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Delving Into Airbnb's Buyback Plan

Motley Fool - Sat Feb 17, 7:00AM CST

In this podcast, Motley Fool host Ricky Mulvey and analyst Tim Beyers discuss:

  • Airbnb's $6 billion share buyback.
  • Lyft's earnings mistake and business fundamentals.
  • Why Uber and Lyft aren't as close as investors may think.

Plus, Motley Fool hosts Dylan Lewis, Deidre Woollard, and Mary Long join Ricky for a Valentine's Day-themed roundtable about finding red and green flags for investments.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Feb. 14, 2024.

Ricky Mulvey: We all make mistakes, but some cost more than others. You're listening to Motley Fool Money.I'm Ricky Mulvey, joined today in studio by Tim Beyers. Tim, good to literally see you.

Tim Beyers: Same here Ricky. We're actually face to face here and I have my coffee.

Ricky Mulvey: I can see it.

Tim Beyers: I'm caffeinating in real-time.

Ricky Mulvey: Hopefully, you'll be ready to go by, let's say, the midpoint of the segment. If we can get there, that'll be good. Let's start with Airbnb earnings. We've got another tech company. It's beating estimates, offering rosy guidance and still Wall Street is not happy with them. On this one I cannot understand why.

Tim Beyers: That makes two of us. This is an excellent business. Let's just hit some of the numbers here. If you take Airbnb at its word, this is a company that's generating close to $4 billion in free cash flow. Even if you take out the stock based compensation, it's still over 2.7 billion. This is astounding. Ricky, let's be clear here, this is not a company that needs to reinvest in huge amounts of cabinets upon cabinets of servers and lots of equipment. This is a very capital light business that does extraordinary cash generation. I don't get it either. The only thing I can surmise here is that the growth just isn't quite up to what Wall Street wants. But really, are we nitpicking here?

Ricky Mulvey: I would assume so. Also, I like that you went with servers rather than real estate for a lodging company. There is some strategic progress because I think there's two stories with Airbnb right now. There's the strategic discussion, the capital allocation discussion. Let's start with the strategic discussion though because they're basically listening to customers making the product better. That includes host cancellations declining by more than a third and quarter four of 2023 compared to the same time last year. They added the total price display, which means that 40% of the active listings are now charging no cleaning fee at all because surprisingly, customers of Airbnb don't like seeing a bunch of fees tacked on at the end. They're rolling out the service to more international markets, including Brazil. I think we have some thorns as a part of this, because it's Valentine's Day, we have roses and thorns. But I think Airbnb deserves some flowers for this move from the investors watching it.

Tim Beyers: I think there's no question. Look, Airbnb fundamentally is a software company. They have made huge investments in software. They've contributed into the open source software movement. The quality of Airbnb's business is directly correlated with how good the experience is of the Airbnb app. Price transparency is a big deal. If you make an app that is clean that gives you also a clean look at what you're actually going to be paying, that should have an impact. It's clearly having an impact here. Nights and experience is up 13.8% for the full year, that was up to 448.2 million. That's extraordinary. Up 12% in the quarter, that's up to 98.8 million. People are getting more and more comfortable using Airbnb. That just hasn't gone away, Ricky.

Ricky Mulvey: I wonder if Airbnb though, will get in its own way. There's a part of the letter that at least raised my eyebrows saying, "We believe that now is the time for us to expand beyond our core business and reinvent Airbnb. While this will be a gradual multi year journey, we're excited to share more about this later in 2024". They're saying they're at an inflection point. This is a business that seems to be doing very well, doing what it's doing. Does it need an inflection point? Does it need to turn around and refocus the business on a bunch of other things?

Tim Beyers: Probably not but let's be clear here too. I wouldn't say it's Airbnb getting in its own way. What I would say is that there are things that have been trying to get an Airbnb's way for quite some time now. All regulators throughout all 50 states and international territories. Anything that Airbnb can do to give itself maybe a bit more leeway to serve customers, earn some incremental revenue, and satisfy regulators is probably a good thing because regulators are not going away, Ricky.

Ricky Mulvey: Yeah, that's why they have a heavy investing. They seem to be investing heavily in their lobbying arm.

Tim Beyers: Yeah, of course.

Ricky Mulvey: Free housing or not free housing, but more open housing for people, which makes sense. They had the problems in New York City and I don't think that will be the only other major city where they're going to run into that. Even in Summit County, in Colorado, there's been a larger crackdown on short term rentals for ski vacationers. Last year I remember this is the capital allocation part. I remember you were, to put it lightly a little critical when Airbnb said that it was going to repurchase $2 billion in stock, it's about a year and a half ago. In this release, they're up in the anti Tim, they're going for six billion.

Tim Beyers: I normally would be a little frosty about this. I'm not frosty about this. Let me explain why because normally this is not something I'd be looking for particularly with a growth company. The buyback is having an effect and it's having a positive effect for existing shareholders. That's one of the reasons that I'm OK with this idea of buying back so much, but also because the amount of free cash flow that Airbnb generates. Let's just frame it a little bit here. Forget about the stock based compensation for a minute, that is hard to do. But just for a second, you're still talking about a company that's generating cash available for investment let's say that's around $3.8 billion annually. Airbnb roughly has about $8 billion extra of cash available just on its balance sheet today after you exclude all of the debt. They have tons of cash. Here's the thing that makes me OK with this. They still reinvest over 17% of revenue backed into product development.

They aren't skimping, Ricky. They are actually building out the product suite here and they're spending richly on doing it. There is that. They have excess cash that they can put to work and still build out the product set. Then in addition to that, the existing buyback from just this past year, which roughly about $2.5 billion, so it's somewhere in there. It's 2.3 to $2.5 billion, you draw down the existing share account by about 2.7%. In other words, if I'm an Airbnb shareholder, my share of the business went up by about 2.7% because of those buybacks. When they have a material effect and you do have the cash to do it without compromising your existing business, I tend to be OK with it. Now, here's the third piece, with the existing free cash flow number, Airbnb today trades in the range. When you do subtract all that stock based compensation of about a 3% free cash flow yield translated, this is trading for like, it's just an average business. This is an average growth business, we'll give it a 3% free cash flow yield. It's not trading expensively. If you're buying back stock when your stock is fairly priced, you got plenty of cash to do it. You aren't skimping on the business and you can deliver a little extra value to shareholders, I tend to be OK with it. I still don't think it's amazing, but I'm OK with it.

Ricky Mulvey: When the information changes, our opinions can change.

Tim Beyers: Absolutely.

Ricky Mulvey: Love to see it. Let's go to this Lyft story because I'm both sad about it. I find it a little hilarious. I can also resonate with it because who among us has never made a typo?

Tim Beyers: I have made some..

Ricky Mulvey: I don't want to throw stones at their investor relations department. The story is, Lyft reported last night and shares soared more than 60% in the after hours trading because there was a release that said profit margins were expected to expand by five percentage points. Later on the call, they had to issue a correction. They didn't mean 5% they meant half a percent but the Algo trading has already happened. We can get to the fundamentals in a second. There's probably a zoom call among the Lyft C-suite, the investor relations department. What's happening at that zoom call right now, if you had to guess?

Tim Beyers: Lots of anxiety, lots of worry, lots of lawyers involved. The SEC is likely to take a look at this. It's a mistake, I do not expect them to be punished severely here. It's a mistake and like you said, we all make mistakes here but mistakes in today's stock market get reflected in stock prices much faster than they used to.

Ricky Mulvey: I think there's some, I guess, longer term judgments not from the mistake itself, but also the reaction to it, especially from the CEO David Richer. He goes on CNBC and we watched the interview. It seems like he was trying to quickly move past the mistake. What is it? What did we learn? Measure it twice. I felt that he didn't really give real answers to finding out what happened. He was, I take responsibility and that we learned you got to measure twice, cut once. It was a little bit of an AI chat bot response to be completely frank.

Tim Beyers: I would have preferred if he had said take it right on the chin and say, look, we recognize that this was a market moving mistake.

Tim Beyers: And we deeply regret it. So, here are a couple of things we're doing about it so that we never repeat this mistake. I think what was missing here. Ricky not to get too therapeutic for you. This is not a therapy session for David Richer.

Ricky Mulvey: We'll have that afterwards.

Tim Beyers: We'll have that afterwards. But in this particular case, the missing piece which I have done many times here, Mr. Richer. So I am not blaming you here. But I think what was missing was the reassurance piece which is like, here's what we're doing to make sure this never happens again. That piece being missing, I think was a fairly big miss.

Ricky Mulvey: Let's talk about the business itself as well. Because there were some positive aspects to the lift quarter, gross bookings were 17% their adjusted earnings beat market expectations by 2x. Richer also says that the company plans on generating positive free cash flow for the entirety of this year, and this is a margin game. This is also a business that we like to associate closely with Uber. And Uber is doing really well too. So what do you think about the fundamentals of lift quarter?

Tim Beyers: I think we have to stop putting these two companies in the same category. Ricky, I know that's probably going to be a hot take for some folks here. These two companies do not belong in the same conversation. They just happen to be in the same industry, but they are nowhere near each other. That comparison needs to stop, and I'll tell you why. It's because the unit economics of Uber are improving and the unit economics of lift are not. They're getting worse. So let me give you a couple of numbers here. So for the year 2023, $6.21 of revenue per ride for a lift. That was down from $6.84 in fiscal 2022. That's worse. It's not great, Ricky. It's not great. If you want to go further, I'll say in terms of bookings, which is how lift tends to measure itself, $19.43 of bookings per ride, that was in 2023. That's down from $20.15 in 2022. So this is a story in terms of lift and how it's going to sort of emerge from here. This is going to be a story about gaining leverage, gaining cost leverage in the business because Uber is in a different place. It is about expanding opportunity, last mile logistics, what can we do with freight? What can we do with delivery? What can we do with ride share? What are the ways that we can capture more of the miles that go into last mile delivery of people, products, freight, all of these things. That is not the lift story right now. The lift story is how do we improve the marginal cost of moving a person from point A to point B? And if you can get it to a profitable place, then all the better. They do project free cash flow for the coming year. I hope that is true because on a unit economic basis, they're going in the wrong direction.

Ricky Mulvey: Well, and I think it'll continue to be difficult also worth mentioning the drivers strike. That's not just affecting lift Uber door dash on Valentine's Day. Honestly, good strategic decision on behalf of the drivers, but that will continue to play out with the unit economics story for both of the companies. Tim Buyers, good to see in person.

Tim Beyers: Thank you for your time and your insight. Thanks, Ricky

Ricky Mulvey: Up next, it's Valentine's Day. Happy Valentine's Day. So my co-hosts, Dylan Lewis, Dija Woollard, Mary Long joined me for a round table on spotting red and green flags for investments and potential partners. Valentine's Day is coming up. Maybe you're going out with someone newer. You're going to be looking for some red flags, some green flags. We're not going to do that a whole lot here, but we will be looking for some red and green flags for your investments in a little host round table, a whip around between the four Motley Fool Money costs. We're going to start with the green flags because we want to be positive and to start with the green flags, we're going to kick it to Dija Woollard.

Deidre Woollard: All right. Well, I'm not exactly the dating market these days, but if I were, I would like my companies to be mature. For the most part, I'm in the not big risk section of my life, so I like some steadiness. You know, something like it, like an eco lab or like a Cintas, a company that does the work. Something I can see in every bath from my visit. Why not? I like a decent dividend, dividend increasing over time. If the company can afford it, when that dividend yield gets a little too large and the company can't really afford it, I don't like it that much a little bit of red flag. I'd like to see a little debt if it's smartly used, but I want it to be steady over time. If there's a lumpy maturity dates, that's something I watch. But the major green flag for me is I love a good fan base. I like a loyalty program for a consumer company like an Altar or Chipotle or Starbucks or on the tech side, something like a salesforce, happy customers whether they're consumers or businesses. Major green flag for me. And the more that a company talks about it, the more I like it. So if they're breaking out customer cohorts and customer spend and they're doing it in this presentation where they're breaking it out all and it's easy to understand. I just love that.

Ricky Mulvey: I think we got three for the price of one, Dylan lose. You have a difficult one. No, it just means that Dylan has going to have a tough time following up. I'm glad I get to host this segment. Dylan, what you got?

Dylan Lewis: Well, I'm going to borrow a bit from some of the things that Dija brought up. I think steadiness and in my case that means strong financial foundation and flexibility. Really a balance sheet that is built to weather storms and puts management teams in a position to take care of their customers, employees and shareholders, all three of those groups. And also invest in opportunities as they pop up and are interesting. And I think just in terms of what it looks like on the balance sheet, cash well in excess of debt. Getting at exactly what Dija was talking about. Discipline on capital allocation, clarity on how they're making decisions, and a margin of safety for investors. I think a great company that maybe doesn't immediately come to mind as a financially steady and incredibly stable business is MercadoLibre. And that's because they are a growth business by most standards. But Meli has had a ton of macro headwinds in the very fragmented markets that they operate in. It has not affected their growth when it comes to their key business metrics. And even though they've had to deal with repricing of growth and an adjustment on their multiple, they've been able to weather that. And they've actually been a company that has hired during a period of mass layoffs in tech. That is all because of the financial position the company's in. And it makes things so much easier for employees, for shareholders, and for fans of the business.

Ricky Mulvey: I'm going to throw in a couple. One is high inside ownership, especially for the smaller cap stocks, which is where I like to play. You want to see a leader or a leadership board that is tied to the mast in terms of financial success riding along with you, the shareholder, and also beyond that, with some of the more mature companies, not just the leaders of the company. I love seeing a company that can control its share count and make sure and have employees act as owners owning stock in the company. I think Home Depot is a good example of that. Then I'll also throw in the ability to have a really big green flag of a mote and some obvious risks. If I know the risks, that's good. I everybody's got trauma. I want to know what it is. With that, I'll throw in Charles Schwab, huge mode has some obvious risks that people know about and also Taiwan Semiconductor. We know the political risks. We also know that it can do manufacturing that no other company on the planet can do with that let's go to the red flags. We've had enough positively. Let's go into some things to watch out for red flags. Mary, what you got.

Mary Long: To be clear, kindness is a green flag 100% but large goodwill impairment charges are a red flag for me not because acquisitions are bad or all acquisitions are bad, but if you are pulling a teledoc and you're writing off $13.4 billion that makes my ears perk up in a not so good way. Yes. Part of that is because of it makes me question management's capital allocation strategies, but also from a strategic standpoint, if you are so intimidated by or worried about a competitor whether it's a direct competitor or someone more tangential that monetary judgment goes to the wayside. That raises a lot of questions for me about the belief that you have in your business to execute on the strategy at hand. It's a money problem there, but a capital allocation strategy issue, but also something more deeper seated. You're insecure about yourself and no insecurity is tough to get past sometimes.

Ricky Mulvey: When money's cheap, it's easy to make big acquisitions. I'm going to highlight, look at what management highlights is what I would say. Sometimes management really likes to bring investors attention to the adjusted EBITDA metric. Always makes me wondering what adjustments they're making and some of these stocks end up doing well. DraftKings would be an example of that. But I like to see real bars. What are the hard metrics that you're looking at that you're trying to step over and with that, we'll kick it to Dylan Lewis.

Dylan Lewis: Let's stick with metrics for a second. I think shifting key business metrics is a massive red flag for me and one that is timely with Meta moving away from some of their user level reporting and to more of a platform based approach not breaking things out with Facebook in particular, more of a focus on overall activity and add impressions on the platform. You could tell a similar story with Apple moving away from iPhone volume and average price metrics. That was something they did a long time ago. Now in both of those cases, strong business, it didn't wind up being a big deal but the reason I think it's important is usually when something like that happens, it's because management feels like they can tell a better story with a different metric and in almost every case, no management team is going to stop reporting something that they can brag about. They are always going to look for the thing that helps paint a great picture. When we see those things shift, it's worth asking questions about the business. In my head, it's being across the table from someone who's losing an argument and keeps changing the goal posts.

Ricky Mulvey: Speaking of moving the goalposts, Deidre what red flags do you have?

Deidre Woollard: Moving things around. I don't enjoy it. Keep your dates, especially when it comes to your reporting deadlines. Unless you have a good reason if there's like an acquisition or something like that, that works but delayed or missed repeated reporting deadlines that's a big red flag for me. I saw that with Latch, they kept moving around the reporting dates. They had a variety of reasons, but it made me not trust the company. The other thing I think with dating and with companies you want to do a little searching around. You want to see what the world says about this company. I look for things like short reports, activist interests, anything that can impact the company materially. I take a little cruise through SEC Edgar and see if there's any filings that look a little weird or something that I don't understand. Just a little background check for the company, None of that can be a strong red flag. In fact, a lot of times sometimes something that it could be a yellow flag could turn back to green. But I just want to know what's out there and if I've got a question, I want to get an answer on it.

Ricky Mulvey: If we can find short reports for potential romantic partners, that would be something. There are Facebook groups called are we dating the same guy in this city where people can look and see and sometimes you get some short reports on there. Let's move on to dating because we're coming up on Valentine's Day. We've done the investment stuff and I'm going to let you all choose. You can pick a red or a green flag. Dylan, what do you got?

Dylan Lewis: I think mine is mostly just a way to look at whether something is a red or a green flag. That is, I think you should be able to do absolutely nothing with somebody and love it. Dates are great, big nights out are awesome. Those are the IPO days of relationship though 95% of the time you are with someone, you are just having a normal day, whatever that might look like for you. Have awesome times together, go do cool trips, but look for someone that makes the mundane parts of life great.

Ricky Mulvey: Boring Dylan. Deidre what's you got?

Deidre Woollard: I like to interview people, and certainly that was true when I was dating people. But I have two rules. The first one is, and I use this for friends, CEOs really anybody. I ask people about their first job. What I'm looking for is someone who had a not great first job and probably in their teenage years, something menial, something, customer facing dishwashers or warehouse workers or having to do retail working, fast food, anything like that. I'm looking for someone who it's on the bottom, learned it factors into everything, how they treat people, how they tip, how they think about the world. I'm going to share another one. This one's weird, but I used to date some comic book lovers back in the day, Batman versus Superman. Now, hear me out. In my opinion, you want someone who prefers Batman because Batman, he's got the utility belt, he's got all the things right. He's using tools and resources to get the job done. Superman didn't really have to do anything, he's just superman. He came here from another place. He's just good because he's here versus being on Krypton. I'd like to see the work. It doesn't have to be Batman versus Superman. I would like someone who'd like preferred like an Iron Man to an Aqua Man. It's all about the tools and the work, and the intelligence.

Ricky Mulvey: Batman, a lot of trauma not a lot of therapy, that's the problem, Deidre.

Deidre Woollard: That is good point.

Ricky Mulvey: I'm going to go with something that can be a red or a green flag and it's if you have friends that care about you, if you have a good group of friends. Do all of them seem to go one way or the other? Because when you're dating someone, sometimes you can be in the phase, and maybe your friends see something that you don't, especially if it's a unanimous decision. Also, does your partner treat their friends differently than they treat your friends? Mary Long, what's you got?

Mary Long: I promise to be Peter Lynch and throughout. Here it goes. I always want to see how a person acts out in the world. Impressing on a date, especially a first date, is one thing you're on, you're trying to give your best impression. But seeing a person when they're in their natural habitat or when they just how they act, when they think that no one's watching or paying attention tells me so much about who you are, whether it's you're around friends or you're at a restaurant, or you're on a road trip, just watching the world go by. If your baseline always is to be kind and engaged and generous and on even when a lot of other people would be off. That is a big green flag to me.

Ricky Mulvey: Happy Valentine's Day to all of you. Thank you for joining me on this host whip around. As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening, will bee back tomorrow.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Deidre Woollard has positions in Apple and Meta Platforms. Dylan Lewis has positions in MercadoLibre. Mary Long has positions in Airbnb. Ricky Mulvey has positions in Charles Schwab, Home Depot, Meta Platforms, and Taiwan Semiconductor Manufacturing. Tim Beyers has positions in Apple, Chipotle Mexican Grill, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Airbnb, Apple, Charles Schwab, Chipotle Mexican Grill, Home Depot, MercadoLibre, Meta Platforms, Starbucks, Taiwan Semiconductor Manufacturing, and Uber Technologies. The Motley Fool recommends Cintas and recommends the following options: short March 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.

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