The Good News From Airbnb

In this podcast, Motley Fool senior analyst Asit Sharma discusses topics including:

• Why the recent announcement from the Federal Reserve won't change the way he invests.
• Record revenue highlighting Airbnb's third-quarter results.
• Whether a drop in share price looks like a buying opportunity.

Ben Foldy, The Wall Street Journal reporter and host of the podcast Bad Bets, shares insights on Nikola founder Trevor Milton, his early career, and the steps that led to one of the hottest stocks of the pandemic.

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 Nov. 02, 2022.

Chris Hill: We're pulling back the curtain on an EV maker and we're taking a closer look at a falling stock. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Asit Sharma. Good to see you. Thanks for being here.

Asit Sharma: Greetings, Chris. Thank you for having me.

Chris Hill: Before we get to Airbnb, let me timestamp this because this is probably not going to be very satisfying for listeners, but people will hear this after the Federal Reserve has made their announcement on what we, I think all expect to be a rate hike of three-quarters of a percent. But you and I are recording this before that happens. I guess my question for you is, is there any way that you're investing is going to change based on whatever the Fed announces this afternoon because I feel like they would have to announce something very extreme for me to rethink how I'm investing?

Asit Sharma: I'm the same way, Chris. I will say that we are all Fed watchers now. Once in a while I used to take an Uber ride, and maybe get into a conversation with the driver and he or she would learn that I invest in stocks, we would start talking stocks. Now that same conversation is what do you think Jerome Powell. But it's not going to change significantly the way I invest whatever happens today. I'm expecting personally another rate hike of three-quarters of a percentage point. Maybe the Fed will pay attention to some of the housing data that we've seen recently, some of the moderation in wage pressure and start to communicate a more dovish stance. Maybe they'll surprises with not so bigger rate hike, that would be a big boon for the stock market today.

But either way, what we've learned this year is that we've got to keep our eye on what makes businesses able to thrive in any environment, whether interest rates are at rock bottom or they're climbing, and that's about the cash flows of the businesses we invest in. It shouldn't really change how we invest, except for those of us who are maybe too concentrated in a sector that's really affected by interest rates. Let's say you're all the way extreme in growth, and your portfolio has been hammered, then sure what the Fed does, what it says about interest rates may make you want to diversify a little bit more. But for those of us who have a balanced approach to investing like growth stocks, but other stocks as well, maybe some dividend plays in there, you really shouldn't try to be reactionary to what the Fed is doing. They're wrong half the time anyway. Look how late they work in trying to inflation.

Chris Hill: Let's move on to Airbnb. Third quarter revenue was a record for this company and shares are down 10 percent. On behalf of all shareholders, Asit, I want to know why because this was a great quarter for Airbnb.

Asit Sharma: Yeah, investors keep wanting to look forward sometimes to the detriment of really great results that are actually telling you about the future. The fact that Airbnb was able to generate close to a billion bucks in free cash flow this quarter, Chris, the fact that they had $1.2 billion in net income on their books, they had a five percent increase in our average daily rate, all of that should be multi-quarter thinking. We should see those numbers and realized that the company's business model is very resilient. This we're past the peak of pandemic effects. People are traveling again. They're showing how flexible they are.

But like all other companies that are of their scale, Airbnb is reacting to what's going on in the macro environment. They're projecting growth that's going to be a little below expectations for next quarter. Of course, the stock is down 10 percent, but this is a year to be buying companies like this with huge global brands, with very strong balance sheets, and great advantages in terms of geographic diversification and in terms of a two-sided platform the way this is. I say on behalf of those who are listening to Airbnb shareholders, so what? If you like this company, I don't see anything in today's report that would dissuade you from buying if your time horizon is a few years, let's say five years or more.

Chris Hill: I was just going to say, it seems like you're pointing to a drop in 10 percent in the share price is like, hey, if this is a stock you've had on your watchlist for awhile and you do have that time horizon, congratulations, you've just been given a 10 percent coupon for shares of Airbnb.

Asit Sharma: Yeah, it very much feels that way because the company is only extending its advantages. There's still a lot of fragmentation in the hospitality industry at large. What we'll probably see in the next two years is more and more competition that Airbnb has to deal with. But bear in mind every large-scale hospitality company that has to compete with Airbnb and offer its own version of Airbnb is taking away resources from a core revenue stream. I don't think anyone will be able to catch up now with all the billions of dollars that Airbnb has invested. But let's also look at that bear case for a moment because there are some risks here. We have seen the tendency of price creep when you're looking at an Airbnb listing, that nightly rate may look great. You go to reserve the room and you see a big cleaning fee that seems outsized relative to this day. This is one of the user interface problems that Airbnb has that's not really related to interface.

What it's related to is the sellers on the platform, the suppliers trying to figure out how they can get what they feel is the most appropriate market price. Then you've got the buyers who are pushing back against that. The ongoing risks that Airbnb has in terms of some stays that just go south and then they have to swoop in with PR and try to smooth over situations so they don't become big public events, these are ever-present risk. Some of this could be an expression of a little bit of investor anxiety over the fact that we don't really know outside of the macro picture what is in the pullback of those estimates. Could a little bit of it be due to a lessening of demand because people are getting tired of trying to book a stay only to find out that final price is way more than they wanted to pay? It could be. We don't know. Uncertainty always clouds the picture. But I'm more bringing out these bear points to say these aren't huge risks, they'll overcome this. I agree, you get a coupon today. I'm a shareowner, can't buy today because we're talking about it. But maybe moving in a little bit later in the week once my compliance time clears.

Chris Hill: You and me both. Asit Sharma, great talking to you. Thanks for being here.

Asit Sharma: Thanks so much, Chris.

Chris Hill: Today, Ricky Mulvey is kicking off a two-part conversation with Ben Foldy, a reporter for The Wall Street Journal and host of the podcast, Bad Bets. The current season of the show looks at the rise and fall of Nikola, starting long before the company's boom. Before Trevor Milton founded the company, he went door-to-door selling religion and then alarm systems.

Ricky Mulvey: This translated into his jobs later, which was selling alarm systems. But that's where it seems that his scams quickly started by charging, what was it, 100 bucks for a free installation?

Ben Foldy: Yeah, I don't know if I'd call that a scam, but according to one of the people we spoke with for this podcast, Trevor, he's like, oh, hang on. I'll give you this special deal. It's $100 installation and the guy's getting the alarm installed. He was talking to the installed and he said, "I got a really good deal. It's only $100," and the guy goes, it's a free installation. It should be free. 

Ricky Mulvey: You don't think that's a scam? Paso, whatever you want to call it.

Ben Foldy: Scam is a heavy word. I don't know how to describe it. I try to be careful. His first job is selling alarms, which again, it's a door-to-door sales job a lot of times and very much a sales culture. That's how you sell alarms. Is telling a story about security, telling a story about safety, selling a vision of safety. I think if Trevor Milton is really good at anything, it's selling a vision and also getting other people to see themselves in that vision. Like I said, he didn't finish high school and didn't finish college. He doesn't have the technical aptitude to deliver on some world-changing technology, so what he needed to do was to find people who could deliver these ideas. He was really good at it getting certain people to see themselves in that too and bringing them on board and selling that. He's in charge of selling the vision, but he was almost never in charge of the execution of the technology.

Ricky Mulvey: As you say, a big theme throughout Trevor Milton's career has been "a big idea, a hype-filled pitch, and then a seemingly a crash into disputes and litigation". How did DHYBRID then lay the groundwork for Nikola?

Ben Foldy: DHYBRID, technically I believe is still a going concern actually, but was a company that attempted to do compressed natural gas conversions for diesel semi-trucks. Basically, you're not coming up with a new engine, what you're doing is you're coming up with a system that can feed compressed natural gas into the ignition chambers and increase efficiency and all that. Again, this technology wasn't invented by Trevor Milton. This wasn't Trevor Milton's idea per se, but he went into this business with a man named Mike Shrout and a few other local people in Southwest Utah. It's another place where you really start to see this divergence between what Trevor was telling people was possible and selling the idea and selling the future and the actual execution of the idea. Astonishingly quickly, Trevor was able to get a potential sales deal with Swift Transportation, who's basically the biggest trucking company in America. If you listen to podcasts, you hear this funny story of the biggest trucking company in America sending a semi-truck to this guy's driveway.

Ricky Mulvey: Garage.

Ben Foldy: Yeah. I couldn't fit in the garage. It was bigger than the houses, it's tall than the house. These nobodies working on a potentially world-changing technology, as they were thinking of it at the time, this revolutionary technology, again the hype outran the substance. The deal that was struck was never really followed through on. It fell into litigation and back and forth. According to the people who worked on it, the technology still had a lot of kinks getting worked out. Never passed emission standards or anything like that. That's one side of it.

Then the other thing I'd say about that company and Trevor's other companies, at the time he also had that online sales company or online classifieds website, there is a lot of money from local folks in that part of the world. When I say a lot I mean single-digit millions of dollars probably according to a recording we have in the podcast, just no small amount of money. The way that a lot of the investors in that ended up was basically, they weren't sophisticated investors, they were friends and family, they were people who knew Trevor from town or people who knew Trevor, what worked for them, pretty big sums of money into this high-risk start-up and then didn't get anything out of it at the end usually, or these took big losses on these sizable investments.

Ricky Mulvey: In this theme of going after individual investors for these, I would say high-tech, because even a natural gas conversion for a truck is not something that I understand, hydrogen-powered vehicles is not something I understand, this seems to be a theme throughout Trevor's career, which is I'm going to bring this world-changing technology, but I'm not going to bring it to the sophisticated investors. Whether it's DHYBRID, whether it's Nikola, I'm really going to sell it to a retail investor who I'm really hoping isn't going to look behind the curtain.

Ben Foldy: Yeah, Nikola I think is a little bit of both in that the stock market performance once it does its SPAC. Trevor in particular is very focused on the retail investors. But it also was good at attracting strategic investment from big-name meaningful partners. Let's see Bosch, Hanwha, which is a big Korean solar company; Iveco, just like one of the bigger, it's a subdivision of CNHI, it's one of the bigger heavy equipment manufacturers; the WABCO. These are not nobodies, these are not people who are total suckers, let's say. They did see something there in Trevor's vision, but I think there's a lot of start-ups that have something there in the vision and can attract strategic investment or venture capital. Those investors take bets knowing that they're not going to pan out. A lot of them aren't going to pan out, that's how that investing works. I think where Nikola becomes something else and became something else for Motley Fool readers and listeners is with the SPAC. It becomes this speculative retail trading boom and it goes public in this insane market of 2020. Forgive the pun, but it's all downhill from there.

Ricky Mulvey: That's the SPAC boom in 2020 in general. We've talked about it a little bit and you've described it in detail on your podcast. That's really when the stock market also became, in a lot of ways, gambling on these high-tech companies because there were no sports going on. There wasn't a lot else going on, but the stock market was open.

Ben Foldy: It was really hard to lose. Just when you think about the dopamine hit of pulling out your phone and seeing that your net worth has doubled in a day or whatever, people were really chasing those hits and there was a whole new generation of executives willing to give those hits too. That's really what I think Trevor is the executive of that moment. He stands out to me as Elon's own thing. Elon has that, call it, personality, but that didn't really come until there were some significant deliveries, until you could sit in a Tesla and drive it. Then there was a generation of executives following who learned a lot, I think, from the Elon playbook in terms of social media use and things like that, but hadn't built a company as fundamentally sound. Regardless of how you feel about Tesla, it's built cars, has revenues.

Ricky Mulvey: This was a company that became worth more than Ford and Fiat Chrysler without selling a single vehicle.

Ben Foldy: Yeah. I think the way to think of that is it's an idea that's worth more than Ford and Fiat Chrysler. Because what is a company that has a few prototypes? It's an idea mostly. I mean, it has people, it has hard assets, but the valuation isn't driven by, they have 300 people on staff or they have a headquarter. It's driven by the idea and Trevor sold this idea.

Chris Hill: Part 2 of the conversation will be on tomorrow's show. 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.