Motley Fool Hidden Gems Investing - "A horrible use of $2 billion."

Episode Date: August 3, 2022

Airbnb's record bookings in the 2nd quarter weren't enough to boost the stock higher. Why? (0:25) Tim Beyers discusses: - Airbnb's highly questionable decision to allocate $2 billion for a share buyback plan - Match Group shares hitting a new low as the business clearly has work to do - MicroStrategy CEO Michael Saylor stepping down after the company reports an eye-popping loss of $94 a share Sign up for Stock Advisor at http://fool.com/foolfest and you’ll get a complimentary digital pass to our FoolFest 2022, our 2-day investing conference! (13:35) Ricky Mulvey talks with WSJ tech columnist Christopher Mims about Meta Platforms, Apple, and how companies are really using artificial intelligence. Stocks discussed on the show: ABNB, MTCH, BMBL, MSTR, META, AAPL Host: Chris Hill Guests: Tim Beyers, Christopher Mims Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Chris Hill. The fight between Apple and Meta Platforms is heating up and we've got the latest. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Tim Beyers, our man in Colorado. Thanks for being here. Tim Beyers. caffeinated, ready to go, Chris. That's good, because we got a bunch of earnings to get to, and we're going to start with Airbnb. Help me understand what's going on here, because Airbnb's second quarter revenue was up nearly 60%. Their bookings were

a record. At one point this morning, the stock was down more than 10%. It's recovered a bit. it. As we're recording this a little before lunchtime, it is still down 5%. This is a great quarter. What am I missing? I don't think you're missing anything. It came in at $2.1 billion, up 58% a year ago, and apparently a hair below the consensus of $2.11 billion. If that sounds like splitting hairs of hairs, you're right. Revenues were up 64% on a constant currency basis. It's just like, last time you and I got together, we said, less bad is the new good. Here's the reverse of that, good isn't good enough. If it's not great, then we don't want to hear from you. It feels pretty silly here. Revenue

was up 73% from 2019 levels, which is really interesting. And the gross bookings value was up 27%, which is, I mean, gosh, pretty incredible here at $17 billion. That's down slightly from $17.2 billion from the first quarter. But overall, really very good here, Chris. And I think in terms of the metrics, the key performance indicators here, the nights and Experiences data, which is essentially rooms booked, $103.7 million during the quarter. That's up 25%. All things look pretty good here, except for one thing I will point out that nobody's talking about. I guess leave it to me to be get-off-my-lawn guy here, but they said that they would buy back $2 billion worth of stock. I think that is a horrible idea,

Chris. I don't know why they're talking about this because of all the good things that they announced. If you want to be nitpicky about something, let's be nitpicky about a thing that actually makes sense, which is, why in God's name, if you're Airbnb, do you take $2 billion off of a balance sheet that's getting better when you're generating, honest to goodness, real free cash flow, and then throwing it at buying back shares when you don't need to do that. Chris, the number of things that Airbnb could do, buying tuck-in acquisitions of smaller companies in this space, reinvesting in R&D to make the software even better, maybe making some capital expenditures because Airbnb has shown some willingness to maybe invest in some properties

or maybe some prototype properties. There's a bazillion things you could do. And you want to throw $2 billion in cold, hard moolah at buybacks? What is Brian Chesky thinking? So I had as a follow-up question, they're buying back $2 billion worth of stock. is that the best use of $2 billion? And I have my answer. The answer is overwhelmingly, in your opinion, no, no, it's not the best use of $2 billion. I mean, it's a horrible use of $2 billion. And here's the thing, Airbnb has done a fairly good job. I mean, let's give them some credit here. So just looking at the cash flow statement here, Chris. Year over year, this is the comparable six months here, stock-based compensation expense.

In 2021, it was about $462 million. In 2022, $442 million. They've been really disciplined and diligent. Now, that sounds like a lot, but when you're a company that generates over $2 billion in net cash from operations, when you include that money, about $1.5 billion, when you take it away. They've been very disciplined in this area. They give away good stock-based compensation to their employees, but not to such a degree that they can't generate real cash from operations from their business. You've been really disciplined. You got a great balance sheet. You got lots of greenfield opportunity in front of you. There is no earthly reason to be buying back stock, none. Let's move on then to the stock of the day, which is Match Group,

the parent company of Tinder, Match.com, and many other dating apps. It's the stock of the day because shares are down 20% after second quarter revenue was light, their guidance was weak. There are times, Tim, when a stock takes a hit like this and it seems like a buying opportunity, But at the moment, and I say this as a shareholder of Match Group, at the moment, this seems like a business that has a lot of work to do. I agree. I completely agree. Revenue was up 12% to $794.5 million in the quarter. That lagged the forecast. Net loss of $31.9 million, and this is a company that's been profitable. They have a relatively new CEO in Bernard Kim, but the Tinder CEO, Renate Nyborg, she is leaving. She's leaving the company. This is not a good sign, in my opinion

here, Chris. It's just that Tinder is not doing, I guess it's not contributing in the way that match would like it to. And some of this is completely understandable. I mean, obviously, during the pandemic, getting together, people getting together, setting up in-person dating arrangements, I mean, that was a business that was compromised by the pandemic. So some of this is completely understandable. Having said that, it's going to be really fascinating to me, Chris, when we get earnings from Bumble next week. I want to see if this is an industry problem or if this is a match problem. And I don't think we have the answer to that, Chris. It's a great question because we saw this in the past few weeks where Snap reported

and everyone was quick to attribute the advertising problems that Snap was having to all other companies that sell digital ads, including and especially Alphabet. And Alphabet came out the next week and reported and basically said, no, no, no, no, we're not Snap. So, yeah, I think this will be very telling because, you know, absent any other information, you could look at Match Group and Bumble, for that matter, and look at the overall environment of, hey, the world is really opening up, and this seems like a time for these businesses to shine. And in the case of Match Group, that is not the case. It doesn't look like it. Now, let's be clear about something. If you were an investor and you wanted to make a speculative bet, I think I could

absolutely see a speculative bet on Match here. But please remember, that's what you're doing here. You're making an informed speculation right now, because the company you knew as a cash generating stable business that was profiting from a very durable trend, dating happens and will continue to happen forever as long as there are human beings. So clearly, there's a core business here that could get healthy. It could get healthy really quickly. And in which case, you'd be buying a value right now. But to your point, Chris, I think there's a lot of unanswered questions. Shares of MicroStrategy are up more than 12% this morning, and I do not think it's because of the massive loss the company just posted in the second quarter. My guess is the

stock is up because CEO Michael Saylor is stepping down. What do you think? And yet, he is still going to be in charge of Bitcoin, Chris? Is this one of those where everything is changing, but really nothing is changing, but we're telling you things are changing, but really nothing is changing? I don't actually know the answer to that, but let's be clear about what happened here. Because of the way accounting rules work, MicroStrategy did have to report the drawdown in the value of its digital assets to the tune of about $1 billion. I think it was a staggering per share loss of something like $94. It was $94 per share. Right. $94 per share loss, which is astounding. Having said that, there's going to be some

temptation, I think, amongst investors to say, well, it can't really get worse here, and maybe this is a value play here and we're moving Michael Saylor to the side. And I would say, please don't go down that path just yet. This is a very dangerous place for a company that's doing very dangerous things with the capital that it has here. So the balance sheet has essentially gone negative. And what I mean by that is the value of all of the assets on MicroStrategy's balance sheet now do not add up to as much as the debt that MicroStrategy carries. And that debt is tied to, it was basically used to buy Bitcoin here. And they're still buying more digital assets, Chris. I want to highlight just one thing very quickly. So people

really get how leveraged this company is. So they spent, it's about $225 million in capital expenditures, but those capital expenditures were for more digital assets. Essentially, MicroStrategy is saying, we're going to make an investment in something that's supposed to give us an expectation of return. That's things like factories, equipment, or even loans if you're a bank, but we're going to make it in things like Bitcoin. We're going to take hard assets, invest it in a variable asset and we have no idea what the expectation of return is and we're just going to keep doing this so nothing has really changed the quality of the balance sheets worse the way that microstrategy is investing is the same but michael saylor has

a new role. I don't think this is a company you want to own, or at least let's say this, Chris, it's not a company that I want to go anywhere near right now. Chris Hill I feel the same way. I get the reaction for the stock because it's clearly an indictment of Saylor. But as you say, he's staying on as Executive Chairman, this seems like a rough job for whoever the next CEO is. It remains to be seen if this move allows for the possibility of MicroStrategy broadening itself to take a look at the core operation that was developing analytics and business intelligence software and making that better because that's been widely ignored for a

long long time now so is there investments to be made there right now there isn't when microstrategy makes capital investments today it is buy more stuff that might go to the moon that's their capital investment strategy right now and i think that is sub-optimal to say the least So this is one of those things where a sound and fury signifying nothing is what it looks like, Chris. Tim Beyers, always great talking to you. Thanks for being here. Thanks, Chris. Can Meta Platform's artificial intelligence fight back against Apple's privacy restrictions? And Ricky Mulvey caught up with The Wall Street Journal tech columnist Christopher Mims to

talk about how companies are really using AI. Today, we're talking artificial intelligence. Joining us now to do that is Christopher Mims. According to Wikipedia, Christopher Mims is a technology columnist at The Wall Street Journal, which he joined in 2014. Mims received a bachelor's degree in neuroscience and behavioral biology from Emory University in 2001. Thanks for that intro, Alexa. I guess the point of that is, I know you write about how artificial intelligence is good at playing boring games. Not boring games, but games with defined

rule sets. And we'll talk about some of those games in a moment. But it is absolutely wild to me just how much better is a consumer artificial intelligence has gotten within just the past couple of years. That's absolutely true. I mean, when you talk about voice recognition, when you talk about the ability of smart assistants to do what we expect and be more flexible in their response to us, that's pretty impressive. You got a new column in the Wall Street Journal called Real AI for the Workaday World. Some of the applications you're excited though, you write, quote, isn't as flashy as some of the artificial intelligences that have been getting wider attention lately. About those games with defined rule sets, what are some of the games

that the AIs you're watching are playing? What's Amazon doing? What are restaurants doing? What are these recyclers doing? One very narrowly defined game that somebody has been training an AI to do is to recognize which particles in a stream of crushed up e-waste are valuable metals like copper and gold and sort those out of a stream of waste. That's a very narrowly defined task that AI is potentially great at and can have a really big impact on an industry where I think between 10% and 20% of e-waste is actually recycled. It's abysmally low, considering that it's literally gold. There's more gold in a pile of e-waste than there is in an equal-sized pile of gold ore from the ground. That's one example. Another example is, there's a company out

of Munich called Prezi Taste. They're using AI with a bunch of fast food restaurants whose names we would recognize, but they're not able to disclose, to take some of the cognitive load away from the folks who are really hard-pressed in the kitchen. Imagine you're working the line at a Chipotle, and you're trying to guess what lunch demand is going to be like. That means 30 minutes, 45 minutes ago, you had to decide how many chickens to throw on the grill and how much guacamole to mash up. That's hard when you don't have enough staff. This AI aims to trace the path of food from when it leaves the fridge to when it's delivered to somebody

and to use predictive analytics to figure out how much of that food you should be preparing at any moment on any given day. So that's another example of a narrow task that AI can be quite good at, and it can have a really big impact. I mean, there's a ton of giant companies that are trialing that technology right now. So those are just a couple examples. There are many others. But in every case where you're trying to apply AI,

and I think self-driving is another good example of this, The more that companies are able to narrow that task, the simpler they're able to make it, the bigger impact it has for them. AI is really not that intelligent. It's a big pile of math, and it's not very flexible. It's not great at doing a lot of the things that we were promised it would be able to do. I guess I would push back on that. It seems to me that there are programs that are getting rapidly more creative. I think of even just the difference between Dali one and Dali two, which is this incredible, uh, it takes text prompts and then generates images based off of them. Dali one would create these sort of like

weird mashup meme looking things. And then with Dali two, you know, you could type in like two bears at a picnic table and it could create this hyper-realistic stylized art. Like that seems to me to be the creative, um, like creative thinking that we were promised and going beyond those narrowly defined rule sets. Yeah, those are very cool. The results are very impressive, but I would hesitate to call it creative because, of course, the reason it's able to do that is it's ingested so many images that it has a super large library of images to draw from and remix. So, you know, is that creativity? It's not really generating something so much as sort of cribbing from its huge database. I think also, the essence of creativity is flexibility, is adaptability,

is having a working model of the world. Dolly's cool, but it's not going to teach our kids or babysit our pets or solve the world's problems. I think that there is a real challenge we have where humans are great at anthropomorphizing inanimate objects. We get excited about these new tools, but at the end of the day, they live in these tiny boxes or they live on the internet or whatever. They're not embodied. They're not really being put into robots yet. They break down in funny ways. There's been a bunch of funny uses of DALI where people will give it a really basic task like, you know, draw a pegasus. And it spits out these like hideous mutant things with no recognizable heads and like five legs. Or when you ask it to do human

faces, it's really terrible. They're all blurred and smudged. So I think it's a great example of something that can enhance human capabilities. Like a lot of designers have said, I get really tired of doing mock-ups all day long. But if I asked Dolly to generate like, you know, six different mock-ups of, you know, like blank business cards on creative backgrounds, it can do that in a snap. And then I can get onto the part of the client work that I enjoy. You know, the same way that the big models for language like GPT-3 and all of its imitators are great at autocomplete, right? They're autocompleting our emails and our texts. They're autocompleting code for programmers. They're generating fake reviews online. So, these tools are tremendous

when used by humans and can certainly make people more productive. They're not going to do anything on their own, though, because they're not flexible. They're really great at these pretty narrow tasks. It can do text prediction, but once you get beyond a couple of lines, it goes into Luluville. I do think some of the applications are a little bit frightening to me. You wrote about a company called Gong, which is essentially teaching salespeople to close more deals. As you write, it just basically is telling salespeople to listen more. But it's also looking at the way that we have conversations over Zoom in creative and unique ways. And I think there's a frightening future, which is someone is trying to sell you

something, and you don't know how your data is being used by that salesperson in order to sell you things. Absolutely. Well, keep in mind that we live in that present, right? One of the most powerful AIs on earth is used by Facebook and has allowed all kinds of ad targeting that gets us when we're at our most vulnerable and we're stuck in the loop of the infinite scroll on Instagram and advertises that mattress that our friends have been talking to us, just at the moment when we're tipsy and tired enough to impulse buy it. If you want evidence that that works, Apple taking that ability away from Facebook to some extent by enacting new privacy controls is costing Facebook $10 billion a year in revenue

and has a lot of advertisers who are targeting people crying foul. A lot of these direct-to-consumer advertisers that built their businesses on Instagram are freaking out because they can't reach people anymore. That AI is incredibly powerful. It knows us better than our own mothers, and it is largely a black box in terms of what it knows about us and how it's using that information. As a result, it's this incredible engine of commerce. Every one of us, every day, when we view that kind of targeted advertising, is but a single human mind up against the greatest hive intelligence humanity has ever concocted, and we're losing. And that's why we spend money there.

So, do you think that Meta's artificial intelligence capabilities can essentially plow through Apple's privacy restrictions with the engine that it's built up? I mean, one of the things you wrote about is that it has this now open source code that can understand every language on earth and that seems to me to be that that might be that might be able to plow over what whatever apple's throwing at it um i mean no no intelligence artificial or otherwise can can operate without its senses right like so meta's algorithm has been partly blinded by apple's uh privacy moves so it doesn't matter how smart it is if it doesn't the information it needs. It can't function the way it was intended to. I mean, this is why you

see the strategy of Facebook trying to get you to spend more time on its services. Because as long as you're in that walled garden and you're completing your purchase inside that walled garden, so you're going to these shops that are now available to merchants on Instagram, then it has what's called first-party data, and Apple can't touch that. So, you know, all of these very unpopular changes that have just been rolled out for Instagram, you know, Facebook is betting that as much as we hate them, that we're all mindless enough that the same thing that keeps us scrolling on TikTok will keep us scrolling in this, you know, very algorithmically determined, you know, TV like environment that they're trying to turn Instagram into. And don't forget, it does work for TikTok. A lot of people hate it, but it might work. Final question. I know you spend a lot of time thinking about supply chains. What's a way that artificial intelligence is improving supply chains that you're excited about?

Well, there's a broad way and a narrow way. The broad way is, predictive analytics keeps getting better, and that makes ports more and more efficient, and the rest of the logistics network. That is exciting, because it is a conservative industry, so you'd be surprised how much of it has yet to adopt this kind of AI. The other thing, though, is that we are seeing the rise of autonomous driving, especially in trucking, potentially. Within a year or two, there could be fully autonomous trucks, no drivers in the cab on America's roads. That could be tremendous because it allows those trucks to start competing with things like air freight. Uh, cause an autonomous truck doesn't have to take breaks, stops to get fuel. And that's

it. Christopher Mims. He's a technology columnist for the wall street journal author of a wonderful book. It's called arriving today from factory to front door, why everything has changed about how and what we buy. Thanks for joining us again on Motley full money. Absolutely. Thank you for having me. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow.