Major Opportunities in the Hospitality and Gaming Industries

In this episode of Industry Focus: Consumer Goods, host Vincent Shen welcomes Seth McNew to the studio to share details from his recent visits to Macau and Japan. Specifically, they discuss the latest developments at Airbnb since it launched "Trips", including paid "Experiences" with locals and other offerings.

Seth also talks about his experiences touring the newest resorts in Macau and the slowly recovering gaming industry in the region before looking at the massive opportunity that is building in Japan since the government officially lifted its ban on casinos.

A full transcript follows the video.

This podcast was recorded on Jan. 25, 2017.

Vincent Shen: Welcome to Industry Focus to podcast that dives into a different sector of the stock market every day. This is Vincent Shen. Thanks to all the Fools out there tuning in. It is Wednesday, January 25th and we're pre-recording this episode to take advantage of the fact that Fool.com contributor Seth McNew is here in D.C. this week and in studio with me right now. Seth, welcome back to Industry Focus, how has 2017 been treating you so far?

Seth McNew: Thanks a lot, Vince! It's been good, I just got back from a long trip in Asia, so I am excited to be back in the States.

Shen: Yes, and we will hear a little bit about that. Where did you go?

McNew: I went to few places. I started in Tokyo and then onto Macau.

Shen: Okay, excellent. That Macau leg of your trip is what we will be talking about a little bit. Even Tokyo, too, will play into it toward the end of the show, because today we're talking about hospitality, gaming, and a few developments with a notable former start-up, upstart and then also a kind of outlook for gaming and how some of the new resorts in Macau have been performing and what you've seen firsthand from your trip.

For our first topic we'd like to revisit Airbnb a little bit. I actually was surprised to find that we haven't really covered the company, substantially at least since 2015. Of course, they have not gone through their IPO yet, but some of the rumors are building up that 2017 is going to be the year after 2016 amounted to a rather slow year for Silicon Valley IPOs. Airbnb though, just in case for anyone who hasn't used the service, quick overview what it is, what they do.

McNew: Yes, sure. Airbnb at its core, it's booking rooms but through private listers. As opposed to a hotel that either licenses or owns properties and you're booking straight through them. Airbnb is just the social platform that allows people with open rooms to list those rooms and then renters can go on the app and book a room.

Shen: The way I've heard you describe which I really like is, you're essentially crowdsourcing various places to stay in these various cities all over the world, and their reach is incredible now, I think they're in like a 190 countries. Airbnb started in 2008. They have millions and millions of guests across many, many, many listings. I think the theme that we're seeing that will take the focus today for the company is that for a long time now in the overall vacation travel booking industry, companies like Priceline, Expedia have seen the value in bundling essentially. By offering you or giving you the option to book through them, not only your airfare, but we where you're going to stay, maybe your car rental, by bundling that and giving you a discount, it's still more lucrative for the company. It seems like with some recent news in November and December that Airbnb is very much embracing this model with the launch of what they're calling Trips, right?

McNew: Right. It's pretty amazing to remember that Airbnb is less than a decade old. It started in 2008 and here we saw it was disrupting the hotel industry and maybe now online travel agencies, maybe something else but the launch of Trips really shows how they're able to use their platform to really diversify.

Shen: In case you haven't seen the release for Trips, the way they describe it, kind of break it down into three components which is their Experiences, their Places, and their Homes. The Experiences aspect of it is very interesting. I believe they started testing for this as early as June of last year, but I think the more official release went out in November. As of early December, the most recent number I could find, Airbnb is offering 500 experiences available in about 12 cities around the world, and I am pretty sure that is expanding quickly to at least another 30 or 40 cities if it hasn't already. Just an example, and I think it's really interesting what these experiences might be, one example is you get to surf and explore the outdoors with a local in Los Angeles. The price is for three days of this immersed experience is $349 per person.

Another example, in Tokyo, where you just came from, you learn the art of the samurai. This is another that they kind of highlight on the Airbnb site. Two days for $437, and you can even book with hosts who have partnered with nonprofit organizations, and the company cites that 100% of the guest payment goes to the organization itself which I thought was interesting.

Reading through the frequently asked questions for people who would like to host an experience, they've obviously implemented some pretty strict standards making the experience unique, value-added, having that local touch and flavor that you might not be able to get as a tourist traveling there just for a week or two. These experiences can break down into two categories from what I find. Something that's just a couple hours and then something that's more of a multi-day immersion.

I was surprised they actually mentioned these numbers. The average price for bookings for the shorter experiences is just a $100, whereas the average for the multi-day immersions is about $270. The way the company makes money here is they collect a 20% booking service fee on the experiences from the hosts, not the guests, which is interesting because for their more traditional business model, they have that 3% listing fee I believe it is, and they charge usually 6% to 12% of the cost of the stay to the guests.

That's the Experiences part of it . . .

McNew: This is just by chance, I did one of these in Tokyo. I did an experience so I took a . . .

Shen: Oh, perfect! Here we go.

McNew: I took a bike ride around Tokyo. It happened to be an American who's been living in Tokyo. It was about three hours long. He took us on a bike all around these alley ways in Tokyo and we got to see the city. It was only about $22. It was great, we got to message with him on the app right before hand, all the payments were taken through Airbnb.

Shen: Did he just stay with you for like an afternoon about?

McNew: Yeah. I think it started in the mid-afternoon. We took a bike ride around sunset, and then we all had dinner together. It was definitely a full experience and well worth the $22 for sure.

Shen: Awesome! That sounds really cool. This, again, is part of Airbnb's efforts to start branching out beyond just the where you put your head each night, and to bring in not just the experiences like what you just described. The second part of this Trips platform which is what they describe as their Places. This has several options itself. The first one I could that find was with these guidebooks. I'm not sure if you saw any of these during your travels, but they call them Insider Guidebooks. Basically, the press release describes them as "hidden gems identified by cultural experts and neighborhood insiders." There's a hundred of these guidebooks available at launch in six cities. They're also pushing meetups, I think encouraging local businesses to organize meetups among locals and also travelers in the same city. They have these audio walks where they partner with Detour. At launch, it's only available in Los Angeles, but that's expected to expand to San Francisco, Paris, London, Tokyo, and Seoul this spring. It's basically supposed to be unique, very much value-added audio walks.

Those are the two components, and of course the third component of the trips is what they describe as Homes which is their traditional business. I found the exact numbers here. They have three million homes now available in 50,000 cities spread across 191 countries. Quite the footprint. Overall, what do you think about . . . I think the question that a lot of people have on their mind around Airbnb with this news and in general, the company having at this point a $30 billion valuation, when is the IPO going to happen? I know a lot of this is going to be coming from rumors and the momentum of other deals, but what do you think?

McNew: Yeah, exactly! It's really all speculation at this point. The company hasn't announced any specific plans other than saying that they are working to shore up their financial position so that they're ready for an IPO, but pretty much the CEO says it's not in their near-term plans. Now what near-term means, none of us know. Does that mean late 2017, we're not really sure. I think the really interesting part is that the valuation is there. Their most recent round, which was in part by an arm of Alphabet, listing them as valuing at $30 billion, second largest right behind Marriott.

Shen: The company at this point has raised specifically over $3 billion in it's eight, nine years of existence. With that $30 billion valuation, for the numbers that I could find, it's really hard obviously because they haven't filed an S-1 or anything like that, but the 2015 revenue number that I could find was $900 million. Estimates of 2016 revenue at $1.7 billion which is 90% year-over-year top line growth, pretty incredible. Definitely seems like they're managing to maintain that momentum behind new listings being added, guests buying into the service, but the core issue for a lot of these unicorns still is on the bottom line. Not surprisingly, the company is still operating at a loss. The most recent number I could find was for 2015. The operating loss was estimated as $150 million. You're absolutely right, company management could be biding their time trying to figure out -- the process might take six months, but you want to know what the market is like for IPOs. One bad deal from a big tech start-up could spell bad news for a lot of deals that are expected to come after that.

Beyond Airbnb though, or beyond the IPO, I think another issue is of the legal challenges and regulations you mentioned to me before the show that when you just search news for Airbnb, the majority of the content is around some legal challenge or hearing in some city abroad or even within the States like New York City. What are they facing right now? What's the big challenge?

McNew: I think you're right, and it's coming from cities internationally as well. Europe, they're having huge issues with that, some of the government regulations there. I think the big challenge is, how are you going to maintain that top line growth if your biggest markets, New York, San Francisco, if the governments there are working to limit how much people can make using Airbnb, how long they can list properties for -- those kinds of things.

I think they're doing the right things to try to combat this. They're diversifying a little bit. They're working with regulators to make sure that they can get the right tax information. They recently, last year had hired former US Attorney General Eric Holder to be on their board to help them navigate some of these things. I think they're doing the right things. It's certainly a risk, but we'll just have to see how that shapes out.

Shen: For anyone who's traveled with Airbnb and you love the service, some of the, I guess the qualms that local governments have had is the issue of the short-term rentals potentially limiting housing availability in already very high demand metropolitan cities. Also, driving up pricing for a lot of housing. I think the company has made efforts as a result of all these lawsuits and hearings to try and crack down a little bit on what essentially amount to professional Airbnb landlords.

People who have multiple listings. Instead of being somewhere they live, and that they rent out on occasion, I think the limit in certain places for example is 90 days a year. No more than 90 days in the U.K., but some of these properties are available 40 weeks a year. Obviously, that is their business to rent it out on a regular basis, that's having issues on housing market in general in these cities. That seems to be the issue people are trying to figure out. Take all that into account, I think the question becomes also -- $30 billion company now, you mentioned second one behind Marriott -- what has the rise of Airbnb done to the more traditional hospitality industry? How are some of these players facing it? Do you think it is all that different for example, from Marriott's business model which is very franchise and management based?

McNew: Yes, I think when we look at those three million listings, that's obviously a lot more. Marriott has 1.1 million rooms around the world.

Shen: In its whole network.

McNew: In its whole network of rooms, but from what I've read, management of these companies doesn't seem too concerned right now. They're biggest business is U.S. business or business around the world. It's kind of business travel and Airbnb really is looking for that more leisure travel. You're not really going to have business conferences in people's private homes. Until Airbnb can kind of figure out that part of it, I think these hotels are pretty well insulated, but of course it's still eating into some of their business and when you're in a very low growth sector that hotels are in right now, that's going to be an issue.

Looking back in 2016, the market hasn't been too concerned clearly. Marriott, Hilton, and Hyatt's stock prices all risen over 20% each throughout 2016, so they've done OK, even with this threat.

Shen: Okay. Overall, I definitely will be curious to follow the news, see when this company starts maybe management commentary, narrows down the timing a little bit. I think a company that everyone is watching to drive or to set the pace or set the tone for IPOs this year will be Snap. That seems to be the one that's expected near term. Other big deals like Uber and Airbnb will follow. We'll have to watch, see how the market reception is to these earlier deals.

Moving on now to your travels a little bit, let's first go to Macau. I've had you on here before as like my insider having lived there for a little bit, and experience again now at the newest resorts that have opened from Wynn (WYNN -1.42%) and other major casino operators in that region. What did you see?

McNew: Macau has grown so much since I lived there. It was great to be back. The city looks completely different. There are tons of new resorts open, but what struck me is, it didn't seem to have that many people. Having come from Vegas, the resorts look amazing and the whole area, and Macau has really grown up. It's just not like packed streets like you'd see in Vegas. That was a bit of a concern, but the resorts themselves . . . I went to each of the new resorts. I'd say the two that really struck out were the new Wynn Palace which is just opulent and incredible. There's a gondola that takes you from the front side of the lake all the way up to your room. Inside it's just like you'd expect from Wynn. It's beautiful in its design. Great shopping, great casinos. There's not really a lot of entertainment aspects of it outside of the shopping and casinos, but that's kind of Wynn style.

Moving on to Las Vegas Sands (LVS -8.66%) though, this was my favorite, it's the Parisian. It's kind of this French inspired resort. A 50%-scale Eiffel Tower right outside. You walk in, there are mime shows, there are clowns walking around. The place is the most interesting casino I've been in in any country yet.

Shen: Did you notice at all, I think, a big trend that people have talked about in Macau was the decline of what was previously the segment that really drove business there which was the VIPs. Did you feel like as these resorts, the industry overall tries to target what they call the mass market gamblers a little bit more. Did you see that actually when you were at the resorts in terms of the tables, the clientele there? Did you feel like you saw a lot more high roller VIPs which you might expect at Wynn, known for its opulence versus some of the other resorts or anything like that?

McNew: Yeah. I think that gets back to kind of how the companies even before Macau taking it's dive pitched to their audience. Wynn is much more upscale kind of VIP experience, as it is in Las Vegas. Las Vegas Sands has always been kind of more of that mass market, but even more so now you really see that divide where when you go to the Parisian, that's the Las Vegas Sands, when you really see that it's entertainment first and gambling second, where the Wynn still feels the other way. It still feels gambling first, entertainment second.

Shen: Okay. For the market overall, do you feel like it's finally at that point where people are seeing that recovery after a year, year and half, two years at most of ongoing declines. Month over month seeing their overall gaming revenue in that region fall by pretty significant amounts. How are the numbers now for that region looking?

McNew: It was actually a little longer. I think it was 26 months of year-over-year declines since 2014. Actually, January was the fifth month in a row of year-over-year increases, at 8%, nothing to shake a leg at. It's definitely starting to grow again. Full-year for 2016 was still down 3% over 2015, but analysts are expecting that 2017 will return to growth for the first time in a while. I think that's looking pretty good.

For how much gambling revenue Macau still has, which is about three times as much as Las Vegas, it still just has a lot fewer visitors than Las Vegas has. I think ramping up the number of visitors with things like governments having better policies toward visitation, more entertainment focused things to the mass market. I think we're really going to see a change there in the next couple of years.

Shen: Just to add some context if you haven't been following the situation, I feel like overall, tourist traffic levels to that region took a dive overall once the Chinese government kind of cracked down on some of the VIP gaming. This was around more issues with like money laundering and essentially the ultra-wealthy in China taking their money out of the country and using Macau to kind of cycle it through. The President and the rest of the Government had a real crack down policy on that which really shifted things from Macau resorts catering to VIPs, to trying to reach a wider audience.

McNew: Yeah, and it actually wasn't just the VIPs, it was even just travel restrictions for all people from mainland China going into Macau for amount of time they could spend, how often they could return to Macau. Those regulations kind of eased up a little bit in 2016 which helped those numbers to grow a little bit, but as we saw in December, there was news that the Chinese government was going to restrict ATM withdrawals, which again sent each of these stocks down. We can see that it's still volatile there. I'm trying to understand what the government policies will be, but as of right now, it still looks pretty positive.

Shen: The last topic I wanted to touch on, and this is a huge opportunity, big news for the gaming industry was in December. The Japanese Parliament finally passed the law legalizing casinos. Still a lot of work to be done on the regulation side of determining taxes, social programs things like that, but overall, it appears that government leaders will be welcoming some of the major casino operators like the ones we've talked about: Wynn, Las Vegas Sands, MGM. The thing is, seems like they're targeting not smaller operations, but these large integrated resorts, kind of looking to Singapore, for example, as a model.

According to one piece of research I found, it's from Daiwa Research, they estimate that just three casinos in Japan could generate as much as $10 billion in annual net profits in this market. What do you think? What is some of the timing? How are companies viewing this? Because this seems like a huge, huge opportunity.

McNew: Yeah, and we've been covering this for a while about every Congress session there. They've really tried to pass this, and it finally got through. People are really excited about this. It still has to go through some regulatory looks before they're going to figure out licensing, but for the companies that win a license to be there, I really think this is the next frontier for growth for this industry.

Shen: Interestingly enough, I think the casino operators and a lot of other tourists are very excited, but some surveys that I found, actually locally among the Japanese population show quite a bit of actual hesitation about this move. They were like 12% really supported the idea, but the numbers behind this opportunity are undeniable.

McNew: I think some of that hesitation is just people are afraid of having a casino here. That's why the integrated resort model that worked in Singapore could really work so well. The Singapore government had invited these casinos knowing that it's going to be a small casino, but lots of other entertainment options with full resorts of restaurants and theaters and those kinds of things.

Shen: Obviously, the political opposition was worried about issues like gambling addiction, money laundering, influence of organized crime, but those are things that they will be working through as a framework gets built out over the next few years. Keep in mind that from what I could find, no one actually expects these new resorts that will be opening in the country to start operations until at least 2022 or 2023, so quite a ways out. Like you said, the licenses haven't even been figured out yet. How many? Who's it going to go to? I'm not sure how much detail you have around this, but I have to imagine that the various major casino operators are already positioning themselves as much as they can to meet partnerships, to get their foot in the door as soon as the flood gates essentially open.

McNew: I'm sure these licenses will be kind of parsed out with local investors as well, so they'll be some partnerships. I think when you're trying to figure out which companies are going to win licenses, you can just look at what's happened in Singapore. Las Vegas Sands was one of the ones that won there, and its resort there is beautiful. That's kind of become the model of how these integrated resorts can really drive business for a country.

Shen: Yup. The last thing I will touch on is the fact that Japan itself is no stranger to gambling. There's actually a pretty substantial market there already in two forms that I could find. Currently, horse, boat, and bicycle races already take legal bets, so that's already a pretty well-established industry for gaming in the country. From what I could find, the horse races alone managed to bring in about $25 billion in wagers in 2015, so quite significant.

You combine that with the existing, and this is a really interesting world. For any Fools listening, do a little bit more research. Just search pachinko parlors or the history of them. It's very interesting. These Pachinko parlors essentially, like adult arcades I guess operate in a bit of a legal gray area, very ambiguous. You collect tokens, you can exchange it for a physical prize to avoid regulations, but then you can take that physical prize to another location and exchange that for cash. It's just gray area, the best way to describe it but, in terms of the size of that market, pachinko players spent almost $200 billion in 2015 which is actually down from I think its height in the 90's. Clearly i think with such a large economy and generally very wealthy citizens, I can totally understand why the casino operators are extremely excited about the market that Japan presents.

McNew: Absolutely.

Shen: Otherwise, I'm going to leave it off there. Any other takeaways that you think for Airbnb or gaming industry, Macau? Anything and then we'll just wrap up.

McNew: No, I'll just say for Airbnb, for anybody who's interested in this space, I would really try to use the platform just to see how well it really does work.

Shen: Okay. Now that you mention that, there's two other things I forgot to touch on during our previous discussion. This again goes back to the way that they have been trying to bundle as many services as possible. This is something that actually just came through this morning in terms of news, and that is a potential deal that Airbnb might be closing soon with a social payment start-up called Tilt. Basically, would effectively give Airbnb experience with payments, and the key thing is Tilt is focused on social events which allow its users to do things like split bills, plan trips, pay as a group.

They also have their Trip Itinerary which brings a guests trip timeline all together into something simple and easy to use. I think with each of these moves, integrating everything more and more into the overall Airbnb service really does indicate to me that timing 2017 could very much be the year.

Thanks a lot, Seth! It was great having you on!

McNew: Absolutely. Thanks for having me back!

Shen: That wraps up our discussion for today. You can reach out to us and the rest of the Industry Focus crew via Twitter @MFIndustryFocus. You can also send us any questions via email to [email protected]. Don't forget to check out www.fool.com/podcasts for our other excellent shows. People on the program may own companies discussed on the show and The Motley Fool may have more recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening and Fool on!