Motley Fool Hidden Gems Investing - Answers from Airbnb, Questions for Upstart

Episode Date: February 15, 2023

If revenge travel was supposed to slow down, then AirBnB hasn't noticed. Dylan Lewis and Tim Beyers (0:15)  discuss: - A very healthy quarter for AirBnB, and how the travel company continues to grow its footprint. - AirBnB's $1.5 billion "waste of capital." - Upstart's not too bad quarter, and questionable use of its balance sheet. - One thing to do whenever you buy a stock. (17:02) Bill Mann and Ricky Mulvey look at Hindenburg Research's report on Adani Group, and a historic parallel that offers some insight for today. Companies discussed: ABNB, UPST, ADANIENT Host: Dylan Lewis Guests: Tim Beyers, Bill Mann Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. Airbnb and Upstart are soaring after earnings. We dig into the details. Motley Fool Money starts now. I'm Dylan Lewis sitting in for Chris Hill, and I'm joined by

my main man for all things tech, Tim Byers. Tim, how's it going? Fully caffeinated, ready to go, Dylan. Love it. And you need that energy because we had a lot of earnings releases come out this week. Oh, my gosh. Yes, we did. We're going to be spending our time with two that I think are particularly interesting for the Fool audience, and that's Airbnb and Upstart, some names that come up often in the Fool universe, some names that have kind of become household names, really, on the street and among retail investors. Tim, let's kick off with Airbnb. I looked at the numbers, just the headline numbers, and this looked like an incredibly impressive quarter. Strong top and bottom line growth, earnings per share, $0.48, nearly double estimates from

analysts. The top line came in at $1.9 billion in sales. Am I wrong in reading this as an incredibly strong quarter for the company? No, it was a great quarter, Dylan, and a great year. For the fiscal year, Knights and Experience is booked up 31% year-over-year. Their gross booking value, so the value of all of the business done on the platform, $63.2 billion for the year. That's billion with a B. That's a lot of money, up 35%. Year over year, 42% if you take out foreign exchange. I think what I love most about Airbnb is that now that we are post-COVID, we're post revenge travel we're starting to see that this business and the business model is capital light capital efficient and generating just a monster amount of free cash flow on an

ongoing basis so just by way of example here dylan if you took out the near billion dollars just given to employees for stock-based compensation you still end up with close to $2.5 billion in free cash flow for Airbnb in fiscal 2022. That's an incredible number for a business that's really killing it. So, yeah, I don't think you're wrong to read it this way. The experience of Airbnb is showing up in a lot of places, and the financial results reflect that. I think that full-year profitability is something worth zooming in on for a company like this. We saw $1.9 billion in net income on that $8.4 billion in full-year revenue. That's real net income. It's driven by operating profits. It's not driven by any fun with accounting

or anything like that. This is a business that I think after a really tumultuous couple of years, Tim, has found stability and found that there's a lot of value in the model that they're offering, both to customers, but to providers on the platform as well. I agree. If you take a look at just some of the other statistics, what's nice about Airbnb is they give us a lot of context about their business. So, for example, trip length for the fourth quarter, 2022, so long-term stays of 28 days or more, did account for 21% of gross nights booked during the quarter. That's pretty stable year over year. So, you have long-term stays that are an increasing part of the Airbnb story. Now, they do expect this to be stable,

to be fair, and maybe decline slightly. But I think it's telling, Dylan. So another piece of data that they gave us is their average daily rates. That was down 1% year over year. And yet still, we're seeing extraordinary growth in bookings volume, extraordinary growth in revenue. There's just more and more activity on the platform. You don't need to raise prices dramatically if more people are flocking to your platform, it does appear that Airbnb just has a bigger and bigger footprint in this market, and they are asserting themselves. Yeah. When I look at this business, I see a bunch of different levers that can provide growth. You talked about how average stay ticket or average nightly ticket hasn't moved, and yet we're still

seeing 20% growth. The company hit 6.6 million active listings. That number is probably only going to continue to go up over time. We see that there's growth opportunities in the length of stay. There are a lot of different ways that they can try to spur growth without having it be a bad experience for their customers. Right. I think if you were looking at this as an investor, what you want to pay the most attention to moving forward here is that gross bookings volume and the nights booked. So in Q4, there were 88.2 million nights in experience booked. That was the highest fourth quarter ever. It was a significant increase from year over year. So it was up 20%. I think that is an area, if the platform is being used on an increasing basis around the world,

if long stays are still a material part of the story so that it's a good avenue for hosts to make money because they can sell a long-term rental to someone, you're going to see the cash continue to come in. You're going to see the revenue continue to grow. Theoretically, Dylan, you're going to see the operating margins continue to expand. Everything is looking very healthy for Airbnb right now. Yeah. I think one thing that really solidifies the strength for me, Tim, is we see that they are on an operating basis profitable, $10 billion in cash and equivalents. We've seen a lot of companies discuss layoffs or actually go through with layoffs. This is a company that did go through layoffs in the immediate aftermath of

COVID while things were shaking out in 2020, but we haven't seen any of that this year. I think that this is a business that is looking really awesome in what is a pretty tough operating environment. Yeah. They're doing most things right, and I say most things. There is one thing. I mean, if you ask me, which you haven't, but I will tell you, there is one thing that I really hated about this report, a $1.5 billion thing that I really hated. But other than that, they have done incredible work. And I'll just say, Dylan. Tim, let me say, what is that $1.5 billion piece of hatred? I mean, it's the buyback. In 2022, Airbnb spent... I mean, they have plenty of cash.

They can clearly afford, because they generate so much cash flow, to buy back $1.5 billion worth of stock. But they're not taking shares out of circulation and doing that. Airbnb has a higher share count in 2022. They came out of 2022 with more shares available for sale than they did in 2021. And yet they spent $1.5 billion to retire shares. They're not retiring anything, Dylan. All they're doing is taking shares that were issued to employees and then using money that they have to buy back those shares to offset some of the dilution, but not all of it. It's just a real waste of capital. So I would much prefer to see that $1.5 billion put to work for me as a shareholder and maybe coming up with new ideas, expanding the platform,

maybe a tuck-in acquisition. Buying back shares is just a bad idea unless you're actually going to retire those shares. But overall, I'm nitpicking a little bit here. It's not like Airbnb is spending money it can't afford to spend. That's just a really poor way to spend it. Nobody's perfect, Tim, right? Yes, nobody's perfect, not even Airbnb. Well, the market seemed to also appreciate the results. Stocks up double-digit percentages today, I think about 13% as of taping. We also saw a pretty sizable spike in shares of Upstart following their report. Shares of the AI lending company are up over 20% following its earnings release. Tim, I will say, I looked at

everything with Airbnb and everything made sense to me. Numbers, market reaction, I had a little bit more of a hard time pairing up what I saw in the market's reaction to what I saw in the results with Upstart. I would say you're not alone. Let's hit the quarterly numbers. Quarterly revenue of $147 million, down 52% year-over-year. A $58.5 million loss from operations, that was down from from a $60.4 million profit in the comparable quarter year-over-year contribution profit, down 45%, net income of $58.9 million last year turned into a $55.3 million net loss. I mean, all of the numbers are going the wrong way for Upstart. If I had to pinpoint something that feels hopeful here is that the numbers could have been worse still. And like on a full year

basis, revenue was down just 1% year over year. And I think that felt maybe a little bit hopeful to some folks. The loss from operations was $113.9 million. That's down from $141 million over fiscal 2021. And the contribution profit, and this is kind of amazing, the contribution profit for fiscal 2022 was $446.8 million. And that was up 12% year over year. And that represents 49% of fee revenue. So their fee revenue was actually not too bad. If we're just looking at it. It wasn't great. Let's be clear about this. Their overall revenue from fees was up to $907.2 I'm sorry, $0.3 million for the year. That was up from $801.3 million. So there is a sense of, hey, you know what? Upstart's writing some loans here. And I'll say that's fair. If you want to

give them credit for that. Fair enough. But I think everything in context, and in this particular case, Dylan, I would say Upstart still has not maybe gotten off of the steroids it's been on, where it's using its own balance sheet to write loans. So in other words, the big part of the thesis of Upstart is, we have a really good model for pricing loans, and we can sell that to institutional providers, so like institutional investors, and we can sell that to banks. And it's not like they're not selling loans to banks and institutional providers, but they're not doing a lot of that. They're using a lot of their own money to say like, yeah, and we'll write personal loans for people and carry those loans on our balance sheet.

And so put this in context a little bit. Yes, the loan volume looks to be up a little bit. They're earning some fees on it, but they're also taking some extra risk here, Dylan. Yeah, I was going to say, Tim, I feel like that model is not necessarily what shareholders have bought into over the last year and a half. It's not necessarily the vision for the company that they thought that they were getting. It's not, and it's not the vision that Upstart originally had. Now, to be fair, let's talk about what they actually said about this, because when they talk about their balance sheet, the balance of loans on the balance sheet rose to over a billion dollars. That was up $310 million from the last quarter. And they are now essentially saying,

And they said this in their conference call, they're at the maximum size of their balance sheet. In other words, they have made all the loans that they want to make directly to personal borrowers. And they're generating a lot of interest income off of that. And so when they issued Q1 guidance, like for this year, they said, we're done. We have maxed out the loans on our balance sheet that we're willing to write to consumers. And now we want to wait and see when market improves and they're thinking in 2023, the market improves and they can sell some of those loans to banks. The guidance for Q1, Dylan, is pretty weak. It's $100 million in revenue. That's way down from what the market expected, which was well over $150 million, so way off.

Part of that is because, look, we didn't really want to do this with our balance sheet. we're not going to do more of it right now, but we did it last quarter, we earned a lot of interest income, we're going to be a bank temporarily, but over the long-term, we don't want to be a bank, which puts Upstart in this weird little position, like how long does this transition last? Yeah. I think to be clear, tough situations mean businesses need to do things a little bit creatively sometimes. It's far better to weather a tough period doing some things that are a little different than maybe what you'd be expecting and have the float and the flexibility to thrive as conditions improve. But I almost feel like the things that made this quarter and the end

of this fiscal year somewhat successful for them are not necessarily the same things that investors should be scoring on them going forward. Right. If I were to give you, just summarize this very quickly. This quarter did not prove out the upstart thesis, the core thesis of upstart in a different way. It didn't do that. What it did is say upstart is maybe pretty resilient, pretty creative, but the core thesis of we've got the most amazing algorithms and banks and institutional investors really want our loans, it didn't give you more proof that that's true. It just proved that Upstart isn't going anywhere, but they still need to prove that their model is the best model for the kind of loans they want to write.

Now, I'm not a shareholder of Upstart, Tim, but to me, this just reinforces the point of write down why you buy a stock when you buy a stock. Write down your thesis and the reason behind it. It's okay if the direction of the business changes over time, but you want to be able to have that accountability. Absolutely. And for me, we have this stock in Rule Breakers. The price at which, and it's on me, that I recommended it was just flat wrong. But that doesn't mean I'm willing to sell this stock from where it is today. There is something to be said for resilience. And I think Upstart in this quarter showed a bit of resilience, is doing a good job earning interest on the loans that it did right, but it's still got to move

those loans off its balance sheet. And it has to just start getting really, really good at selling loans to banks as well as institutional investors. I think when we see more of that, this stock will really rally. If we don't see more of that, then the story is going to get played out. Here's hoping. Here's hoping. Tim, thank you so much for joining me. Love talking tech earnings with you. Love breaking it down. Thanks, Dylan. We've got more investing talk in a minute, but before that, Alison Southwick and Robert Brokamp are answering your questions about saving, spending, and personal finance this Tuesday.

If you've got a question, shoot us an e-mail at podcasts at fool.com. Is it the largest corporate con in history or just a company working a broken system? Adani Group's publicly traded companies lost $100 billion after Hindenburg Research released a short report on the conglomerate. Ricky Mulvey and Bill Mann dive into the details and what history can tell us about this scandal. Joining us from an office building in the island nation of Mauritius. Good to see you as always. Allegedly in Mauritius. It looks a lot like Alexandria, Virginia outside here in Mauritius, I got to tell you. Fair enough. Conglomerates are back in the news.

And before we dive into the scandal around Adani, I think it's worth laying out both how important this company is to India and how widespread the business is. So, it is one of India's largest companies by market cap. The Adani Group was founded in the 80s by an entrepreneur named Gautam Adani, and it was a commodity trading business, first and foremost, which doesn't really get to explain just how important that is within the Indian economy, but particularly in the 80s, really prior to the information revolution in India, being a commodity trading business meant that you had your fingers in all sorts of levers of the Indian economy. And so, they moved into

things like managing ports and electric power generation and renewable energy and mining. And they operate airports and natural gas and food processing. So, they moved out from, if you think of all of those businesses, they are either infrastructure or they are within the realm to this day of commodity trading, but still an incredibly important component of the Indian economy. There's a major short report that recently came out from Hindenburg. You may have heard their name when they came out with a short report on the carmaker Nikola. Now Hindenburg is calling Adani, quote, the largest con in corporate history. You have another perspective from the Professor Aswath Damodaran that, quote, this is about the weakest links in the India

story. And from my perspective, this is not a con game. This is just a company that's played those weaknesses, end quote. Short sellers are in the business of making explosive and very pessimistic claims, Bill. Where do you fall between those two claims? I fall closer to Professor de Moteren's claim, but that does not mean that Adani has behaved particularly well. I would describe, so essentially, what Hindenburg came out and said in their report is that Adani is a conglomerate of loosely tied companies together, but then they also had offshore entities in places like here in Mauritius that masked who owned what within the business. It essentially allowed Adani itself to manipulate the shares. Now, that's something that's entirely

different from a Nikola where, and Hindenburg came out and said with Nikola, they're not doing anything that has any business value to it. This is, in effect, a fake business. That's not what they're saying about Adani. What they're essentially saying about Adani is that it is an incredibly sophisticated stock manipulation scheme. So, when Professor Damodaran comes out and says, yes, they are taking advantages of the weaknesses within the Indian system. I don't really find that being too far away from what Hindenburg is arguing, although he's using much fewer explosive adjectives than they chose to do so in their report. So, yeah, we don't have time to go through all of the claims, but you referenced stock parking,

and one of the things that Hindenburg accused them of is using these shell companies essentially to say there was a larger float of shares outstanding, and then they could bid up the stock price and in turn make the company larger, give it a larger market cap. And then Adani was using its stock as collateral for loans. And then when the stock price goes down, that means that Adani has to start paying up for its loans. There's also some strange intraparty transactions. So for example, a company with zero employees made a loan of like $200 million to the Adani Group. Sure, why not? Sure, why not? And then there's also a claim that the auditors who were looking at Adani's books were,

at best, inexperienced. At best, inexperienced. Yeah, that's right. And any of those you want to zoom in on a little more? You know, it's one of those things, you're talking about a Monet painting. When you stand up close, you see all these things, and they don't make a whole lot of sense. They don't seem all that important. And then you go back and you see the painting itself. You know, Ricky, we don't really like pointing to a share price and saying that there's information within that share price, because the stock can go up and down for a million different reasons. And I'm actually understating by just saying a million, by as many reasons as you can think of. But it is meaningful

to know that Adani's share price today, after it has lost 60% of its value, is higher than it was at any point before December of 2021. It was never higher than that prior to, what's that, 13 months ago. That's what is, in quotations, lost. So what Hindenburg is saying is essentially that Adani Group is taking advantage of weaknesses within the Indian financial system and their regulatory framework and their markets to inflate the price and then hide who is truly benefiting from it. And so, from that standpoint, what they are saying is that these organizations, that the fact that they went out, and to me, let me say as an aside without making an accusation here, but it is a tried and true tactic for companies that are playing fast and loose

to use an auditor who is completely not armed to audit a company that complex. So, what you have here is a situation that, honestly, none of the single elements look all that bad, but in totality, I think that you have a situation where a company has manipulated itself within one of the largest economies in the world. Going with Monet instead of the point guy? The dot point guy? That's what I'm saying. I think it was Surratt. Surratt, exactly.

So do any parts of the report, though, give you pause? I went through it, and I found it kind of unsavory that they were doxing one of the suspect's personal email addresses, like this is this guy's personal contact information. And then also, it did seem like there was an overwhelming amount of evidence. And I understand why they publish everything after a two-year report, but I'm also aware of the rhetorical tactic of just bombard, blasting someone with so much evidence that they can't respond to a single part of it. And then it gives more credence to the person who's just going point, point, point, point, point, point, point. Right. Exactly. It's like that old line that you should never get in an argument with a fool because other people who are watching have

no idea which one is the smart person and which person is the actual fool. So, yeah, and I've actually seen a very similar situation to this take place with a company that was run by an Indian national entrepreneur called NMC Health. It was a Dubai-based healthcare company that was ultimately found to be a management-directed fraud and essentially, as far as shareholders were concerned, was rendered valueless because the type of extraction that was being taken, and that's the amount of money that was being taken out of the business. The business itself, as is the case, we believe with Adani, the business is real. They are generating cash flows, they are running ports, they're running airports. All of

the business itself is real. What you're talking about here, and there is precedent for this, is a business that is essentially weaponizing regulations and seams within the laws and the financial system to extract wealth from an operating business. This is more of a take, because this is different than Nikola. I'm really curious to see how the shorts play out. because some of the evidence that Hindenburg lays out is incredibly detailed, seems extraordinarily clear that Adani had been playing games with manipulating its stock to the levels of billions and billions of dollars. But even if you're right that they're doing that, you're still playing a shorting game against a company that's really good at manipulating its stock allegedly.

Yeah, that's exactly it, Ricky. There's never been a time that a company has been accused of being a fraud. And they said, well, you got us. We did it. We were on you. This is not Scooby-Doo and the mystery machine. And there's no mask being pulled off of the bad guy. And it turns out that it's actually the farmer up the road. It does not happen that way. So, yes. And in India in particular, there are all sorts of restrictions for companies to short shares. And it is why to me, and we can have a longer conversation about short sellers. I don't happen to think of them as being the most evil people in the world, but I also don't happen to think of them as being the people with the white hats. But you are exactly right. They are taking on a different

form of risk, being on the other side of a trade, especially in a country like India that has so many limitations placed on companies' capacity to sell short. Two things I've noticed that I'm going to lump in together in one point as we wrap up. One is that I've seen reporting in Bloomberg that a lot of Indian mutual funds did not own shares of Adani. The second is that India's population recently overtook China. It seems like if you're an investor, you'd want to have some exposure to the largest population in the world. But does the Adani story give you any more caution about investing in companies based in India? You know, I have a long experience professionally in India, and it is a country

that I am always very hopeful for, but I am mindful of. And for people who are curious about what it is that Hindenburg is accusing Adani of, go back and look at the history of NMC Health, because it's a very similar situation. And in any case where you are a minority investor in a country where there are not great protections for minority investors, you'd need to just have a little extra layer of doubt that at the end of the day, that your interests are going to be the ones that are going to end up being paid attention to. Bill Mann, thank you for kindly stepping away from the painting and joining me to talk to Donnie. Always appreciate it.

Thanks, Ricky. Dylan Lewis. As always, people on the program may have interests in the stocks they talk about 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 Dylan Lewis. Thanks for listening. We'll see you tomorrow.