Motley Fool Hidden Gems Investing - Prime Day 2: E-Commerce Boogaloo

Episode Date: September 26, 2022

For the first time ever, Amazon is having a second "Prime Day" event. (0:21) Jason Moser discusses: - Behind-the-scenes planning that led up to this announcement - Inventory clearing, and the role it may play in this event before Amazon's final holiday push - Apple finding their headliner for next year's Super Bowl halftime show (11:00) Brian Stoffel and Jamie Louko engage in a Bull vs. Bear debate over AirBnb. Got questions about stocks? Call the Motley Fool Money Hotline at 703-254-1445! Stocks discussed: AMZN, AAPL, ABNB, EXPE, BKNG Host: Chris Hill Guests: Jason Moser, Brian Stoffel, Jamie Louko Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Chris Hill joining me today, Motley Fool Senior Analyst, Jason Moser. Happy Monday. Jason Moser. Happy Monday indeed. I saw some green in the market at some point. It could be worse, I guess. So, yeah, it feels like a happier Monday than many we've been witnessing. Well, let's not jinx anything. No, let's not. Let's get to Amazon, because this morning Amazon announced it is holding a second Prime Day sale on October 11th and 12th. And I got to give a hat tip to Annie Palmer, who covers tech for CNBC, because she had reported back in late June that Amazon had

quietly contacted third-party sellers about a fall event of some sort. Seeing that story this morning, Jason, removed the suspicion I had when I saw this announcement because I thought, wait, wait, was this just thrown together? You're going to do this in 15 days? I did wonder if that was in fact the case. So, okay, this has been planned for a while. What was your reaction? Prime Day 2 e-commerce boogaloo. That's what I first thought. The beauty of Amazon's model is that they can do this. We've always said with Prime Day, it was just one of those things they can flip like a switch. We talked about in the show many times before, throughout the years, and I believe they pointed this

out a couple of shareholder letters ago, the importance that third-party sellers have become in regard to Amazon's business. It accounts for so much of the overall sales now for the I mean, I certainly understand from the perspective of a third-party seller, they'd be all-in on this. And I think for Amazon, you know, this has been a tough stretch, at least in regard to the e-commerce operations, right? I mean, they're feeling the hangover from, I think, the big pandemic tailwinds. They overbuilt, right? They've got far more capacity than they need at this point. So, you're hearing talk about subleasing warehouse space, and then that's going to be something that flows through the financials for the next several

quarters. This most recent quarter, they reported 7% top-line growth. This is a company that just consistently records 20%, 30% revenue growth. It's not terribly surprising to see those headwinds, but really, it's going to be interesting to see how they respond to it. This feels like a sensible thing to do, particularly now that the holiday season is just around the corner, and we know that there's plenty of data out there that says that consumers are going to be very more thoughtful about how they spend this holiday season compared to many recent ones. Do you think part of the rationale for this, from Amazon's standpoint, is this enables them to select specific categories of merchandise to really feature that upfront

to deal with inventory problems. I'm just thinking about, you know, back over the summer where Target was talking about, and Target wasn't the only one having inventory problems, but they were very specific about the categories that they had essentially mishandled, and I'm wondering if that's part of the potential upside here for Amazon is, hey, we can put stuff on fire sale and get it out of the way so that we have a better handle of our inventory for the home stretch of the holidays. Yeah, I think that's absolutely right. I think that you should expect to see that as investors and as consumers. I mean, Prime Day to me is, I don't get all that worked up over it as a

consumer, it does seem to be kind of confusing at times, really, understanding exactly what you can get and how much of a deal it is. Now, with that said, I mean, they clearly get a lot of data from consumers' spending and all those prime members. And so, I think this gives them the opportunity absolutely to liquidate inventory that just is becoming more and more obsolete. But also, I mean, these are tremendous brand builders, I think, business. We look at Amazon today, this is not the same company it was 10 years ago. We always refer to it as the e-commerce giant, but this business is so much more now. E-commerce is just one part of the operation. You've got advertising, you've got entertainment, you've got obviously

Amazon Web Services, which, listen, Amazon Web Services brought in $5.7 billion in operating income on its own last quarter alone. So, I think that they have a lot of different levers they can pull, and this is going to be one where they can kind of help clean up a little bit of the mess they've been dealing with over the last several quarters, maybe put them in a little bit of a better spot to get 2023 off on a better foot. So, yeah, I think we fully should expect to see that. Last thing on Amazon before we move on, does this also raise the bar for expectations in terms of Wall Street analysts? If you're looking at Amazon as a business, as challenged as they are, as all retailers are, do you look at this and say, okay,

I'm expecting more out of you in the last three months of 2022? Possibly. That's difficult to say. They are guiding for sales growth in a range of 13% to 17% for this third quarter, the current quarter that we're in now. Then you would expect to see a nice boost from holiday season spending as well. It's really difficult to say how much this would ramp up those expectations. It feels like no matter what company you are right now, expectations just are not really great. I mean, shares of Amazon, along with companies like Microsoft, Google, and even Apple, I mean, they're all having very, very tough years, but Amazon is a bit tougher than most. It's hard to say whether this really ramps up those

expectations, it would make sense. Following up on last Friday's show, So one of the things we had talked about, Maria Gallagher, was Apple becoming the sponsor of next year's Super Bowl halftime show. And now we know what that show is going to feature, because in the interim, it was announced that Rihanna is going to be headlining the show. Good for Apple. It's one of those situations. I always think of years ago when Alphabet was looking for a new CFO and we were talking on the show, like, who are they going to get? Probably whoever they want, because they're Alphabet. And I was like, I wonder, it's like, Jay-Z is producing, Apple is the sponsor,

I kind of feel like they're going to get whoever they want. Yeah, it does feel like they landed. I think that'll be a good call. I mean, I personally don't really have any interest in the halftime show, no matter who's playing, it's just not my bag. But I also get it. I think that she'll appeal to a very broad audience, which is great for everybody involved. This will be a tremendous brand builder as if they need it. Apple could put a rock in a box and just sell it and three million people would buy it without even thinking twice. But yeah, this will be something that just continues to cement their status, I think, as really a modern-day entertainment company. I think

that's what we're seeing with a lot of these tech companies, they're developing into more. I was just saying with Amazon, Amazon is another one. These are your modern-day entertainment companies, they're really building that out. Whether it's music or TV or movies, they're going to have their say-so there. The nice thing about these businesses is that entertainment requires a lot of capital. It's not cheap, but these companies can drop tens of millions of dollars on it and you just never even notice it. That puts them in just a tremendous competitive position for sure. Some people are no doubt looking forward to Prime Day 2, October 11th and 12th, but there's another event in October that we're looking forward to even more.

Shout out to long-time listener, Fred Gaddis of St. Charles, Missouri, because we got our invitation to the 16th annual Fred Tober Beer Festival on October 7th, featuring over 50 types of beer. I love it. It's right up my alley, Fred. I wish I could be there, but I'm going to hoist a Schlafly in your honor, I promise. Jason Moser, always great talking to you. Thanks for being here. Thank you. So, what does the competitive landscape look like for Airbnb? Ricky Mulvey hosts a bull versus bear debate over the short-term rental marketplace.

Welcome to Bear vs. Bull. We find a company, get some analysts, then flip a coin to see which side they'll take. Today, the company is Airbnb, the online marketplace for short-term rentals that you probably know is a verb. On the bull side, we have Jamie Luko. Jamie, good to see you. Good to see you too, Ricky. And on the bear side, we have Brian Stoffel. Brian, thanks for taking the side. Absolutely. Thanks for giving me the opportunity. And this is interesting. Both of you have positions in Airbnb, which means you follow

the company closely. And I can't wait to hear the cases. Starting with the bull side, Jamie Luko, time is yours. So I think I got pretty lucky on this coin flip because there's a lot to like about Airbnb, As Ricky mentioned, we both own it, and for good reason. So first, I want to talk about how popular Airbnb is. Even during the second quarter, when consumers were becoming increasingly worried about a recession and rising inflation, just an uncertain economy, Airbnb saw massive activity on its platform.

It reached a record number of nights and experiences booked, hitting almost 104 million in the quarter. And this helped revenue soar 58% year over year. Now, obviously, the company did benefit a little bit from the pent-up travel demand from COVID. That said, it was growing faster than some of its traditional hospitality rivals. Hilton Worldwide, for example, only posted 54% growth in Q2. So it's taking market share, and there's reason to believe that Airbnb will continue to grow faster than traditional hospitality players over the long haul. The main reason is the company's focus on innovation.

Innovation is ingrained into Airbnb's culture. And I think that's a major highlight because they're just making the consumer experience better for those customers, just makes customers want to come back and use it more. So in the summer, Airbnb released categories, which helps customers find unique homes easier. That's one of Airbnb's primary selling points. It also released air cover for guests, which is top to bottom coverage for a guest to ensure that they have a great experience on the platform or they get their money back. Now, this was on top of their already announced air cover for hosts, which provides damage and liability insurance for hosts in case their stays get damaged or trashed by an unruly guest. So this innovation really isn't expected to stop anytime soon. They're planning on releasing another release with multiple innovations in the winter.

And now this is just in line with the company's traditional semi-annual feature release, which is just full of innovation. And these innovations have paid off, and it's made Airbnb one of the best hospitality companies in terms of customer satisfaction. Airbnb has a net promoter score of 31, which is far higher than some of its rivals. Vrbo, for example, has a score of negative 83. Booking Holdings has a score of 18, and Marriott has a score of just 28. So it is certainly pleasing customers much more than any of its rivals. Now, Airbnb is great from a product perspective, but it's also amazing from a financial perspective. Not only is the company growing fast, but its balance sheet is nearly flawless.

It has over $8.3 billion in cash and securities with just about $2 billion in long-term debt at the end of Q2. And importantly, this is probably the thing that blows me away about Airbnb, it is gushing cash. Over the trailing 12 months, the company generated $2.9 billion in free cash flow. And that's representing a margin of about 40% over the trailing 12 months. Now, what's it going to do with that cash? Personally, the best thing, in my opinion, is continuing to innovate, create those products to make its platform stand out compared to competitors like Virpo or other traditional hospitality.

So one big concern that Brian might touch on is this regulatory risk. And while I can't speak for every single local government in the world, I can speak about the effects regulation would have on my own government in Maine. So I live in a very touristy environment, which gets a lot of money. Both local businesses, they get a lot of activity, and governments get a lot of taxes from the tourists that come to my town every summer. Now, a lot of this is from vacationers who are using Airbnb. So while regulating Airbnbs and trying to reduce the activity in some of these small tourist hotspots, that might be beneficial for the residents living there. But it also would take away significantly from the economy, at least in my local town.

Again, I can't speak for every country or every city or municipality in the world or the United States. But I can say that these regulations have struggled in my hometown primarily because of the benefits that Airbnb actually brings to our town. So if I could leave you guys with just one takeaway about Airbnb, it's this. Airbnb has an unrivaled focus on customer satisfaction and improving that every single day. As a result, Airbnb continues to innovate and differentiate itself. And with immense and growing cash generation, the success Airbnb has seen will likely continue, potentially making shareholders pretty happy over the long term. Next time, we will ask you to speak on behalf of every municipality in the United States. Jamie Luko, thank you for the bullseye.

Next up, we have the bear case. Brian Stoffel, five minutes is yours. All right. Now, like we said, I am a shareholder of this company, but I believe in iron manning the other side's argument, not straw manning. So that's what I'm going to try and do here. Now, the key in Jamie's argument is the network effect, which is the more hosts that are attracted to the platform, the more places there are to rent. And if there's more places to rent, that will attract more travelers. And if there's more travelers and I have a place that I can rent out, I'm going to go to Airbnb because they have the most potential customers. It is a virtuous cycle. And what I want to say is, is that that network effect could be under assault

from two different sources. And that's what I want to talk about. Now, the first source I want to talk about is competition. You heard Jamie say that VRBO has a net promoter score of something like negative 83. That sounds terrible, but it's really important to understand the difference between VRBO and Airbnb. And that is that Airbnb is squarely focused on the customer experience. Sounds great, right? Well, it has to come at the expense of something. And what that something is, is usually the host experience. VRBO takes the opposite side of that coin, and they are focused on making it the best experience possible for hosts. As we can see, in general, that has meant that more business goes to Airbnb than it does to VRBO. That's not surprising. But it is perhaps

what we're starting to see a case of VRBO, which is owned by Expedia, taking the uber long game while Airbnb is taking the more grab the profits now short game. And if enough of those hosts decide to migrate over time because VRBO has more friendly policies than Airbnb does, and as we see more and more of these parties, more and more of these instances where places are being trashed or there are negative interactions between the host and the hostee, then I wouldn't be surprised to see some start defecting to VRBO. The problem is, is once that network effect stops being a virtuous cycle, it starts being a vicious cycle. And that can make the dominoes fall quickly. So that is the first threat to that network effect mode. The other threat I want to talk

about is what Jamie mentioned, and that is the codes. Now, Airbnb benefits immensely from the fact that municipalities are decentralized. A decision in my small village doesn't affect where Jamie lives that much. However, if a large city decides to adopt a framework that is then used by other cities can be copied, a blueprint that others can use, I wouldn't be surprised to see that make a meaningful dent in Airbnb's business either. And one lurking variable we haven't talked about is that even though home prices are finally falling, we still have an immense housing shortage in the United States. One of the leading ways to deal with this, and I'm a big proponent of this, is changing our outdated codes. If we change our outdated codes, smaller

spaces need to be available for living, but nobody wants those smaller spaces to be taken up by tourists. They want it to be used for people living and working in the community. Again, if a large city comes up with a blueprint that addresses this housing shortage, it could very easily be adopted by other municipalities. So my large takeaway is that this network effect, while it has definitely been working well for Airbnb, could turn on a dime if VRBO gains traction or if a large municipality addressing the housing crisis adopts codes that could meaningfully eat into Airbnb's legal standing. Ryan Stoffel, thank you for the bear side.

You can go on Twitter at MotleyFullMoney. We'll have a poll up where you can vote on who made the better argument because today's lucky winner will receive a four-night stay at a desert cabin near Reno, Nevada. The shared vacation property is just 50 miles away from the biggest little city in the world. Take a photo at the Reno Arch

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Please keep it that way. Upon checkout, unload the dishwasher, take out the trash, and pick up your roommate's prescription. This Reno, Nevada getaway could be yours if you win bear versus bull. While this property booking is free, the prize winner will be responsible for the following costs, a $50 service fee, local and state taxes of $75, and a $200 cleaning fee. 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 sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.