Motley Fool Hidden Gems Investing - AppLovin, Airbnb, and More Earnings Surprises

Starting point is 00:00:00 Matt Frankel. Earnings season is in full swing and we have seen some big surprises. Motley Fool Money starts now. I'm Matt Frankel, joined by longtime Fools Tyler Crowe and John Quast. Today, we're going to get to earnings from Airbnb, Zillow, and some of our favorite retail real estate companies. And later, we're going to discuss some of the companies whose earnings reports we're most looking forward to next week. First, let's put Applovin's latest results under the microscope. Applovin posted extremely strong 77% revenue growth in the second quarter, and its adjusted EBITDA roughly doubled. Free cash flow was $768 million, and the company spent nearly half of that buying back stock. John, what do you think? Matt, shareholders are

Starting point is 00:00:55 getting used to these kinds of numbers from Applovin, but I think we just need to take a second to really soak it in. Nearly $1.3 billion in quarterly revenue, growing at 77%. A profit margin of 65%. These are extraordinary numbers. Here's the impressive context. When we're looking for hidden gems, we're usually wanting to see companies and markets that are fast-growing. By contrast, Applovin is doing most of its business in the mobile gaming space, which is actually quite slow growing, maybe around 3% growth for the industry. But Applovin's advertising products are so effective that it's been able to grow at a much faster rate than the industry. And I think this is kind of turning into a theme this earnings

Starting point is 00:01:37 season. Applovin has its AI-powered advertising engine, and some advertising companies are underperforming this earnings season, whereas some companies such as Applovin or even Reddit are using AI to better match advertising supply with demand, and those which are doing AI well are getting much stronger. Did this earnings report change how you feel about the stock? I'd love to get both your takes on this, but Applovin's business is growing rapidly, but its stock has delivered six X returns over the past year. We'll start with you, John. This report actually didn't change the way that I feel about Applovin's stock, unfortunately. I thought that I'd have more clarity about its

Starting point is 00:02:16 future. There's still a lot of unanswered questions here. Just the context, App11 has effectively conquered mobile gaming. This quarter, it sold off its apps business. It ran a portfolio of apps. It was doing that so it could train its AI data better. It's gotten out of that. It's more pure advertising now. It wants to expand beyond its core competency. It wants to get into direct to consumer e-commerce. It wants to move beyond mobile into web-based advertising. I thought that investors would have a lot more answers when it comes to this second phase, if you will, of Apple Oven's growth. But it seems that management is taking a slower, more measured approach. One thing that stood out to me and something to watch is Apple Oven is going to

Starting point is 00:02:59 get into performance marketing. For perspective, yes. Part of the reason that it's been a 6X stock over the past year is because it's extremely profitable, $2.8 billion in trailing 12-month free cash flow. And it only spent 4% of its revenue on sales and marketing to grow in the first half of 2025. Now it's looking to go into new verticals. In theory, this could jumpstart its growth in a huge way. And it could be really successful. But how is it going to be now that it's spending more money on performance marketing? In theory, it should be really good. It is an advertising business. But it's also possible that it really doesn't grow the way it wants to. It's spending more money on marketing. And so, profits could take a hit.

Starting point is 00:03:42 There's a lot of companies that we all have differing opinions on. And Applovin has always been one that, despite its massive success so far, I've always had a lot of questions. And it's made it a little bit hard for me to get over the hump of changing my opinion on it. I've always thought the business was a little bit on the fragile side. Perhaps I'm wrong. But if we look back through its history, the majority of its revenue did come from those owned gaming studios. Now, it did sell those off in the most recent quarter, still maintaining an equity position in them as part of the deal. This e-commerce business that it has been standing up, it's actually stood up on a platform owned by a board member of Applovin. It's

Starting point is 00:04:31 an interesting relationship and it has worked out so far. It's left me a lot of questions on some of how the accounting works and things like that. Not to say anything bad about the company. It's just sometimes we have questions about companies. For me, it's enough that it has made me want to learn more about the company before I really want to commit to it. Unfortunately, I think I've been kind of wrong in this assessment because clearly the market has liked what it's seen with its revenues growth. And the company has been posting pretty impressive numbers. So, maybe I just need to keep digging and figure out why I seem to be hesitant based on these sort of things and reassess my ideas. Let's quickly move over to Airbnb's latest

Starting point is 00:05:20 earnings. They reported Wednesday afternoon. The results look pretty strong with revenue up 13% year-over-year, really strong margins, double-digit growth in booking volume. But The stock is down primarily because management cautioned investors about demand heading into especially the fourth quarter of the year. I'd love to get both of your thoughts on Airbnb. We'll start with you, Tyler. I want to focus on the guidance a little bit more on the numbers. Revenue growth of 13%, cash flow margin strong. Compared to a lot of other companies, the numbers themselves actually looked, in my opinion, relatively fine. I want to focus on probably why so many people are a little apprehensive, and that's this guidance

Starting point is 00:06:00 that they're giving. And if you look at some of the broader macroeconomic numbers, I know Peter Lynch would probably crucify me for talking about macro, but things like the University of Michigan consumer sentiment scores, they're currently at some of the lows that we saw during 2022 inflation, COVID, the great recession levels. Consumer sentiment surveys are hovering right around there. And a little caveat to me, as it's even stranger, is that these surveys don't coincide with higher gas prices, because one of the weird things is that consumer sentiment tends to go with gas prices, and with gas prices actually trending lower and consumer sentiment dropping, that's an odd correlation that we don't often see in those sort of numbers. The growth in parts of

Starting point is 00:06:52 Airbnb's business were still good, though, and I think that's maybe a little bit overlooked. Some of its less penetrated markets, like in the Asia-Pacific and the Latin America areas, are still growing in mid-to-high teens rates, so that's encouraging. They may not be showing up in the overall numbers as much because North America and Europe are such dominant parts of the revenue pie for Airbnb today, but there are still green shoots in international markets that give it levers to pull. And yes, Airbnb has been a market disruptor for this industry, but it is a cyclical market that is based on consumer spending. Eventually, you can only disrupt so much, and a cyclical market will win. So, not too surprising, again, that a little bit more

Starting point is 00:07:41 tepid demand with consumer sentiment a little bit down. And just a weird caveat that I noticed too is Airbnb makes a ton of money on interest income because we pay for all of our stays and things like that, and they get to hold that cash, so they earn a ton of interest income. Rate cuts come, we might actually see a little bit of decline in profitability from that. Tyler, I want to jump off there and talk about maybe the narrative that floats around among investors when it comes to Airbnb. The stock's only up, as of this taping, the stock's only up 3% over the last three years. It's still down more than 40% from its highs in 2021. There's a lazy narrative out there that consumers don't like Airbnb, they don't like

Starting point is 00:08:28 it's fees, so they're moving to hotels, moving away from Airbnb. In my view, that's simply not accurate. Nights and experiences in Q2 are up 7%. Average daily rates, so this is what a place costs to book, up another 3%. If Airbnb were having a demand problem, I would expect those average daily rates to come down. I would expect bookings to come down. That's not happening. Those key metrics are still trending in the right direction. What we have seen, though, is perhaps Airbnb stock was way too overvalued at one point compared to the growth that it has put forward. I don't see that so much as a business model problem. On that line of thinking, it does need some better growth, I think, if it's going to reward shareholders. A little bit interesting

Starting point is 00:09:19 that it does have incredible margins, $1 billion in free cash flow in the quarter, But it also used $1 billion to repurchase shares. That's a little bit interesting. Essentially, to me, this is telling me that management doesn't really have good places to invest the cash in the business. Share repurchases are good. It's just interesting that essentially all of the free cash flow went to share buybacks rather than investing in that second phase of growth. Next up, we're going to examine some of our favorite retail REITs, and you might be surprised how they're doing. You're listening to Motley Fool Money.

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Starting point is 00:10:37 really predictable, raised its FFO guidance as well as its investment spending expectations for this year. All this during a, quote, challenging consumer spending environment. Tyler, what are your big takeaways from all this? Can I say that I thought it was a little weird? And I want to go back to what we talked about previously with Airbnb and consumer sentiment. Allegedly, consumer sentiment is way down. It's in the dumps. And yet, we look at some of these numbers that retail REITs are putting up, and they're incredibly impressive. And their outlook on the future looks really good. I want to focus a little bit on Tanger. I spent a little bit more time in their results than I did

Starting point is 00:11:14 some of the other ones. But I looked at Tanger's results. Their sales per square foot for all of stores were up. Occupancy was up. It's blended average lease rates, which basically means when you renew a lease or get a new tenant into a lease, those are up 12%. Those are incredibly impressive numbers for a retail REIT that's hitting for the cycle here. It's weird because it seems like everyone's miserable based on these sentiment surveys, but we're just spending through it. And it's really reflecting in these retail numbers. The last takeaway, and I'll leave a little bit of a question, is we have been talking for six months, seven months now about tariffs and when they're going to hit. They're not going to hit how big, how small, because it has been

Starting point is 00:12:01 changing very frequently over the past several months. And I've been wondering with this quarter with so much aggressive changes in those tariff rates during the quarter, if we saw a little bit of everyone trying to buy now, pull ahead, pull forward some demand to lock in prices or buy things before tariff prices really start to eat into people's purchasing powers. I own all three of the stocks that I mentioned earlier. I think you both own at least one or two. How do you see retail REITs like this performing over, say, the next three to five years? Tyler? For retail REITs writ large, I'm going to shrug a little bit. If consumer sentiment

Starting point is 00:12:45 is a leading indicator of actual spending, then some REITs in retail, especially the more experiential, maybe not consumer durables like groceries and things like that, they could struggle. But that's talking about the entire industry, not just these specific companies. The good thing about the three companies that you mentioned, Simon, Property Group, Tanger, outlets and Realty Income, is they have proven over many years to be some of the superior operators and managers of their business in this respective industry. I think that if we were just focused on these three instead of retail, REITs, writ large, these are the kind of companies that will benefit during times of struggle. Maybe it might not show up on their stock prices,

Starting point is 00:13:27 but they're the ones that can take advantage of struggling other competitors and things like that, either through acquisitions or, yeah, sure, we'll take a couple of malls off of your plate because you're struggling. Why not? And then we'll turn them into much more profitable engines. I think that's a little bit more accurate reflection on my opinions of retail REITs because industry at large, we're getting into a very wide field of sometimes not the best operators on the planet. Yeah, I won't comment on retail REITs as a whole. I do own Tanger stock and I plan to keep holding Tanger stock. Like Tyler was mentioning, I do get concerned when you start looking at the consumer sentiment. But one of the things I have learned over the years is that negative narratives are

Starting point is 00:14:17 really seductive and they're also very contagious. And so sometimes people do have negative thoughts and that tends to spread and people talk negatively, but really watch what people are doing. And what we're seeing is that they do continue to spend money, especially in these retail rates. Those businesses are doing quite well. Tanger, as Tyler mentioned, really good numbers that it's putting up. So I do plan to keep holding this stock. It's not my highest conviction for growth over the next three to five years, but just predictability steady as she goes. I do like having it in my portfolio, reinvesting the dividends. All right. So, quickly, let's pivot over to Zillow. They just reported their second

Starting point is 00:14:56 quarter results. Revenue growth was strong despite a pretty slow real estate market, and the company exceeded expectations. Margins were strong, and Zillow was actually slightly profitable on a gap basis. But Tyler, what's your quick take on Zillow's numbers? I liked where the growth came from, which was mostly rentals and mortgages. These are kind of their nascent businesses. Rentals is also nice. It's not as interest rate sensitive as buying homes. There's some encouraging things there to maybe take a little of the cyclicality out of this business. The one thing I would pick some nits against is the profitability. It's still producing operating losses, and the actual net income gain was interest on cash balance sheets.

Starting point is 00:15:37 So, the fact that it's still operating profit losses still makes me a little bit wary. All right. So, just real quick on Zillow, and I want to get both your opinions on this. Do you think it's a buy, a hold, or a runaway? Tyler? I was an early doubter, but there have been some green shoots that have started to prove me wrong, like with residential and mortgages. I'm still holding out until they can prove that those businesses can generate consistent operating profitability. For me, I would rate Zillow as a hold. When it comes to real estate, it is undeniably the name. Everyone does go there. It does have a super app strategy. It does seem to be the right company to pursue that. If anyone's going to pursue it, I can see why it would be

Starting point is 00:16:21 Zillow. That said, they've been talking about that for quite some time, and it really hasn't produced the consistent growth that I'm looking for in a company such as this. I ask myself with companies like this, what is different now? If they've been talking about all along, what's different now? What is going to lead to better growth and better profits from here? I'm hearing a lot of the same from Zillow. So call me somewhat skeptical, but it is still a great business and a great name. I'm just in the show me camp. Next up, we'll learn what stocks the three of us are watching as earnings season continues. Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world.

Starting point is 00:17:02 The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. choose firmer or softer adjust cooler to warmer and right now save up to twenty five hundred dollars during our massive labor day event hurry into your local sleep number store today because we have your number these past two weeks were the peak of earning season but there's still a lot of stocks left to report so let's give each give one on our radar and i'll start with c limited ticker symbols se it was by far the top performing stock in my portfolio last year growth and profitability. The turnaround from 2022 and the downturn has exceeded even my most optimistic expectations already. So I'm really looking forward to seeing what they report on

Starting point is 00:17:48 the 12th. John, what is on your radar? Mediterranean restaurant chain Kava reports on August 12th. Fast food and fast casual are struggling a little bit here in 2025, whereas casual dining is doing better. Those are generalities. There are some fast food that are doing well. There are some casual dining who are not, but I'd say that's a general trend. And so where does Kava fit in consumers' minds? They're only forecasting 6% to 8% same-store sales growth this year compared to 13% last year. So they're already looking at a deceleration management is. But does it decelerate faster than management anticipated? That's something I'm considering, especially as it's trading at 10x sales. So we'll see when it reports.

Starting point is 00:18:30 So, I'm going to go with BBB Foods. The ticker is TBBB, and it's a Mexican hard discount grocer. It actually reports on August 11th. Hear me out. I know it sounds like an oddball one. But this company has been posting impressive operating results ever since it went public last year. We're talking double-digit same-store sales growth on top of double-digit store count. So, we're looking at 25% to 30% year-over-year growth for a grocery company. All of the operating metrics say that they're doing great, high inventory turnover, good initial returns on a lot of what they're doing. I think it really has a lot of those hidden gems qualities that we're looking for in the business. I don't see any reason why it would start to slow

Starting point is 00:19:12 down outside of some drastic macroeconomic sluggishness in Mexico, because it is Mexico only that we're talking about here. But how much does that really hurt a discount grocer, one of the places people go to shop in the event of macroeconomic sluggishness? I don't think I'm going to see much of a change, and I really look forward to the update. 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. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are

Starting point is 00:19:49 sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For John Quast, Tyler Crowe, our production magician, Dan Boyd, and the entire Motley Fool Money team, I'm Matt Frankel. We'll see you tomorrow.

Motley Fool Hidden Gems Investing - AppLovin, Airbnb, and More Earnings Surprises

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