It is easy to argue, as so many have over the last few years, that the market’s recent love affair with growth has gotten a little overheated. That has led to a selloff in a lot of the high-profile tech companies that led the charge up, but it doesn’t change the basic rationale for owning those stocks: that they are companies investing in their future who have the ability to turn the profit tap on when it suits them. The classic historical example of that approach would be Amazon (AMZN), which was criticized for years for not turning their large and growing revenues into profits. That criticism sounded reasonable for a time but looks ridiculous now that it is clear that what they were doing was establishing a market dominance so strong that it ensured future profitability on a massive scale, even in a competitive market.
That same criticism, that not thinking small is a mistake, is being used right now against Airbnb (ABNB), and it is as wrongheaded in this case as it was in Amazon’s.
That said, a for-profit corporation’s prime purpose is to make money, and putting a premium on stock in companies that don’t do that is always a risky business. What is different in the case of an Amazon or an Airbnb is the timescale on which they operate. Boardrooms and C-suites in America are frequently criticized for taking a short-term, next quarter-focused view, and yet when a company looks decades into the future and invests with that in mind, their stock is often punished. That kind of punishment is usually as short-term as the mindset that prompts it, and investing in growth pays off quite quickly.
Looking to the future is what Airbnb has been doing recently. For obvious reasons, the pandemic hit them hard. After we all became germaphobes a year ago and convinced ourselves that coronavirus lived on surfaces for days on end, just waiting to infect us, who wanted to go and stay in a stranger’s house for a week or two? But just as Amazon faced the tech wreck early in its life, and the Great Recession, it eventually emerged stronger from both. Airbnb’s survival of the pandemic will leave them leaner, fitter, and better equipped for the future when all is said and done.
Their earnings report last week made it pretty clear that that they are working towards that end. On the surface, it looked pretty ugly. Losses were a much larger than anticipated at $1.95 per share, which for many overshadowed the good news of greater than expected revenue growth. When you look at the reasons for that discrepancy, this earnings report should actually give encouragement to those seeking growth.
That may sound a bit strange when a large part of the loss was attributed to “restructuring costs,” which is boardroom speak for layoffs, but as most high-profile tech companies have found out at some point, overstaffing is often more of an impediment to long-term growth than understaffing. Airbnb were forced into cuts by the pandemic, but that will probably turn out to be a good thing. It necessitated an early, brutal assessment of efficiency that will have hurt, I’m sure, but which will leave them much better placed for growth from here on out.
The same can be said of the other quoted reason for big losses on big revenue: paying down debt. Airbnb took available loans to get through the pandemic, and it is probably tempting to massage the numbers by keeping that debt on the books. However, once the existential threat has passed, it makes sense to take a short-term hit to profits that will enable growth-focused borrowing in the future, rather than to delay the inevitable for the sake of a better EPS number.
Other than paying down debt and laying people off, the main expenses for Airbnb last quarter were investments in their renters, or hosts. This is the equivalent of most companies investing in improving their supply chain and has the added advantage of creating barriers to growth and entry for competitors and newcomers to the market. Lowering costs by reducing staffing and paying down debt will enable more of that in the future, and that cannot be a bad thing.
Over the last couple of months, we have seen the market as a whole go through a massive “buy the rumor, sell the fact” pattern. Stock prices rose steeply in the second half of last year as hope for vaccines grew, but have dropped now that they are here, and some kind of normality is returning to the U.S. That played out in an exaggerated way in the covid-sensitive ABNB stock but now that it is clear that they will come out of this not just alive but also focused on future growth, a turnaround in the stock can be expected. It may not come right away, but as the stock approaches its trading low of $121.50 it is worth the attention of investors with a longer-term viewpoint.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.