New York City Rules Are Not an Airbnb Killer

In this podcast, Motley Fool host Ricky Mulvey and analyst Jason Moser discuss:

• How restrictions on short-term rentals could impact Airbnb's growth story.
• Why investors are sour about AMC's new share issuance.
• One company managing its share count well.

Plus, Motley Fool host Deidre Woollard interviews Oliver Franklin-Wallis, author of Wasteland: The Dirty Truth About What We Throw Away, Where It Goes, And Why It Matters.

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 Sep. 06, 2023

Ricky Mulvey: The city that never sleeps now has fewer places to go to bed. You're listening to Motley Fool Money. I'm Ricky Mulvey. Joining us now is Jason Moser. Jason, good to see you.

Jason Moser: Hey Ricky, how's it going going?

Ricky Mulvey: Going well, Airbnb has lost a city, that is New York City. I'm going to run through some of the rules that Airbnb has to follow. Something they are calling a de facto ban in what is called local law 18. All right, Jason. Here are the new rules. Hosts can only run a place where they live. Hosts must be present during the stay. Hosts and visitors must leave the doors inside the dwelling unlocked, so occupants can access the entire unit. There's an exception if you are using the room privately, and Airbnb units are limited to two guests and you've got to register them. Is this a good headline or do you think this is a long term problem for Airbnb?

Jason Moser: So on its own, I don't know that it's a very good headline. I think it probably catches a lot of attention. It's not a great headline, I think from that perspective. I wouldn't call this necessarily a problem for Airbnb on its own but I think this is a sign, at least, of headwinds or some challenges perhaps to the growth assumptions going forward for the business. This isn't some Airbnb killer. Let's get that out of the conversation now.

Ricky Mulvey: That is even a better headline though.

Jason Moser: [laughs] Oh, well, yeah.

Ricky Mulvey: New Airbnb killer.

Jason Moser: This is why we do what we do. [laughs] But I do think again, this is something that at least makes you start to question the growth assumptions going forward for the business. This isn't just about New York City but it's more so what it portends. How other communities, how other cities or municipalities, how they're going to react to this in order to help shape their laws on the matter. When you talk about New York City, obviously that's a very, very large market. I think that's something like 40,000 plus Airbnb listings in New York, according to data from inside Airbnb. But when you put that in the context of Airbnb's overall network, they have over 7 million listings around the world and to date, over 1.5 billion with a B cumulative guest arrivals. This is clearly a very large company, a very large network. I think it's important to remember this is a global company. This is probably a bit more of a problem that we focus on here at home. You look at something like Europe for example. It seems like they've had a bit more success in working with the EU and all parties involved to come up with middle of the road solutions that can work for everyone. The reason why I bring that up is simply because the EU is home to over 1 million hosts on Airbnb, which is more than any other region in the world. So while we here at home love to focus on things here at home, it's also worth remembering this company's opportunity is the entire world and that does matter.

Ricky Mulvey: Yeah, I think a rent also might be a sore spot for probably the most expensive location to rent in the United States.

Jason Moser: I'd imagine. [laughs]

Ricky Mulvey: To your point, New York City is not the first town to put some limitations on Airbnb. It seems to be the most stringent though. Many cities require licenses. Some cities limit the number of days that an Airbnb can be rented. In San Francisco, that's 90 days, In Amsterdam that's 30. But like many companies, it went first before figuring out the regulatory landscape. We'll start our business here and then see what happens. Do you think that strategy is going to continue to benefit Airbnb or now that they're a mature company, do you think they have to ask questions first?

Jason Moser: As they mature, I think you probably are right. It gets to be more than ask questions first. I think for the time leading up to now, it's probably a lot easier just to ask for forgiveness later. I think that works out for a lot of us in a lot of ways. But this is one of those things that comes with being a disrupter in finding new solutions to old problems. It's not to say that Airbnb's way is thee way, but their way certainly opens the conversation up to a new way. I think that's ultimately what we're looking at here. I think of other companies that have come into a big space like this and disrupt, Uber stands out as one. We've seen them going through through regulatory ups and flows, the whole gig economy thing. So it's not necessarily to say that Airbnb's way is the way, but this opens up a conversation to a new way. Then, again, like I was saying earlier, this is something New York City is just one little piece of the overall puzzle here. You do have to ask yourself the question from a global perspective, is this just a really, really loud minority? Maybe so maybe not. I mean, I think as real estate goes, it is all about locations. Some places will welcome stuff like this more than others. Particularly here domestically. As we know, the United States is a big melting pot, going from the east to the west, to the north to the south. There are a lot of different perspectives on things like this. Those that don't want it, they find ways to regulate it. Then those who do want it find loopholes. [laughs]

Ricky Mulvey: All I heard you say there, in referring to New York, was that it's really loud and a small piece. [laughs]

Jason Moser: Minority, maybe not, but loud. Absolutely. [laughs]

Ricky Mulvey: Anyway, Airbnb, there's that New York City story. But it also joined the Standard and Poor's 500, which the stock seems to be reacting to. Which story do you think its shareholders should be paying more attention to?

Jason Moser: Absolutely, the New York City story. Joining the S&P is great. That comes with a little reputational boost maybe, it brings your stock more into the phrase as funds rebalance. Maybe it brings you more into the conversation for investing nerds like us. But the S&P news ultimately, it's nothing that really contributes to the fundamentals of the business. I mean, it can be a little reflective of the fundamentals up to this point. But ultimately, it's nothing that really contributes to the fundamentals of the business. Whereas New York City, again, maybe not just on its own, but this idea in general. This longer term trend, and watching how this plays out, this very much will play out in the fundamentals of the business, and we'll only learn more in time.

Ricky Mulvey: Let's talk a little bit about those fundamentals. Revenue is growing at an 18% year over year clip for Airbnb. You would think that it would be feeling a post pandemic hangover. Why do you think this business is still growing the way it is?

Jason Moser: Well, I think one thing, I mean, certainly this is a disruptor. I think they have taken an old stayed space in traveling and the way that we as travelers have been used to doing things and they've given us new options and in many cases, really impressive viable attractive options. Again, going back to that global opportunity, remember travel in total is a 2 trillion-dollar global opportunity. This is just a huge market opportunity. Now obviously that's not all Airbnb's market opportunity, but it's a good portion of it. It just again goes to speak to the massive opportunity there in front. But then when you look back at the company's most recent quarter that they reported, they are really seeing a lot of trends continuing to go in the right direction. Active bookers grew in every region, they had more first time bookers compared to a year ago. They mentioned that guests are traveling even farther now. Whenever we talk about cross border, I think a lot of times cross border is something we talk about with payments like Mastercard and Visa.

Cross border is something I think you need to get used to hearing with companies like Airbnb. Cross-border nights booked increased 16% in the second quarter versus a year ago. People are travelling farther, going into different countries. Asia Pacific, where really inbound travel in Asia Pacific was very hampered over the last several years. That was at 80% versus a year ago. Then ultimately guests are also staying longer with Airbnb. In Quarter 2 they noted that long-term stays remained 18% of total night's book. I think a lot of us were wondering if maybe that number wouldn't start pulling back as the world got back to normal. It seems like right now that number is holding steady, which is encouraging. But I think when you put all of those things together, that really tells the story of a business that as Ron Gross might say, firing on all cylinders.

Ricky Mulvey: Yeah, but you're going to pay for that growth If you're an investor. It trades at about 35 times forward earnings. That's about triple the price tag of competitor Expedia. It's also doing well operating income of around $2 billion and a very solid return on invested capital above 30%. Any thoughts at the valuation, the growth that those Airbnb investors are paying for?

Jason Moser: Yeah, so full disclosure, I actually recommended the stock to our members back at the end of June. It's up around 13% or so since then, my basic thinking back then, all the way back to June [laughs] was ultimately looking out through 2027. I think I believe they'll be able to continue growing that top line somewhere in the range of 12 to 15%. To me, that seems more than achievable compared to historical results. That really does also take into consideration some of these regulatory headwinds that they may witness from time to time. Ultimately, I could see them more or less doubling operating income versus what they earned in 2022, if not better. So you look at the stock today, it's around 23 times free cash flow, and that's actually 30 times if you back out the stock based compensation operating cash. I wouldn't call this a steel by any stretch, but I think it's a reasonable time to consider opening a position. I think this is one where you maybe consider building a position over time and adding on points of weakness. Because again, to me, that rule breaker mentality, looking for those top dogs. Airbnb just really stands out as one of those top dogs in the travel industry.

Ricky Mulvey: Last question before the next story. Let's say you've got a trip book to New York City. You staying in a hotel or are you taking a roommate?

Jason Moser: Man, I'll tell you, Going up to New York City, that might be a little bit of a stretch. I think. I wouldn't mind paying up for the hotel. But every once in a while, look back what we did with Paris a couple of years ago with our family, we did an Airbnb there on the outskirts of the city. That worked out real well. So I don't know what these new regulatory changes, I'm probably opting for a hotel. But if you know somebody and you can find the right place, maybe that'll sway my decision-making.

Ricky Mulvey: It depends on how cool the host is. Let's move to ASC. Movies are back but maybe not the theater chain. The stock is down about 20% today as at the time of this recording on news that AMC will be issuing 40 million new shares. That's about a 6% increase from its current share count. Company has done this before. Jason, you like following share counts of companies. Why do you think it's investors are taking this news so poorly?

Jason Moser: Well, ultimately because it doesn't solve the problem. It's like with many things, this is just a short term solution to a long term problem. If anything, this just really reiterates the challenges the business is facing, traffic is down, the top line isn't going anywhere. Profitability is hampered. The company's capital position continues to be challenged. This is something that buys them a little time, but at the end of the day, it's just that it's a temporary solution to a business with some greater fundamental issues.

Ricky Mulvey: Yeah, the reason it's issuing shares is to "bolster liquidity to repay refinance, redeem, or repurchase its existing indebtedness and for general corporate purposes. What does that word salad mean to you?

Jason Moser: You know what they say? You can't borrow your way out of debt, Ricky.. That does feel a little bit like what this is and ultimately, at the end of the day, what this means, if you're an investor in AMC, you better pack at lunch because it's going to be a while.

Ricky Mulvey: I think it's also important to note that this company, over the past 12 months has about three Xed its existing share count. Perhaps those long term investors might be feeling a little diluted. I don't want to end this in a totally negative place though. We're a little bit negative right now. You could talk about AMC's share account, or the fact that it doesn't really own any of the property that it there to sit on. But let's end in a more positive place. What's a business that you think is managing its share count well?

Jason Moser: I love your glass half full perspective there. I think that's exactly the right way to end the show. I did a little bit of thinking over this when you posed the question earlier. I think, one company that stands up, when it comes to share management. You want to either see these issuances going to good investments, companies will issue shares to make acquisitions. But more often than not, we talk about share repurchases and I guess you just want to make sure that the share repurchases are doing what they're supposed to do, which is really bringing that share account down. You bring that share account down, it makes every share out there worth, in theory, a little bit more. One company that stands out to me, in regard to repurchases, look at a company like Lowe's and Marvin Ellison, I really give him a lot of credit for doing this. He's had some challenges, I think just with the business itself and part of that just is the nature of the business and how mature it is. But he has brought the share account down by 218.8 million shares since 2019. That's about 27.5%. Now they spent $43.8 billion on share repurchases all through the way to buy those 218.8 million shares. That's a cost basis of around $200 shares today $230. You look at the total return for Lowe's since 2019. Shareholders are up 130% so I feel like they've done OK, especially for a business really. Again, it's not necessarily a challenge business, but it's in a mature industry, it's only recording top line growth annualized over the last five years, around 5.7%. You consider that, and then you look at what they've done from a capital management perspective. I think they've done right by shareholders.

Ricky Mulvey: It's nice to see a company buying back shares and reducing its share count. Jason Moser. I appreciate your time and your insight.

Jason Moser: Thank you.

Ricky Mulvey: You hear companies talk a lot about how things are made a little bit less about where they end up. Oliver Franklin-Wallis is a contributing editor for Wired and the author of Wasteland: The Dirty Truth About What We Throw Away, Where It Goes, and Why It Matters. Deidre Woollard caught up with Franklin-Wallis to learn about the business of trash in the gold mine of electronic waste.

Deidre Woollard: One of the lines you had about midway through the book that really stuck with me was about how little we see of the way things are made and how little we understand of the true cost. Why was it important for you to tell these stories?

Oliver Franklin-Wallis: Yeah, I think that's right. The thing that struck me from the outset of this journey is that, we spend as a society, a lot of time talking about where stuff comes from. We care about whether things are all organic, whether they're free trade and air miles and all of these kind of things that we think about with our purchases. But we spend or historically have spent much less energy thinking about where it goes afterwards. But, as explore in this book, quite often these days, in this global economy, that journey is just as long, and there are a huge number of variations in where your things end up. Quite often things are getting loaded on container ships and going halfway around the world before they're being disposed of. The impact is quite profound, actually. I use the example of the solid waste industry, is estimated to be about 5% of all greenhouse gas emissions. Food waste, which is calculated separately, is thought to be 8-10% of all greenhouse gas emissions according to the IPCC. Those two figures together make it the waste it is a huge environmental challenge before we start talking about why the ocean is full of plastic and the tangible elements of the pollution that we see in our everyday lives. The thing that fascinated me was well, how did we get to this state where the Pacific Ocean has a garbage patch five times the size of Mexico. How did we get here? A big part of the answer is because we've historically treated waste as something that should be out of sight, out of mind, and as a result, it's something that has been on the periphery, and my hope is that this book can start an ongoing conversation, I should say. Because over the last few years as I've been reporting this story, the level of consciousness around waste and recycling and those things has changed hugely, which has been really encouraging, but there's still quite a long way to go. Hopefully this is a way to kick, start another conversation.

Deidre Woollard: One of the things that you just mentioned is that, out of sight, out of mind one of the things that many countries have done for years is export their trash. But the economics of it, that's shifting. What are the long term consequences of that when we can't just ship it away from us?

Oliver Franklin-Wallis: Yeah, that's right. This story really started in 2018 for me because for people who don't know, really for the past two decades, the story of waste has been the story of the growth of China and a lot of the stuff that we were throwing away, and particularly things to be recycled, whether that's scrap metals or plastics, was being sent to China, which the global industrial harbor, to be melted down and remade. The problem is, is that we were sending thousands and thousands of container ships floated with garbage every year back to China and often what we were sending wasn't very high quality so things were mixed badly and, or it was dirty and essentially unusable partly because of what we talked about. No one was really checking and there was this sense that OK, well they're not going to send it back so you can get away with a lot. What ended up happening was in about 2018 the Chinese government turned around and said, right, we've had enough of this, you're sending too much garbage, like it's polluting our environment. We're producing enough of this stuff locally that we don't really need the materials anymore and they shut their doors to the international waste trade more or less. They pass these incredibly stringent environmental curbs on what waste could be imported. All of a sudden, basically overnight, the entire global waste economy crashed and we saw a bunch of waste companies, particularly in places like California and on the west coast where there were a lot of exporters going bust, and the waste markets in the international waste trade essentially had this panic about, OK, well what are we going to do with all this raw material? It ended up flooding in places like Southeast Asia, Malaysia, Indonesia, Vietnam, Thailand.

In the intervening years has been a story of essentially [inaudible] because plastics will flood into a country like Vietnam, or Thailand and overwhelm the waste management system there until they've passed bands, so it's a series of countries now have banned waste imports. The result in the global north and in the west has essentially been, it's galvanized a sudden reinvestment in our waste infrastructure. In the UK for example, where I am right now, there's been a huge like a series of big waste reforms, there's been big investment by large waste companies in building new recycling facilities, for example. Because at the same time as the waste market has crashed, we've had this huge environmental awakening among consumers about the impact of our waste and our carbon footprints, and particularly the impact of plastics on the oceans. All of a sudden, people are choosing to buy recycled plastics more. It's become very desirable for companies to include recycled plastics in their products. In some countries now like the UK, it is legally mandated to have a certain quantity of recycled plastics now in packaging in the UK. You have these two competing forces and the result has been a kind of upheaval in the waste industry that is quite remarkable and a level of change and upheaval and innovation that has been a long time coming. It's a very exciting space, but there's been a lot of upheaval in a short period of time.

Deidre Woollard: Well, you mentioned cobalt and lithium earlier and you had this data in the book that stuck out to me, which is that only 17.4% of electronic waste is recycled. Yeah, we spent a lot of money on our phones and I think we're starting to use them a little bit longer, but we are still so bad at recycling electronics. Is there any way for us to get better at this?

Oliver Franklin-Wallis: I mean, the good news about that is that electronic waste, we went through this incredible glut period of electronic waste because whenever you have a new technology that is really rapidly improving, smartphones is a classic example, that technology was improving so quickly, year on year that people were constantly wanting new ones and so we were getting new phones every 12 months or every 24 months, or what have you. The level of waste, the wastefulness inherent in that is astonishing to think about, particularly when you understand the value of the materials in your smartphone. There's not just things like gold and platinum, it's cobalt, it's neodymium. It's like there are all of these rare metals in there that are incredibly difficult to get to. There's real value when we throw them away. For a long time, this stuff was essentially disappearing. It was going in landfills, or it's going in your kitchen drawer or the back of a cupboard somewhere. We don't really know the end fate of a lot of this material. Now we're in a situation where tech companies and governments have realized the value locked away there. There's a lot more focus on recycled content and you see companies like Apple doing interesting things with E waste recycling.

One of my most surreal moments in the reporting of the book was I went to write about ERI, which is one of the biggest recycling electronic recycling firms in America, I went out to their big plant in Fresno. You go into these places and again, it's essentially like, I don't want to over simplify thing, but it's like the most gigantic blender you've ever seen it is a disassembly line and they go through these things and they're crushed and then shredded and all of these different magnetic and flotation means of separating out the different materials. The silicon well as copper. They have extremely high end ways of separating these materials. Then on the other side of things, there are literally guys with hammers, like hammering stuff apart. Because when you get to something the size of a TV, there are some stuff that's like literally glued together and so before you can recycle it, you have to like tear the glue apart. It's a fascinating industry to be a part of. Yeah, the growth is quite remarkable and the value there is truly not quite appreciated yet. But there's a great statistic in the book, which is that there is more gold in a ton of E waste than there is in a ton of gold ore. You end up with this situation, which is what we have now that large mining companies are among those investing in electronic waste and in what they call urban mining, which is like essentially mining old landfills eventually to see what metals can be recovered from there because there's so much value.

Deidre Woollard: That's fascinating. Instead of trying to dig gold out of the Earth, we're now going to try to dig it out of the trash.

Oliver Franklin-Wallis: Well, precisely. It makes a lot of sense because particularly rare metals, you are having to dig insane low amounts of oil, the concentration of copper ore now when you mine it is much lower than it was at the peak of copper mining, for example. It's getting harder and harder to get this stuff. Meanwhile, we've got huge quantities of it already on the surface. Essentially, you know that we don't have to dig down and find so the ability to find this stuff in our landfills or in our kitchen drawers is suddenly very competitive, which is why you can find, even now that you can go and sell those old electronics for a decent price and someone will take it off your hand and it will get turned into a new iPhone or something and I would encourage everyone to do that if you can. Because honestly, if you want to talk about waste like the mining industry is crazy. The thing that I think shocks people the most is if you understood the discrepancy between industrial waste versus the household waste. We spend so much time talking about recycling and things we do at home. There is one estimate which I think I have to credit this to an academic called Max Liboiron because I read it in his book. But I think it comes from old EPA data that by weight, which is a very crude measure, 97% of all waste is industrial waste. When you consider like how much of that is the petrochemical in the mining industry and it's literally, weight because it's heavy rock and things, but you know, it's so overwhelming the amount of industrial waste, it's almost hard to picture and a lot of that come from mining so if we can find ways to get that out of our old smartphones and cut down the amount of mining that we need to do then, we'll all be better.

Ricky Mulvey: That's just a portion of Deidre's conversation with Oliver Franklin-Wallis that captured your interest. The full-length interview is up on the Motley Fool Money YouTube channel. As always, people on the program may have interests 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 Ricky Mulvey. Thanks for listening. We'll be back tomorrow.