Wipeout - The Mr. Market Edition
The Curious Investor - May 24, 2021
The Curious Investor will be on hiatus for the next two weeks for the holiday and some personal life festivities! We’ll be back on June 14th with a new edition. Don’t fret, you can always reach us via our Slack community with any questions or market topics you’d like to discuss!
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What the Market?
It's been another tumultuous week for Mr. Market as equity, bond, and crypto markets slide sideways. Investors are getting slightly tired of the recent ups and downs and are moving towards safer assets to weather the ongoing transitional growth-to-value storm. Economic data this week should help shed some light into where we may be heading next.
What’s driving the market?
We heard you liked inflation, so we put some inflation on your inflation: This week the Bureau of Economic Analysis will release its monthly personal consumption expenditure data. The data also includes the Fed’s favorite inflation measure, the Core Personal Consumption Expenditures Price Index. Analysts suspect that the Fed feels comfortable with the PCE Price Index hovering up to 2.8%, and economists are expecting a 2.9% reading for April. While the Fed may tolerate higher rates for consecutive months, policymakers may have to start considering alternatives to quiet inflationary fears. The Fed has yet to deem the current rising inflationary pressure as an issue and still has a number of tools to use.
A little retail therapy never hurt nobody! The Conference Board will release its Consumer Confidence Index on Tuesday, while the University of Michigan will release its consumer sentiment survey on Friday. Both had recently reached pandemic-high figures and are expected to drop due to expected higher inflation. Overall sentiment is still bullish and consumption levels are still expected to increase in the coming months due to pent-up demand and record savings. In an environment where interest rates remain low and inflation rises, consumption tends to accelerate despite rising prices as present money is worth more than the future value of money. The increasing consumption rates will add pressure onto suppliers to keep up with demand. In a self-fulfilling prophecy sort of way, that added pressure itself will pump an increase in prices.
What’s an investor to do?
We knew beforehand that Q2 was going to be a rough one. The economic machine is churning, and inflation is accelerating as expected, albeit, a bit faster than anticipated. Don’t fret about what media coverage tells you; selling a catastrophe is always easier than the mundane truth. Although many investors do not trust the Fed downplaying inflation (evidenced by the shift to commodities and the bond markets), remember that economic cycles are long-term and some inflation is healthy, particularly in the current post-pandemic context and with an overly dovish approach to monetary policy.
It feels like we’re a broken record at this point but the story remains the same, shift to more value-based investments. Adopt a long-term approach that aligns with the changing macroeconomics environment (e.g., the Fed becoming more hawkish). The time for a growth only portfolio is passing, at least for the time being. There is still wiggle room and opportunity for reopening and value plays as well as commodity exposure. Focus on identifying solid companies with long-term horizons; ask yourself, do I believe in this company’s direction for the next 3-to-5 years?
Keep an eye on the economy
As mentioned above, keep an eye on inflation and consumer data this week. They will be the key drivers of the market. Isn’t it nice that we’re back to data driving the market? It sure helps us sleep better at night...most nights...
The Curious Investor:
In search of a reopening play, is Airbnb the answer?: The travel and hospitality industry took massive hits throughout the pandemic. Industry disruptor, Airbnb, decided it was the perfect storm to go public in. Six months later, Airbnb is trading about 7% below their listing price of $144 a share. Let’s see what’s going on:
Where is ABNB today? Airbnb recently announced their Q1 2021 results and it was underwhelming, at best. The company missed on EPS for the second straight quarter while beating revenue expectations and reporting a 5% YoY increase (remember travel didn’t slow down till late Q1 2020 due to the pandemic). All things considered, the revenue increase is a feat, especially when taking into account that old-school competitors like booking.com and Expedia reported losses of 40%+ YoY. It doesn’t appear that the company has benefited yet from the early reopening but signs point to increased volume. Gross Booking Volume (GBV) increased by over 50% to $10B worth of bookings in Q1 2021 (GBV is recorded when someone books, even though ABNB doesn’t realize the revenue until the booking is completed). At an initial glance, this points to lots of upcoming travel and demand in the summer months; however, average daily rates also increased by 35% (the average price of a booking) and played a large factor in volume increases. While these price increases helped Airbnb maintain revenues, many customers and hosts alike have begun to complain about Airbnb’s costs and question whether it is still an economical alternative to a hotel.
Where is ABNB heading? The current focus is on North America where vaccination rates and domestic travel are ticking back up. Global economies, EMEA in particular, may take years to rebound which will continue to weigh on ABNB which has a large international presence. In the meantime, ABNB has outlined 4 key areas of focus:
Educating the world about what makes Airbnb different: The company has launched its first major marketing campaign in 5 years.
Recruiting more hosts and setting them up for success: Keep an eye out for a webcast today about some anticipated updates to Airbnb’s service.
Simplifying the guest’s journey (e.g., flexible booking dates) and delivering world class service (e.g., making people comfortable traveling again).
We’ve seen this story before right? Airbnb’s story is looking quite similar to that of Uber’s, which is unsurprising considering the two companies utilize the same underlying business model (unlocking adjacent assets) and have thrown their respective industries on their heads. Airbnb is facing an increasing amount of regulatory pressure (more so in Europe) and dealing with competitors like Vrbo working to steal their hosts. To crystalize the comparison even more, customers (riders) are beginning to complain that prices are no longer an economical alternative and hosts (drivers) that the company is squeezing out every dollar from them. Airbnb has a number of challenges ahead of them, and they have a renowned leadership team to steer them through it headed up by Brian Chesky as well as a brand with a lot of goodwill. Not to mention, if you’ve looked at any booking service, Airbnb has a superior product and user experience, hands down. The Airbnb model will likely win out regulatory battles in the long run as industries must evolve and competition will likely increase as well but it’s certainly not a winner-take-all market and never has been for hospitality. Airbnb’s brand and product may carry them through the challenges if the company can continue innovating and find a way to balance prices, fees, and profitability. Which brings the next question - how does Airbnb look under the hood, and is this the right time to invest?
Are there any hidden fees in the current pricing?
ABNB missed earnings expectations for the second consecutive quarter just as the company’s 6 month lockup periods ended and both the CFO and CSO sold off a significant number of shares. Unsurprisingly, shares of the company dipped substantially. Does this mean it’s a buying opportunity?
Analysts have raised their long-term expectations while simultaneously lowering their short-term views, suggesting most (or at least more) of the current value comes from FUTURE earnings. The company currently trades at 24x sales, and is expected to trade at 20x next year’s sales (about 2.3x the industry average). That sort of valuation makes you think, surely, you must be joking WTM? No, no we’re not, and don’t call us Shirley. It’s quite possible that there is a premium baked into the price given the company’s cult-like following and brand equity.
The market is questioning what to do with Airbnb. The short-float is roughly 15% (an aggressively high figure) and the options chains are almost equally split between bearish and bullish positions for the upcoming quarter. Even market analysts are struggling to pin a price on ABNB with price targets ranging from $76 to $246. At this point, ABNB looks more like a coin-toss than an investment.
But it’s such a good product, what’s got everyone so befuddled? To be honest, trying to make sense of the bottom line of an industry-disruptive growth company in the tech space would be a painful exercise even for the sadist in all of us (don’t lie to yourself, there’s a bit in all of us). Our inner demons aside, it will probably be an irrelevant assumption on financial management practices and a waste of time in what is closer to astrological divinology than a real valuation. What we do know is that ABNB is losing a lot of money right now. It’s not surprising though as the company is still a startup (albeit a mature one) and is experiencing big company growing pains across its business in addition to a pandemic. The key thing to focus on is the company’s direction. On the bright side, the company is sitting on a LOT of cash (about $6.4bn of it), has no short-term debt and only $1.9bn in long-term debt. You go Glen Coco! ABNB has held its ground and outperformed in terms of topline and customer acquisition against its comparables (Expedia, Booking.com, and TripAdvisor).
But how does it make you feel? (i.e., the conclusion): I feel troubled Cotton, even with a promising strategy, market share to gain, and great product ABNB may be cursed like many other pandemic stocks and recent IPOs with a valuation that is simply too hard-to-achieve. Anything outside stellar, mind-blowing results may push the stock down, and even if they achieve it, it may just stay put. What we’re saying is that the current price is based on highly optimistic future results. ABNB may deservedly demand a higher premium than its competitors, but how much more? As the company works through growing pains, they have a number of challenges to solve for including:
ensuring they remain an economic alternative to hotels for both vacationers and hosts.
overcoming regulatory hurdles as well as increasing competition,
Becoming a financially sound company
With a great leadership team led by Bryan Chesky, Airbnb will likely overcome all these challenges. All that to say, we love Airbnb, but to paraphrase my ex, it’s just not the right time, let’s try again next quarter. Airbnb will sit at the top of our watchlist as one to monitor throughout Q2 and we’ll be tuning in to see what kind of announcements they have during today’s webcast.
Monday: Bank of Japan speech, Chicago Fed National Activity Index
Tuesday: US Housing data, Richmond Fed Manufacturing Index, Consumer Confidence, Bank of England speech
Wednesday: Japanese leading economic index, US Fed speeches
Thursday: US Personal Consumption data, Jobless Claims, Durable goods orders, Q1 GDP data, Treasury Secretary speech
Friday: Eurozone consumer confidence and business climate, US Personal Income data and consumer sentiment
If you didn’t know, now you know
Anti-Semitic hate crimes are on the rise both in the US and around the world. In 2019, anti-Semitic hate crimes hit a multi-year record high and have continued rising. The FBI’s hate crime statistics cite that Jews are 3x more likely to experience a hate crime in America than any other ethnic group. This has been ongoing for years and is spiking right now, over the past two weeks anti-Semitic hate crimes have risen 438%. We ask that you stand up to this hate as you have for other movements. Regardless of your position on the Israeli-Hamas-Palestinian situation, there is no place for hate and dehumanizing rhetoric of innocent people. Your support makes us all feel safer. Please, keep your eyes open to what’s happening and help raise awareness in any way you can. #StopJewishHate
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
The Surrender Experiment by Michael Singer: From years living in the woods to taking a company public, Michael Singer narrates his spiritual awakening and journey from hippy to CEO. The book tackles questions like what happens when you put aside your preferences and open up to the opportunities life may bring.
Cradle to Cradle by William McDonough & Michael Braungart. A rejection of manufacturing and industrial practices and culturally perceived efficiency. This book discusses the role of design-thinking and environmentalism as a framework for modern processes and the life-cycle of consumer products.
Looking for more?
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.