slightly lower RevPAR than Sonder's apartment-style offerings, come with a crucial advantage: lower operating costs. This dynamic is clearly illustrated in Sonder's Q3 results:

Total overhead costs saw a remarkable 14% improvement.Total property level expenses per occupied night decreased by 9%.Reference: (Source: Sonder Holdings Q3 2023 Earnings Call Transcript) [https://seekingalpha.com/symbol/SOND]

Hotels tend to have lower rent costs and lower property-level expenses. They often have centralized utility systems, streamlined cleaning and maintenance processes, and a more standardized setup, all contributing to a lower cost per occupied night.

The Emergence of a Hidden Profitability Engine

What we're witnessing is the emergence of a hidden profitability engine within Sonder. As the company continues to shift its portfolio towards a higher proportion of hotels, these lower operating costs are starting to have a significant impact on the bottom line. This is evident in:

The impressive 60% improvement in free cash flow year-over-year, from negative $39 million to negative $16 million.A 21% improvement in free cash flow margin, from negative 31% to negative 10%.Reference: (Source: Sonder Holdings Q3 2023 Earnings Call Transcript) [https://seekingalpha.com/symbol/SOND]

Let's do some back-of-the-envelope calculations. Assuming Sonder maintains its current trajectory of converting 30% of its portfolio to hotels annually (based on the 10% shift from apartments to hotels over the past year), and assuming a conservative 5% cost savings per occupied night for hotel properties, we can project a potential annual cost reduction of approximately $11 million based on their current annual occupied night count. This doesn't even factor in the potential for even greater cost savings as Sonder refines its hotel operating model and scales its hotel portfolio.

This strategic shift towards hotels isn't just about diversifying offerings; it's a calculated move to leverage a more profitable operating model. It's a play that, if executed effectively, could accelerate Sonder's path to sustained profitability and unlock significant shareholder value.

Analysts Are Missing the Story

While analysts are focused on Sonder's challenges with RevPAR growth and corporate sales, they're overlooking the quiet revolution happening within its portfolio. This hidden engine of profitability, driven by the strategic shift towards hotels, could be the key to Sonder's future success.

"Fun Fact: Sonder's tech-driven approach extends beyond its guest app. The company utilizes data analytics to optimize pricing, manage operations, and even select new property locations!"