Motley Fool Money - "A horrible use of $2 billion."

Episode Date: August 3, 2022

Airbnb's record bookings in the 2nd quarter weren't enough to boost the stock higher. Why? (0:25) Tim Beyers discusses: - Airbnb's highly questionable decision to allocate $2 billion for a share buyback plan - Match Group shares hitting a new low as the business clearly has work to do - MicroStrategy CEO Michael Saylor stepping down after the company reports an eye-popping loss of $94 a share Sign up for Stock Advisor at http://fool.com/foolfest and you’ll get a complimentary digital pass to our FoolFest 2022, our 2-day investing conference! (13:35) Ricky Mulvey talks with WSJ tech columnist Christopher Mims about Meta Platforms, Apple, and how companies are really using artificial intelligence. Stocks discussed on the show: ABNB, MTCH, BMBL, MSTR, META, AAPL Host: Chris Hill Guests: Tim Beyers, Christopher Mims Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard. Daredevil Born Again official podcast Tuesdays and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. The fight between Apple and meta platforms is heating up, and we've got the latest. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool's senior analyst Tim Byers, our man in Colorado.

Thanks for being here. Well, he caffeinated, ready to go, Chris. That's good, because we got a bunch of earnings to get to them. We're going to start with Airbnb. And help me understand what's going on here, because Airbnb's second quarter revenue was up nearly 60%. bookings were a record. At one point this morning, the stock was down more than 10%. It's recovered a bit. As we're recording this a little before lunchtime, it is still down 5%. This is a great quarter. What am I missing? I don't think you're missing anything. So it came in at $2.1 billion,

up 58% a year ago. And apparently a hair below the consensus of $2.1.1 billion. If that sounds like splitting hairs of hairs, you're right. Revenues were up 64% on a constant currency basis. So it's just like, you know, last time you and I got together, we said, you know, less bad is the new good. And here's the reverse of that is like good isn't good. enough, you know, which is, or, you know, like if it's not great, then we don't want to hear from you.

It feels pretty silly here. Revenue was up 73% from 2019 levels, which is really interesting. And the gross bookings value was up 27%, which is, I mean, gosh, pretty incredible here. It's $17 billion. That's down slightly from $17.2 billion from the first quarter. But overall, really very good here. Chris, and I think in terms of the metrics, the key performance indicators here, the Knights and Experiences data, which is essentially like rooms booked, 103.7 million during the quarter, that's

up 25%. So all things look pretty good here, except for one thing. I will point out that nobody's talking about. So I guess leave it to me to be get off my lawn guy here, but they said that they would buy back $2 billion worth of stock. And I think that is a horrible idea, Chris. I don't know why they're talking about this because of all the good things that they announce. If you want to be nitpicky about something, let's be nitpicky about a thing that actually makes sense, which is why, in God's name, if you're Airbnb, do you take $2 billion off of a balance sheet that's getting better when you're generating honest of goodness real free cash flow and then throwing it at buying back shares when you don't need to do that. Chris, the number of things that Airbnb could do.

Buying tuck in acquisitions of smaller companies in this space, reinvesting in R&D to make the software even better, maybe making some capital expenditures because Airbnb has shown some willingness to maybe invest in some properties or maybe some, you know, prototype properties. There's a bazillion things you could do. And you want to throw $2 billion in cold hard mullah at buybacks? What is Brian Chesky thinking? So I had as a follow-up question, they're buying back $2 billion worth of stock. Is that the best use of $2 billion? And I have my answer. The answer is overwhelmingly, in your opinion? No. No, it's not the best use of $2 billion.

I mean, it's a horrible use of $2 billion. And here's the thing. Airbnb has done a fairly good job. I mean, let's give them some credit here. So just looking at the cash flow statement here, Chris. So year over year, this is the comparable six months here, stock-based compensation expense. In 2021, it was about $462 million. In 2022, $442 million.

So they've been really disciplined and disciplined. Now, that sounds like a lot, but when you're a company that generates over $2 billion in net cash from operations, when you include that money, about $1.5 billion, when you take it away, they've been very disciplined in this area. They give away good stock-based compensation to their employees, but not to such a degree that they can't generate real cash from operations from their business. So, you've been really disciplined. You've got a great balance sheet.

You got lots of Greenfield opportunity in front of you. There is no earthly reason to be buying back stock, none. Let's move on then to the stock of the day, which is Match Group, the parent company of Tinder and Match.com and many other dating apps. And it's the stock of the day because shares are down 20% after second quarter revenue was light. Their guidance was weak. And there are times, Tim.

when a stock takes a hit like this, and it seems like a buying opportunity. But at the moment, and I say this as a shareholder of Match Group, at the moment, this seems like a business that has a lot of work to do. I agree. I completely agree. So revenue was up 12% to $794.5 million in the quarter. That lagged the forecast. Net loss of $31.9 million, and this is a company that's been. profitable. They have a relatively new CEO and Bernard Kim, but the Tinder CEO, Renate Nyborg,

she is leaving. She's leaving the company. This is not a good sign, in my opinion here, Chris. It's just that Tinder is not doing, I guess it's not contributing in the way that Match would like it to. And some of this is completely understandable. I mean, obviously, during the pandemic, getting together, people getting together, setting up in-person, dating arrangements. I mean, that was a business that was compromised by the pandemic. So some of this is completely understandable. Having said that, it's going to be really fascinating to me, Chris, when we get earnings from Bumble next week. I want to see if this is an industry problem or if this is a match problem.

And I don't think we have the answer to that, Chris. It's a great question because we saw this in the past few weeks where Snap reported and everyone was quick to attribute the advertising problems that Snap was having to all other companies that sell digital ads, including and especially Alphabet and Alphabet for came out the next week and reported and basically said, no, no, no, no, we're not snap. So, yeah, I think this will be very telling because, you know, absent any other information, you could look at Match Group and Bumble for that matter and look at the overall environment of, hey, the world is really opening up and this seems like a time for these businesses to shine.

And in the case of Match Group, that is not the case. It doesn't look like it. Now, let's be clear about something. If you were an investor and you wanted to make a speculative bet, I think I could absolutely see a speculative bet on Match here. But please remember, that's what you're doing here. You're making an informed speculation right now because the company you knew as a cash-generating stable business that was profiting from a very durable trend.

dating happens and will continue to happen forever as long as there are human beings. So, clearly, there's a core business here that could get healthy. It could get healthy really quickly, and in which case, you'd be buying a value right now. But to your point, Chris, I think there's a lot of unanswered questions. Shares of micro-strategy are up more than 12% this morning, and I do not think it's because of the massive have lost the company just posted in the second quarter. My guess is the stock is up because CEO Michael Saylor is stepping down. What do you think? And yet, he is still going to be in charge of Bitcoin, Chris? Like, is this one of those

where, you know, everything is changing, but really nothing is changing, but we're telling you things are changing, but really nothing is changing. I don't actually know the answer to that, but let's be clear about what happened here. So because, of the way accounting rules work, Microstrategy did have to report the drawdown in the value of its digital assets to the tune of about a billion dollars. I mean, I think it was a staggering per share loss of something like $94. It was $94 per share. Right.

$94 per share loss, which is astounding. Having said that, there's going to be some temptation, I think, amongst investors to say, well, it can't really get worse here. And maybe this is a value play here, and we're moving Michael Saylor to the side. And I would say, please don't go down that path just yet. This is a very dangerous place for a company that's doing very dangerous things with the capital that it has here. So the balance sheet has essentially gone negative. And what I mean by that is the value of all of the assets on micro-strategy's balance sheet now do not add up to as much as the debt that micro-strategy carries. And that debt is tied to.

It was basically used to buy Bitcoin here. And they're still buying more digital assets, Chris. I want to highlight just one thing very quickly. So people really get how leveraged this company is. So they spent, it's about $225 million in capital expenditures, but those capital expenditures were for more digital assets. So essentially, micro-strategy is saying, we're going to make an investment in something that's supposed to give us an expectation of return.

So that's things like factories, equipment, or even like loans, if you're a bank. but we're going to make it in things like Bitcoin. And so we're going to take hard assets, invest it in a variable asset, and we have no idea what the expectation of return is, and we're just going to keep doing this. So nothing has really changed. The quality of the balance sheets worse. The way that Microstrategia is investing is the same,

but Michael Saylor has a new role. I don't think this is a company you want to own, or at least, let's say this, Chris. It's not a company that I want to go anywhere near right now. No, I feel the same way. And I get the reaction for the stock because it's clearly an indictment of Sailor. But as you say, he's not going, like he's staying on as executive chairman. This seems like a rough job for whoever the next CEO is. It remains to be seen if this move allows for the possibility of micro strategy broadening itself to take a look at the core operation that was developing analytics and business intelligence software and making that better.

Because that's been widely ignored for a long, long time now. So is there investments to be made there? Right now there isn't. When Microstrategy makes capital investments today, it is buy more stuff that might go to the moon. That's their capital investment strategy right now. And I think that is suboptimal to say the least. So this is one of those things where a sound and fury signifying nothing is what it looks like, Chris. Tim Byers. Always great talking to you. Thanks for being here. Thanks, Chris. Can Meta Platform's artificial intelligence fight back against Apple's privacy restrictions? Ricky Mulvey caught up with the Wall Street Journal tech columnist Christopher Mims to talk about how companies are really using AI. Today, we're talking artificial intelligence. Joining us now to do that is Christopher Mims. According to Wikipedia, Christopher Mims is a technology columnist at the Wall Street Journal, which he joined in 2014.

Minns received a bachelor's degree in neuroscience and behavioral biology from Emory University in 2001. Thanks for that intro, Alexa. I guess the point of that is I know you write about how artificial intelligence is good at playing boring games. Not boring games, but games with defined rule sets. And we'll talk about some of those games in a moment. But it is absolutely wild to me just how much better is a consumer artificial intelligence has gotten within just the past couple of years. That's absolutely true. I mean, when you talk about voice recognition, when you talk about, you know, the ability of smart assistance to do what we expect and be more flexible in their response to us, that's pretty impressive.

You got a new column in the Wall Street Journal called Real AI for the Work a Day world. Some of the applications you're excited, though, you write, quote, isn't as flashy as some of the artificial intelligences that have been getting wider attention lately. So about those games with defined rule sets, what are some of the games that this, that the, that the, AIs you're watching or playing. What's Amazon doing? What are restaurants doing? What are these recyclers doing? So, you know, one very narrowly defined game that somebody has been training an AI to do is to recognize which particles in a stream of crushed-up e-waste are valuable metals like copper and gold and sort those out of a stream of waste. That's a kind of very narrowly defined task that

AI is potentially great at and, you know, can have a really, really, really big impact on an industry where, you know, I think between 10 and 20 percent of e-waste is actually recycled. It's abysmally low, considering that it's literally gold. There's more gold in a pile of e-waste than there is an equal-sized pile of gold ore from the ground. That's one example. Another example is there's a company out of Munich called Prezite Taste, and they're using AI with a bunch of fast food restaurants whose names we would recognize, but they're not able to disclose, to take some of the cognitive load away from the folks who are really hard-pressed in the kitchen. So imagine you're working the line

at a Chipotle, and you're trying to kind of guess what lunch demand is going to be like. And so that means, you know, 30 minutes, 45 minutes ago, you had to decide how many chickens to throw on the grill and how much guacamole to mash up. That's hard when you don't have enough staff. So this AI aims to trace the path of food from when it leaves the fridge to when it's delivered to somebody and to use predictive analytics to figure out how much of that food you should be preparing at any moment on any given day. So that's another example of a narrow task that AI can be quite good at, and it can have a really big impact. I mean, there's a ton of giant companies that are trialing that technology right now.

So those are just a couple examples. There are many others, but in every case where you're trying to apply AI, and I think self-driving is another good example of this, the more that companies are able to narrow that task, the simpler they're able to make it, the bigger impact it has for them. Because AI is just really not that intelligent. It's a big pile of math, and it's not very flexible. It's not great at doing a lot of the things that we were promised that would be able to do. I mean, I guess I would push back on that.

And it seems to me that there are programs that are getting rapidly more creative. I think of even just the difference between Dolly 1 and Dolly 2, which is this incredible, it takes text prompts and then generates images based off of them. Dolly 1 would create these sort of weird mash-up meme-looking things. And then with Dolly 2, you could type in like two bears at a picnic table and it could create this hyper-realistic, style. art, like, that seems to me to be the creative, like, creative thinking that we were promised and going beyond those narrowly defined rule sets. Yeah, those are very cool. The results are very impressive, but I would hesitate to call it creative because, of course,

the reason it's able to do that is it's ingested so many images that has a super large library of images to draw from and remix. So, you know, is that creativity? It's not really generating something so much as sort of cribbing from its huge database. And I think also the essence of creativity is flexibility, is adaptability, is having a working model of the world. I mean, Dolly's cool, but it's not going to teach our kids or babysit our pets or solve the world's problems. I think that there is a real challenge we have where humans are going to, you know, humans are integrated anthropomorphizing in animate objects.

And, you know, we get excited about these new tools. But at the end of the day, you know, they live in these, you know, tiny boxes or they live on the internet or whatever. They're not embodied. You know, they're not really being put into robots yet. And, you know, they just, they break down in funny ways. So there's been a bunch of funny uses of Dali where people will give it a really basic task, like, you know, draw a Pegasus.

And it spits out. these like hideous mutant things with no recognizable heads and like five legs or when you ask it to do human faces it's really terrible they're all blurred and smudged so I think it's a great example of something that can enhance human capabilities like a lot of designers have said I get really tired of doing mock-ups all day long but if I asked Dali to generate like you know six different mock-ups of you know like blank business cards on creative backgrounds it can do that in a snap and then I can get on to the part of the client work that I enjoy. You know, the same way that the big models for language, like GPT3 and all of its

imitators, are graded autocomplete, right? They're auto-completing our emails and our texts. They're auto-completing code for programmers. They're generating fake reviews online. So these tools are tremendous when used by humans and can certainly make people more productive. They're not going to do anything on their own, though, because they're just, they're not flexible. They're really great at these pretty narrow tasks. It can do text prediction, but once you get beyond a couple of lines, it kind of goes into Luluville. I do think some of the

applications are a little bit frightening to me. You wrote about a company called Gong, which is essentially teaching salespeople to close more deals. As you write, it just basically is telling salespeople to listen more. But it's also looking at the way. that we have conversations over Zoom or in creative and unique ways. And I think there's a frightening future, which is someone is trying to sell you something and you don't know how your data is being used by that salesperson in order to sell you things. Absolutely.

Well, keep in mind that we live in that present, right? Like, one of the most powerful AIs on Earth is used by Facebook and has allowed all kinds of ad targeting, you know, that kind of gets us when we're at our... our most vulnerable, and we're stuck in the loop of the infinite scroll on Instagram, and, you know, advertises that mattress that our friends have been talking to us just at the moment when we're tipsy and tired enough to impulse by it. And, you know, if you want evidence that that works, Apple taking that ability away from Facebook to some extent by enacting new privacy controls is costing Facebook $10 billion a year in revenue and has a lot of advertisers who are targeting people

crying foul. A lot of these direct-to-consumer advertisers that built their businesses on Instagram are freaking out because they can't reach people anymore. So that AI is incredibly powerful. It knows us better than our own mothers, and it is largely a black box in terms of what it knows about us and how it's using that information. And as a result, it's this incredible engine of commerce. Every one of us, every day, when we view that, kind of targeted advertising is but a single human mind up against, you know, the greatest hive intelligence humanity has ever concocted, you know, and we're losing. And that's why we spend money there. So do you think that meta's artificial intelligence capabilities can essentially

plow through Apple's privacy restrictions with the engine that it's built up? I mean, one of the things you wrote about is that it has this now open source code that can understand every language on Earth. And that seems to me to be, that might be able to plow over whatever Apple's throwing at it. I mean, no intelligence, artificial, or otherwise, can operate without its senses, right? So meta's algorithm has been partly blinded by Apple's privacy moves. So it doesn't matter how smart it is. It doesn't have the information it needs. It can't function the way it was intended to. I mean, this is why you see the strategy of Facebook trying to get you to spend more time on its services. Because as long as you're in that walled garden and you're completing

your purchase inside that walled garden, so you're going to, you know, these shops that are now available to merchants on Instagram. Then it has what's called first party data and Apple can't touch that. So, you know, all of these very unpopular changes that have just been rolled out for Instagram. You know, Facebook is betting that as much as we hate them that we're all mindless enough, that the same thing that keeps us scrolling on TikTok will keep us scrolling in this, you know, very algorithmically determined, you know, TV-like environment that they're trying to turn Instagram into. And don't forget, it does work for TikTok. You know, a lot of people hate it, but it might work. Final question. I know you spend a lot of time thinking about supply.

chains. What's a way that artificial intelligence is improving supply chains that you're excited about? Well, there's kind of a broad way and a narrow way. I mean, the Broadway is predictive analytics, you know, keeps getting better, and that makes ports, you know, more and more efficient and the rest of the logistics network. And that is exciting, right? Because it is kind of a conservative industry, so you'd be surprised how much of it has yet to adopt this kind of AI. The other thing, though, is that You know, we are seeing the rise of autonomous driving, especially in trucking potentially. So within a year or two, there could be fully autonomous trucks, no drivers in the cab on America's roads. That could be tremendous because it allows those trucks to start competing with things like air freight.

Because an autonomous truck doesn't have to take breaks. It stops to get fuel and that's it. Christopher Mims, he's a technology columnist for the Wall Street Journal, author of a wonderful book. It's called Arriving Today from factory to Front Door, why everything has changed about how and what we buy. Thanks for joining us again on Motley Full Money. Absolutely. Thank you for having me. As always, people on the program may have interest in the stocks they talk about, and the Motley Full 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.