Motley Fool Hidden Gems Investing - Lyft’s Typ0

Episode Date: February 14, 2024

Shares of the ride hailing soared more than 60% on a mistake. (00:21) Ricky Mulvey and 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, (15:03) Dylan Lewis, Deidre Woollard, and Mary Long join Ricky for a Valentine’s Day themed roundtable about finding red and green flags for investments. Stocks discussed: ABNB, LYFT, UBER, CNTS, ECL, ULTA, CRM, MELI, TDOC, AAPL Host: Ricky Mulvey Guests: Tim Beyers, Dylan Lewis, Deidre Woollard, Mary Long Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

You gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. 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 Byers. Tim, good to literally see you.

Yeah, same here, Ricky. We're actually face-to-face here, and I have my coffee, so I'm caffeinating in real time. 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 to understand why. 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? I would assume so. I like that you went with servers rather than real estate for a lodging company. There is some strategic progress. 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. They're basically listening to customers, making the product better. That includes host cancellations declining by more than a third in Q4 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.

And 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. Oh, 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. So, 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. And it's clearly having an impact here. Knights 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. 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, quote, 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, 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? 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 in Airbnb's way for quite some time now. Cue all regulators throughout all 50 states and international territories. So, 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. Regulators are not going away, Ricky. Yeah, that's why they seem to be investing heavily in their lobbying arm. 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 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, 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 was about a year and a half ago. In this release, they're up in the ante, Tim. They're going for $6 billion. I normally would be a little frosty about this. I'm not frosty about this. Let me explain why. 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 am OK with this idea of buying back so much. But also, because of 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. Hard to do. 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. So, they have tons of cash. And here's the thing that makes me OK with this. They still reinvest over 17% of revenue back 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.

So, there is that. They have excess cash that they can put to work and still build out the product set. And then, in addition to that, the existing buyback from just this past year, which is roughly about $2.5 billion, somewhere in there, $2.3 billion to $2.5 billion, you draw down the existing share count 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 an average business. This is an average growth business. We'll give it a 3% free cash flow yield. It's not trading expensively. So, if you're buying back stock when your stock is fairly priced, you've 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. When the information changes, our opinions can change. Absolutely. Love to see it.

Let's go to this Lyft story. I'm both sad about it, I find it a little hilarious, I can also resonate with it. Who among us has never made a typo? Oh, I've made some doozies! 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 5% points. Later on the call, they had to issue a correction. They didn't mean 5%. They meant 0.5%. But the algo trading has already happened.

We'll get to the fundamentals in a sec. 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? Lots of anxiety. 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. Like you said, we all make mistakes here. But mistakes in today's stock market get reflected in stock prices much, much faster than they used to. And I think there's some longer-term judgments, not from the mistake itself, but also the reaction to it, especially from the CEO, David Risher.

He goes on CNBC, and we watched the interview. It seems like he was trying to quickly move past the mistake. What did we learn? Measure twice. I felt that he didn't really give real answers to finding out what happened. He was like, I take responsibility in that we learned you've got to measure twice, cut once. It was a little bit of an AI chatbot response, to be completely frank. 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, 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 Risher. We'll have that afterwards. We'll have that afterwards. But in this particular case, the missing piece, which I have done many times here, Mr. Risher, 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. Let's talk about the business itself as well. There were some positive aspects

to the Lyft quarter. Gross bookings were up 17%. Their adjusted earnings beat market expectations by 2X. Risher also says that the company plans on generating positive free cash flow for the entirety of this year. This is a margin game. This is also a business that we like to associate closely with Uber. Uber's doing really well, too. What do you think about the fundamentals of Lyft's quarter? I think we have to stop putting these two companies in the same category, Ricky. 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. I'll tell you why. It's because the unit economics of Uber are improving, and the unit economics of Lyft are not. They're getting worse. Let me give you a couple of numbers here. For the year 2023, $6.21 of revenue per ride for Lyft, 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 Lyft 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 Lyft and how it's going to 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 rideshare? 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 Lyft story right now. The Lyft 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 great, 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. Well, and I think it'll continue to

be difficult. Also worth mentioning, the driver's strike that's not just affecting Lyft, Uber, DoorDash on Valentine's Day. Honestly, good strategic decision on behalf of the drivers, but that'll continue to play out with the unit economics story for both of the companies. All right, Tim Beyers, good to see you in person. Thank you for your time and your insight. Thanks, Ricky. you just found out that your sales team is at risk of missing quota don't panic just ask rippling ai since it's built on your real-time people and business data rippling ai can pull metrics from rippling and salesforce into a meeting ready dashboard showing quota attainment headcount

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access today. Rippling dot A-I slash fool. Up next, it's Valentine's Day. Happy Valentine's Day. So my co-hosts, Dylan Lewis, Deidre Woolard, Mary Long, join me for a roundtable 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 roundtable, a whip around between the four Motley Fool money co-hosts. 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 Deidre Bullard.

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 sort of not big risk section of my life. So I like some steadiness, you know, something like an Ecolab or like a Syntos, a company that just kind of does the work, something I can kind of see in every bathroom I 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 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. You know, I like a loyalty program for a consumer company like, like an altar or Chipotle or Starbucks, or on the, 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. Yeah, I just love that. I think we got three for the price of one. Dylan Lewis, you have a difficult one. No, it just means that Dylan is going to have a tough time following up. I'm glad I get to host this

segment. Dylan, what you got? Well, I'm going to borrow a bit from some of the things that Deidre 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. I think, just in terms of what it looks like on the balance sheet, cash well in excess of debt, getting that exactly what Deidre 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. That's because they are a growth business by most standards. But Melly 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. Even though they've had to deal with repricing of growth and an adjustment on their multiple, they've been able to weather that. 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. 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 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 moat and some obvious risks. If I know the risks, that's good.

Everybody's got trauma. I want to know what it is. With that, I'll throw in Charles Schwab. Huge boat, 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. And with that, let's go to the red flags. We've had enough positivity. Let's go into some things to watch out for. Red flags, Mary, what you got? 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 Teladoc 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 it makes me question management's 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. So it's a money problem there, and a capital allocation strategy issue, but also something more deeper-seated, like you're insecure about yourself. And no, insecurity is tough to get past sometimes. 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. Yeah, 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 into more of a platform-based approach, not breaking things

out with Facebook in particular, more of a focus on overall activity and ad 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're always going to look for the thing that helps paint a great picture. And when we see those things shift, it's worth asking

questions about the business. In my head, it's kind of like being across the table from someone who's losing an argument and keeps changing goalposts. Speaking of moving the goalposts, Deidre, what red flags do you have? Yeah. Moving things around. I don't enjoy it. Keep your dates, especially when it comes to your reporting deadlines. So unless you have a good reason, if there's an acquisition or something like that, that works. But delayed or missed repeated reporting deadlines, that's a big red flag for me. 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. So 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 kind of 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's, 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. 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. All right, let's move on to dating, because we're coming up on Valentine's Day. We've done the investment stuff. I'm going to let y'all choose. You can pick a red or a green flag. Dylan, what you got? I think mine is mostly just a way to look at whether something is a red or a green flag. And 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 kind of like the IPO days of a 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. So boring, Dylan. Deidre, what you got? Well, you know, 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. And 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, you know, dishwashers or warehouse workers, or having to do retail, working fast food, anything like that. I'm looking for someone who, you know, on the bottom learned, uh, it factors into everything, how they treat people, how they, how they tip, how they think about the world.

And I'm going to share another one. This one's kind of weird, but I used to date some, some comic book lovers back in the day, Batman versus Superman. Now hear me out. So 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, 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. So I 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 Aquaman. It's all about the tools and the work and the intelligence. Batman, a lot of trauma,

not a lot of therapy. That's the problem, Deidre. That is a good point. 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 ha phase and, and maybe, maybe your friends see something that you don't, especially if it's a unanimous decision. And also does your partner treat their friends differently than they treat your friends? Mary Long, what you got? I promised to be Peter Lynchian throughout. So 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. If 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. Happy Valentine's day to all of you. thank you for joining me on this host whip around. Thank you.