Digging In on the Latest News From Airbnb and Upstart

In this podcast, Motley Fool analyst Dylan Lewis and Motley Fool senior analyst Tim Beyers 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.

Motley Fool senior analyst Bill Mann and Motley Fool producer Ricky Mulvey look at Hindenburg Research's report on Adani Group and a historic parallel that offers some insight for today.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 15, 2023.

Dylan Lewis: 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 Beyers. Tim, how's it going?

Tim Beyers: Fully caffeinated, ready to go, Dylan.

Dylan Lewis: Love it. You need that energy because we had a lot of earnings releases come out this week. Oh my gosh.

Tim Beyers: Yes, we did.

Dylan Lewis: We're going to be spending our time with two that I think are particularly interesting for the Fool audience. That's Airbnb and Upstart. Some names that come up often in the Fool universe. Some names have 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, 48 cents, nearly double estimates from analysts. The top-line came at 1.9 billion in sales. Am I wrong in reading this as an incredibly strong quarter for the company?

Tim Beyers: No, it's great quarter, Dylan. A great year for the fiscal year nights and experiences booked up 31% year-over-year, their gross booking value. 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. 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. 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.

Dylan Lewis: 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 is a lot of value in the model that they are offering both to customers but to providers on the platform as well.

Tim Beyers: 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. For example, trip length for the fourth quarter, 2022. 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 another piece of data that they gave us is their average daily rates that was down on 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 it just has a bigger and bigger footprint in this market and they are asserting themselves.

Dylan Lewis: 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 hits 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.

Tim Beyers: 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. In Q4, there were 88.2 million nights and 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, and theoretically Dylan, you're going to see the operating margins continue to expand. Everything is looking very healthy for Airbnb right now.

Dylan Lewis: I think one thing that really solidifies the strength from 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 disgust 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.

Tim Beyers: Yeah. They're doing most things right. I say most things. 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.

Dylan Lewis: Tim, let me say, what is that $1.5 billion piece of hatred?

Tim Beyers: It's the buyback in 2022 Airbnb spent. 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 in 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. 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.

Dylan Lewis: Nobody is perfect, Tim, right?

Tim Beyers: Yes, nobody's perfect, not even Airbnb.

Dylan Lewis: 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 that 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.

Tim Beyers: 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 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. 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, unlike on a full-year basis, revenue was down just 1% year-over-year. 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 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. 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 907.3 million for the year. That was up from 801.3 million. There is a sense of, hey, you know what? Upstart's writing some loans here. I'll say that's fair. If you want to give them credit for that. Fair enough. But I think everything in context. 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. 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. 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, we'll write personal loans for people and carry those loans on our balance sheet. Put this in context a little bit. Yes. The loan volume looks to be up a little bit, their earnings and fees on it. But they're also taking some extra risk here, Dylan.

Dylan Lewis: 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. That's not necessarily the vision for the company that they thought they were getting.

Tim Beyers: 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 $1 billion. That was up 310 million from the last quarter. They are now essentially saying, and they said this in their conference call, there 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. They're generating a lot of interest income off of that. 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 the market improves. 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. How long does this transition last?

Dylan Lewis: Yeah. I think to be clear, tough situations mean businesses need to do things a little bit creatively sometimes. It's far better to whether it's 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 or not necessarily, the same things that investors should be scoring on them going forward.

Tim Beyers: If I were to give you to 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 loans they want to write.

Dylan Lewis: 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.

Tim Beyers: Yes.

Dylan Lewis: Write down your thesis and the reason behind it. It's OK if the direction of the business changes over time. But you want to be able to have that accountability?

Tim Beyers: Absolutely. For me, we have this stock in Rule Breakers, the price at which and it's on me that I recommended it, it was just flat wrong. But that doesn't mean I'm willing to sell the stock from where it is today. There is something to be said for resilience. I think Upstart in this quarter showed a bit of resilience, is doing a good job earning interest on the loans that it did write. 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.

Dylan Lewis: Here's hoping, Tim, thank you so much for joining me. Love talking tech earnings with you, love breaking it down.

Tim Beyers: Thanks, Dylan.

Dylan Lewis: We've got more investing talk in a minute, but before that, Allison 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 email at podcasts at fool.com. Is it the largest corporate con in history or just accompany 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 the scandal.

Ricky Mulvey: Joining us from an office building in the island nation of Mauritius. Good to see you as always.

Bill Mann: Allegedly in Mauritius. It looks a lot like Alexandria, Virginia outside here in Mauritius. I got to tell you.

Ricky Mulvey: Fair enough. Conglomerates are back in the news. Before we dive into the scandal around Adani, I think it's worth laying out both how important this company is to India in how widespread the business is.

Bill Mann: 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 levels of the Indian economy. So they moved into things like managing ports and electric power generation and renewable energy and mining. They operate airports and natural gas, food processing. 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 components of the Indian economy.

Ricky Mulvey: 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 quote, "This is about the weakest links in the India story. From my perspective, this is not a con game. This is just a company that's played those weaknesses". Short sellers are in the business of making explosive and very pessimistic claims. Bill, where do you fall between those two claims?

Bill Mann: I fall closer to Professor Damodaran claim, but that does not mean that Adani has behaved particularly well. I would describe. 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 like a Nikola where in Hindenburg came out and said with Nikola, they're not doing anything that has any business value to it. This is, in fact, 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. 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, that they chose to do so in their report.

Ricky Mulvey: 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. Then they could bid up the stock price and in turn, make the Company larger, give it a larger market cap. Then Adani was using its stock to as collateral for loans. 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 $200 million to the Adani Group.

Bill Mann: Sure. Why not? 

Ricky Mulvey: Then there's also a claim that the auditors who were looking at Adani's books were at best inexperienced.

Bill Mann: At best inexperienced. Yeah, that's right.

Ricky Mulvey: Any of those you want to zoom in on a little more.

Bill Mann: It's one of those things you're talking about a Monet painting. When you stand up close, you'd see all these things and they don't make a whole lot of sense, they don't seem all that important. Then you go back and you see the painting itself. 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. I'm actually understating by just saying a million, buy 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. 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. 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 the company that complex. 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.

Ricky Mulvey: Going with Monet instead of the point guy, the dot point guy.

Bill Mann: That's what I'm saying.

Ricky Mulvey: I think it was cirrhotic.

Bill Mann: Exactly.

Ricky Mulvey: Do any parts of this, the report, they'll give you pause. I went through it and I found it unsavory that they were daxing one of the suspects personal email addresses like this is this guy is personal contact information. 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 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.

Bill Mann: Exactly. It's 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. I've actually seen a very similar situation to this take place with a company that's run by an Indian National entrepreneur or called NMC Health, who was a Dubai-based healthcare company that was ultimately found to be a management directed fraud and essentially as far as shareholders we're concerned, was rendered valueless because the type of extraction would that was being taken and that's the amount of money that was being taken out of the business and 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.

Ricky Mulvey: I mean, this is more of a take because this is different than Nikola and 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 the company that's really good at manipulating its stock allegedly.

Bill Mann: Yeah, that's exactly it Ricky. There's never been a time that a company has been accused of being a fraud and they've said, you got us, we did it. We were on. This is not Scooby-Doo and the mystery machine and there's no mask being pulled off of the bad guy. It turns out that it's actually the farmer up the road. It does not happen that way. Yes. In India in particular, there are all restrictions for companies to short shares. 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 hearts, 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 a company's capacity to sell short.

Ricky Mulvey: Two things I've noticed that I'm going to lump them together in one point as we wrap up. One is that I've seen reporting and 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?

Bill Mann: 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. 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 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.

Ricky Mulvey: Bill Mann. Thank you for kindly stepping away from the painting, joining me to talk Adani, always appreciate it.

Bill Mann: Thank you.

Dylan Lewis: 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 anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll see you tomorrow.