Why This Investor Thinks Airbnb's Stock Buyback Plan Is a "Horrible" Idea

In this podcast, Motley Fool senior analyst Tim Beyers discusses:

• Airbnb's questionable decision to allocate $2 billion for a share buyback plan.
• Match Group shares hitting a new low as the business has work to do.
• MicroStrategy CEO Michael Saylor stepping down after the company reports an eye-popping loss of $94 per share.

Motley Fool producer Ricky Mulvey talks with Wall Street Journal tech columnist Christopher Mims about Meta Platforms, Apple, and how companies are using artificial intelligence.

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 August 3, 2022.

Chris Hill: 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 Senior Analyst Tim Beyers, our man in Colorado. Thanks for being here.

Tim Beyers: Fully caffeinated. Ready to go, Chris.

Chris Hill: That's good because we got a bunch of earnings [laughs] to get to and we're going to start with Airbnb. Help me understand what's going on here because Airbnb second quarter revenue was up nearly 60 percent. Their bookings were a record. At one point this morning, the stock was down more than 10 percent. It's recovered a bit. As we're recording this a little before lunchtime, it is still down five percent. This is a great quarter. What am I missing?

Tim Beyers: I don't think you're missing anything. It came in at 2.1 billion up 58 percent a year ago and apparently a hair below the consensus of 2.11 billion. If that sounds like splitting hairs of hairs, you're right. Revenues were up 64 percent on a constant currency basis. It's just like, the last time you and I got together, we said less bad is the new good and here's the reverse of that. It's like, good isn't good enough or if it's not great then we don't want to hear from you. It feels pretty silly here. Revenue was up 73 percent from 2019 levels, which is really interesting and the value of the gross booking was up 27 percent, which is, gosh, pretty incredible here at 17 billion. That's down slightly from 17.2 billion from the first-quarter, but overall, really very good here, Chris. I think in terms of the metrics, the key performance indicators here, the nights and experiences data, which is essentially rooms booked are 103.7 million during the quarter, that's up 25 percent.

All things look pretty good here, except for one thing I will point out that nobody's talking about. I guess leave it to me to be get off my lawn guy here, but they said that they would buy back two billion dollars worth of stock. 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 announced. 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 two billion dollars off of a balance sheet that's getting better when you're generating honest-to-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, and maybe making some capital expenditures because Airbnb has shown some willingness to maybe invest in some properties or maybe some prototype properties. There's a bazillion thing you could do and you want to throw two billion dollars in cold hard moola at buybacks? What is Brian Chesky thinking?

Chris Hill: I had as a follow-up question, they're buying back two billion dollars worth of stock. Is that the best use of two billion dollars? I have my answer. [laughs] The answer is overwhelmingly in your opinion. No, it's not the best use of two billion dollars.

Tim Beyers: It's a horrible use of two billion dollars and here's the thing. Airbnb has done a fairly good job, let's give them some credit here. Just looking at the cash flow statement here, Chris. 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. They've been really disciplined and diligent. Now that sounds like a lot, but when you're a company that generates over two billion dollars in net cash from operations when you include that money, about one and a half 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 the operations of their business. You've been really disciplined, you've got a great balance sheet, and you've got lots of greenfield opportunities in front of you. There is no earthly reason to be buying back stock, none.

Chris Hill: 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. It's the stock of the day because shares are down 20 percent 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.

Tim Beyers: I agree. I completely agree. Revenue was up 12 percent to 794.5 million in the quarter that lagged the forecasts, net loss of 31.9 million and this is a company that's been profitable. They have a relatively new CEO in Bernard Kim but the Tinder CEO, Renate Nyborg, she's leaving the company. This is not a good sign in my opinion here, Chris. It's just that Tinder I guess it's not contributing in the way that Match would like it to and some of this is completely understandable. Obviously, during the pandemic, people getting together, setting up in-person dating arrangements, that was a business that was compromised by the pandemic. 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. I don't think we have the answer to that, Chris.

Chris Hill: 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. Alphabet came out the next week and reported and basically said, no, we're not Snap. I think this will be very telling because, 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.

Tim Beyers: 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. 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.

Chris Hill: Shares in MicroStrategy are up more than 12 percent this morning and I do not think it's because of the massive loss the accompany just posted in the second quarter. My guess is the stock is up because CEO Michael Saylor is stepping down. What do you think?

Tim Beyers: Yet he is still going to be in charge of Bitcoin, Chris. Is this one of those where everything is changing, but really nothing is changing 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. 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 think it was a staggering per-share loss of something like $94.

Chris Hill: It was $94 per share.

Tim Beyers: Ninety four dollars per share loss, which is astounding. Having said that, there's going to be some temptation, I think, among 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." 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. The balance sheet has essentially gone negative. What I mean by that is the value of all of the assets on MicroStrategy's balance sheet now, do not add up to as much as the debt that MicroStrategy carries and that debt, it was basically used to buy Bitcoin here. They're still buying more digital assets. Chris, I want to highlight just one thing very quickly. People really get how leveraged this company is. They spent, it's about $225 million in capital expenditures.

But those capital expenditures were for more digital asset. Essentially MicroStrategy is saying, we're going to make an investment in something that's supposed to give us an expectation of returns. So that is things like factories, equipment, or even loans if you're a bank. But we're going to make it in things like Bitcoin. 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. Nothing has really changed the quality of the balance sheet's worse. The way that MicroStrategy 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.

Chris Hill: I feel the same way and I get the reaction for the stock because it's clearly an indictment of Saylor. But as you say, he's staying on as Executive Chairman. This seems like a rough job for whoever the next CEO is.

Tim Beyers: It remains to be seen if this move allows for the possibility of MicroStrategy 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 time now. 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 sub-optimal to say the least. This is one of those things where sound and fury signifying nothing is what it looks like, Chris.

Chris Hill: Tim Beyers, always great talking to you. Thanks for being here.

Tim Beyers: Thanks, Chris.

Chris Hill: Can Meta Platforms 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.

Ricky Mulvey: Today, we're talking to artificial intelligence. Joining us now to do that as Christopher Mims.

Alexa: According to Wikipedia, Christopher Mims is a technology columnist at The Wall Street Journal, which he joined in 2014. Mims received a bachelor's degree in neuroscience and behavioral biology from Emory University in 2001.

Ricky Mulvey: 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. 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.

Christopher Mims: That's absolutely true. When you talk about voice recognition, when you talk about the ability of smart assistance to do what we expect and be more flexible on their response to us. That's pretty impressive.

Ricky Mulvey: You got a new column in the Wall Street Journal called Real AI For The Workday World. Some of the applications you're excited though, you write, "isn't as flashy" as some of the artificial intelligences that have been getting wider attention lately. About those games with defined rule sets, what are some of the games that the AIs you're watching or playing? What's Amazon doing? What are restaurants doing? What are these recyclers doing?

Christopher Mims: One very narrowly defined game that somebody has been training in 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 very narrowly defined tasks at AI is potentially great at and can have a really big impact on an industry where 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 in an equal size pile of gold ore from the ground. That's one example. Another example is there's a company out of Munich called Prezi Taste.

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. Imagine you're working the line at Chipotle and you're trying to guess what lunch demand is going to be like. That means, 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. 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.

That's another example of a narrow task that AI can be quite good at and it can have a really big impact. There's a ton of giant companies that are trialing that technology right now. Those are just a couple of 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, it's 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 it would be able to do.

Ricky Mulvey: I guess I would push back on that. 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, it takes texts, prompts and then generates images based on them. Dolly 1 would create these weird mash-up meme-looking things and then with Dolly 2, you could type in two bears at a picnic table and it could create this hyper-realistic, stylized art. That seems to me to be the creative thinking that we were promised and going beyond those narrowly defined rule sets.

Christopher Mims: 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. Is that creativity?. It's not really generating some things so much as cribbing from its huge database. I think also the essence of creativity is flexibility, is adaptability, is having a working model of the world. Dolly is 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 great at anthropomorphizing inanimate objects. We get excited about these new tools. But at the end of the day that they live in these tiny boxes, or they live on the Internet or whatever. They're not embodied. They're not really being put into robots yet and they break down in funny ways. There's been a bunch of funny uses of Dolly where people will give it a really basic task like draw Pegasus. It spits out these hideous mutant things with no recognizable heads and five legs.

Or when you ask it to do human faces, it's really terrible. They're all blurred and smudged. 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 mockups all day long. But if I asked Dolly to degenerate six different mock-ups of blank business cards on creative backgrounds. It can do that in a snap and then I can get onto the part of the client work that I enjoy." The same way that the big models for language like GPT-3 and all of its imitators or created auto-complete. They're auto completing our emails and our texts. They're auto completing code for programmers, they're generating fake reviews online. [laughs] 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 not flexible. They're really great at these pretty narrow tasks.

Ricky Mulvey: It can do texts prediction, but once you get beyond a couple of lines, it goes in delulu ville. 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, basically it's 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. 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.

Christopher Mims: Absolutely. Well, keep in mind that we live in that present. One of the most powerful AI's on earth is used by Facebook and has allowed all kinds of ad targeting. That gets us when we're at our most vulnerable and we're stuck in the loop of the infinite scroll on Instagram and advertises that mattress that our friends have been talking to us. Just at the moment when we're tipsy and tired enough to impulse buy it. 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. 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. As a result, it's this incredible engine of commerce. Every one of us, every day when we view that targeted advertising is but a single human mind up against the greatest hive intelligence humanity has ever concocted, and we're losing, and that's why we spend money there.

Ricky Mulvey: 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? One of the things you wrote about is that it has this now open source code that can understand every language on earth. That might be able to plow over whatever Apple's throwing at it.

Christopher Mims: No intelligence artificial or otherwise can operate without its senses. Meta's algorithm has been partially 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. 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, you're going to 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. All of these very unpopular changes that have just been rolled out for Instagram. 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 very algorithmically determined TV-like environment that they're trying to turn Instagram into and don't forget, it does work for TikTok. A lot of people hate it, but it might work.

Ricky Mulvey: 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?

Christopher Mims: Well, there's a broad way and a narrow way. The broad way is predictive analytics keeps getting better and that makes ports more and more efficient and the rest of the logistics network, and that is exciting because it is a conservative industry. You'd be surprised how much of it has yet to adopt this AI. The other thing though is that we are seeing the rise of autonomous driving, especially in trucking potentially. Within a year or two, there could be fully autonomous trucks, no drivers in the cab on Americas 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, stops to get fuel and that's it.

Ricky Mulvey: Christopher Mims, he's the 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 Fool Money.

Christopher Mims: Absolutely. Thank you for having me.

Chris Hill: 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 stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.