Motley Fool Hidden Gems Investing - Airbnb's Record Quarter, Nikola's Early Days

Episode Date: November 2, 2022

If you think this is a market that will automatically reward a stock because the company posted record revenue, think again.  (0:17) Asit Sharma discusses: - Why today's announcement from the Federal Reserve won't change the way he invests - Record revenue highlighting Airbnb's 3rd-quarter results - Whether today's drop in share price looks like a buying opportunity (8:31) Ben Foldy, Wall Street Journal reporter and host of the podcast "Bad Bets", shares insights on Nikola founder Trevor Milton, his early career, and the steps that led to one of the hottest stocks of the pandemic. Companies discussed: ABNB, NKLA, KNX Host: Chris Hill Guest: Asit Sharma, Ben Foldy Producer: Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news. The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. We're pulling back the curtain on an EV maker and we're taking a closer look at a falling stock. Motley Fool Money starts now. Chris Hill. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Asit Sharma. Good to see you. Thanks for being here. Asit Sharma. Greetings, Chris. Thank you for having me. Before we get to Airbnb, let me timestamp this because this is probably not going to be very satisfying for listeners, but people

will hear this after the Federal Reserve has made their announcement on what we, I think, expect to be a rate hike of three-quarters of a percent. But you and I are recording this before that happens. So, I guess my question for you is, is there any way that your investing is going to change based on whatever the Fed announces this afternoon? Because I feel like they would have to announce something very extreme for me to rethink how I'm investing. I'm the same way, Chris. I will say that we are all Fed watchers now. Once in a while, I used to take an Uber ride, maybe get into a conversation with the driver, and he or she would learn that I invest in stocks, we would start talking stocks. Now, that same

conversation is, what do you think Jerome Powell is going to do? But it's not going to change significantly the way I invest. Whatever happens today, I'm expecting personally another rate hike of three quarters of a percentage point. Maybe the Fed will pay attention to some of the housing data that we've seen recently, some of the moderation in wage pressure and start to communicate a more dovish stance. Maybe they'll surprise us with not so big a rate hike. That would be a big boon for the stock market today. But either way, what What we've learned this year is that we've got to keep our eye on what makes businesses able to thrive in any kind of environment, whether interest rates are at rock bottom

or they're climbing, climbing, climbing. That's about the cash flows of the businesses we invest in. It shouldn't really change how we invest, except for those of us who are maybe too concentrated in a sector that's really affected by interest rates. Let's say you're all the way extreme in growth and your portfolio has been hammered, then sure, what the Fed does, what it says about interest rates may make you want to diversify a little bit more. But for those of us who have a balanced approach to investing, like growth stocks, but other stocks as well, maybe some dividend plays in there, you really shouldn't try to be reactionary to what the Fed is doing. They're wrong half the time anyway. Look how late they were in trying to

tame inflation. Let's move on to Airbnb. Third quarter revenue was a record for this company, and shares are down 10%. On behalf of all shareholders, Asit, I want to know why, because this was a great quarter for Airbnb. Yeah. Investors keep wanting to look forward, sometimes to the detriment of really great results that are actually telling you about the future. The fact that Airbnb was able to generate close to a billion bucks in free cash flow This quarter, Chris, the fact that they had $1.2 billion in net income on their books, they had a 5% increase in their average daily rate. All of that should be multi-quarter thinking. We should see those numbers and realize that the company's business model is very, very resilient.

We're past the peak of pandemic effects. People are traveling again. They're showing how flexible they are. But like all other companies that are of their scale, Airbnb is reacting to what's going on in the macro environment. And so they're projecting growth that's going to be a little below expectations for next quarter. So of course, the stock is down 10%. But this is sort of a year to be buying companies like this with huge global brands, with very strong balance sheets, and great advantages in terms of geographic diversification and in terms of a two-sided platform the way this is. I say, on behalf of those who are listening to Airbnb shareholders, so what? If you like this company, I don't see anything in today's report that would dissuade

you from buying if your time horizon is a few years, let's say five years or more. I was just going to say, it seems like you're pointing to a drop in 10% in the share price. It's like, hey, if this is a stock you've had on your watch list for a while and you do have that time horizon, congratulations, you've just been given a 10% coupon for shares of Airbnb. Yeah, it very much feels that way because the company is only extending its advantages. there's still a lot of fragmentation in the hospitality industry at large. What we'll probably see in the next few years is more and more competition that Airbnb has to deal with. But bear in mind, every large-scale hospitality company that has to compete with

Airbnb and offer its own version of Airbnb is taking away resources from a core revenue stream. And I don't think anyone will be able to catch up now with all the billions of dollars that Airbnb has invested. But let's also look at that bear case for a moment, because there are some risks here. I mean, we have seen the tendency of price creep. When you're looking at an Airbnb listing, that nightly rate may look great. You go to reserve the room and you see a big cleaning fee that seems outsized relative to the stay. This is one of the user interface problems that Airbnb has that's not really related to interface. What it's related to is the sellers on the platform, the suppliers, trying to figure out how they

can get what they feel is the most appropriate market price. Then you've got the buyers who are pushing back against that. The ongoing risk that Airbnb has in terms of some stays that just go south, and then they have to swoop in with PR and try to smooth over situations so they don't become big public events, these are ever-present risks. Some of this could be an expression of a little bit of investor anxiety over the fact that we don't really know outside the macro picture what is in the pullback of those estimates. Could a little bit of it be due to a lessening of demand because people are getting tired of trying to book a stay only to find out that final price is way more than they wanted to pay?

Could be, we don't know. Uncertainty always clouds the picture, but I'm more bringing out these bear points to say these aren't huge risks, they'll overcome this. I sort of agree, you get a coupon today. I'm a share owner. Can't buy today because we're talking about it, but maybe moving in a little bit later in the week once my compliance time clears. You and me both. Asit Sharma, great talking to you. Thanks for being here. Thanks so much, Chris. Today, Ricky Mulvey is kicking off a two-part conversation with Ben Foldy, a reporter for Wall Street Journal and host of the podcast Bad Bets. The current season of the show looks at the

rise and fall of Nikola, starting long before the company's boom. Before Trevor Milton founded the company, he went door to door selling religion and then alarm systems. And this translated into his jobs later, which was selling alarm systems. But that's where it seems that his scams kind of quickly started by charging, what was it, $100 for a free installation? Yeah, I don't know if I'd call that a scam, but according to one of the people we spoke with for this podcast, Trevor's like, oh, I'm going to, I'll give you this special deal. It's a $100 installation. And the guy's getting the alarm installed and he asked the installer, he's talking to

the installer and he says, oh, I've got a really good deal. It's only $100. And the guy goes, oh, it's a free installation. It should be free. You don't think that's a scam? Well, I mean, you know, hustle, whatever you want to call it, it is a, I don't know how to describe it. I'm just, uh, I try to be careful. Um, the, uh, yeah. So his first job is selling alarms, which again is kind of a, you know, it's a door to door sales kind of job a lot of times. Um, and you know, very much a sales culture, you know, like that's how you sell alarms is telling a story about security, telling a story about, you know, Um, safety, you know, selling a vision of, of safety. And, and I think, you know, if, if Trevor Milton is, is really good at anything, it's

selling a vision and, and also getting other people to kind of see themselves in that vision. Um, cause like I said, he, he didn't go to high school, he didn't go to college or he, he didn't, didn't finish high school and didn't finish college. He doesn't have the technical aptitude to kind of deliver on some world changing, uh, technology. So what he needed to do was to find people who could, you know, kind of deliver these ideas. And he was really good at getting certain kinds of people to kind of see themselves in that too, and bringing them on board and kind of selling that. You know, he's kind of in charge of selling the vision, but he was almost never in charge of kind of the execution of the technology. As you say, a big theme throughout Trevor Milton's career has been, quote, a big idea, a hype-filled pitch, and then seemingly a crash into disputes and litigation, end quote. How did D-Hybrid then lay the groundwork for Nikola?

Yeah, so D-Hybrid was a, technically I believe is still a going concern, actually, but was a company that attempted to do compressed natural gas conversions for diesel semi-trucks. Um, so basically you're not, you're not coming up with a new engine. What you're doing is you're coming up with a system that can feed compressed natural gas into, into the, the ignition chambers and, you know, increase efficiency and all that. Um, again, this technology wasn't kind of invented by Trevor Milton. This wasn't Trevor Milton's idea per se. Um, but he went into this business with, with a man named Mike Shrout and a few other local people in Southwest, uh, Utah. And it's another place where you really start to see this kind of divergence between what Trevor was telling people was possible and selling the idea and selling the future and the actual execution of the idea. So, you know, kind of astonishingly quickly, Trevor was able to get a potential sales deal with Swift Transportation, who's, you know, basically the biggest trucking company in America.

And, you know, I think it's a, if you listen to the podcast, you hear this kind of funny story of the biggest trucking company in America, like sending a semi truck to this guy's, you know, driveway. Yeah, to build. Hey, I couldn't fit in the garage. It was bigger than the house. It was taller than the house. Um, and, and so, you know, this kind of, these nobodies kind of working on a potentially, uh, you know, world changing technology, you know, as they were thinking of it at the time, you know, this kind of revolutionary technology. Um, and again, I mean, you know, the hype kind of outran the substance. Um, the, you know, the deal, the deal that was struck was never really followed through

on, um, you know, it fell into litigation and back and forth, um, you know, according to the people who worked on it, the technology, you know, still had a lot of kinks getting worked out, um, you know, never, never passed emissions standards or anything like that. So, um, but, you know, so that's one, that's one side of it. And the other thing I'd say about that is, is, you know, that company and Trevor's other companies at the time, he also had that online sales company or online classifieds website. And they raised a lot of money from local folks in, in that part of the world. Um, and when I say a lot, I mean, you know, single digit millions of dollars, but, you

know, eight, probably according to a recording we have in the, in the, in the, um, podcast. just like no small amount of money. And, and the way that a lot of the investors in that ended up was basically, you know, they weren't sophisticated investors. They, they were friends and family. They were, um, you know, people who kind of knew Trevor from town or new people who knew Trevor and put, you know, what were, what were for them pretty big sums of money into this kind of high risk startup and then didn't get anything out of it at the end, usually, or these kind of took big losses on these sizable investments. And this theme of going after individual investors for these, I would say, high-tech

content, because even a natural gas conversion for a truck is not something that I understand. Hydrogen-powered vehicles is not something I understand. This seems to be a theme throughout Trevor's career, which is, I'm going to bring this world-changing technology, but I'm not going to bring it to the sophisticated investors. Whether it's D-Hybrid, whether it's Nikola, I'm really going to sell it to a retail investor who I'm really hoping isn't going to look behind the curtain. Yeah, Nikola, I think, is a little bit of both in that the stock market performance, once it does its SPAC, Trevor in particular is very focused on the retail investors. But it also was good at attracting strategic investment from big name, meaningful partners, Bosch, Hanwha, which is a big Korean solar company, Iveco, which is one of the bigger, it's a subdivision of CNHI, it's one of the bigger heavy equipment manufacturers.

So, Wabco, these are not nobodies. These are not people who are total suckers, let's say. And they did see something there in Trevor's vision. But I think there's a lot of startups that have something there in the vision and can attract strategic investment or venture capital. um and those investors take bets knowing that they're not gonna pan out you know a lot of them aren't gonna pan out that's how that kind of investing works and i think i think where nicola becomes something else and became something else for you know motley fool readers and listeners is

is with the spec and it becomes this kind of speculative retail trading boom and it goes public in kind of this insane market of 2020 um and and you know forgive the pun but it's all downhill from there. The SPAC boom in 2020 in general, we've talked about it a little bit, and you've described it in detail on your podcast. That's really when the stock market also became, in a lot of ways, gambling on these high-tech companies because there were no sports going on. There wasn't a lot else going on, but the stock market was open. And it was really hard to lose, right? I mean, just when you think about the dopamine hit of pulling out your phone and seeing that your net worth has doubled in a day or whatever, people were really chasing those hits.

And there was a whole new generation of executives kind of willing to give those hits too. And that's what, that's really what I think Trevor is kind of the, the, or the or executive of that moment. Um, he's, you know, he, he stands out to me as, you know, Elon's his own thing, right? Like Elon has that kind of cult of personality, but that didn't really come until, you know, there were some significant deliveries, right? Like until you could sit in a Tesla and drive it, you know? And then there was a kind of a generation of executives following who, you know, learned a lot, I think, from the Elon playbook in terms of social media use and things like that. that, but hadn't built a company as fundamentally sound, regardless of how you feel about Tesla. It builds cars, has revenues. This was a company that became worth more than Ford and Fiat Chrysler without selling

a single vehicle. Yeah, and I think the way to think of that is it's an idea that's worth more than Ford and Fiat Chrysler, right? Because what is a company, you know, that has a few prototypes? It's an idea, mostly. I mean, like it has people, it has assets, it has hard assets, but the valuation isn't driven by, oh, they have 300 people on staff or, oh, they have a headquarters.

It's driven by the idea. And Trevor sold this idea. Part two of the conversation will be on tomorrow's show. 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.