In this podcast, Tom Gardner, co-founder and CEO of Motley Fool, addresses member inquiries about:
Identifying potential multibaggers.
Exploring lesser-known investment opportunities.
The advantage of having a chief technology officer within your family circle.
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This video was recorded on September 8, 2024.
Tom Gardner: John, those are some of the considerations I have, and there are more. But I always ask, is the company led by its founder? Is it generating positive cash flow? Does it have the potential for a global customer base, and is it showing strong top-line growth rates?
Mary Long: I’m Mary Long, and that’s Tom Gardner, co-founder and CEO of Motley Fool. Today’s episode features a segment from our exclusive members-only podcast, Stock Advisor Roundtable. We’ll provide a link to the podcast in the show notes for you. In this preview, Tom joins Motley Fool Contributor Brian Stoffel to discuss investor expectations for Airbnb, the impact of AI on the tech workforce, and some lesser-known names investors should consider.
Brian Stoffel: John asks, what criteria should the average person look for in a company to identify future blockbusters? For instance, what were the early indicators for Nvidia, Google, Amazon, Tesla, Apple, and similar companies that signaled their potential? You’ve touched on this, but John points out that “success leaves clues,” and the key is to recognize them early and seize the opportunity. Any additional clues you’d like to mention beyond a CEO who might drive employees to madness by making last-minute changes before launch?
Tom Gardner: Well, I believe that is indeed one of the criteria. Generally speaking, when identifying these opportunities early on, you’re unlikely to be in for a smooth ride. This applies to both the business and the way it’s managed, and certainly to the stock. How volatile? The top-performing stocks in American history have, at some point, been quite volatile because they were entering a confusing category. People were unsure whether to believe in them or not, but they ultimately proved to be great. As people observed their business and product performance, they convinced institutions to invest, leading to stabilization. So if you’re jumping in early on, and John, I appreciate the question and the way you framed it.
I’d like to highlight a few points and explain how I came to believe Airbnb could be one of these companies. I often start by asking, is it founder-led? The reason I look for that is not that it’s a strict requirement, but founders are often willing to do things that other professional leaders might not. First, they stick with the story for the long term. There will be ups and downs, and many people pursue professional careers, receive affirmation, but don’t necessarily do what they love, which doesn’t sustain them for 10, 20, or 30 years. What does is having a reason to start the business, as Jim Sinegal did with Costco. I believe that reason traces back to his childhood, but that’s just my guess. I haven’t discussed it with him. He had a personal reason to create Costco, and it mattered to him, so he dedicated his professional and personal life to it. Founders do that more than a CEO who joins with stock options vesting over four years.
The second thing a founder is willing to do, due to their long-term perspective, is make decisions that seem unfavorable now but are planting seeds for growth in 3, 5, or 7 years. Taking actions that look embarrassing or costly in the short term can lead to significant long-term benefits. Consider Mark Zuckerberg’s pursuit of the metaverse. It may not unfold as planned or on the expected timeline, but a founder CEO’s willingness to pursue it within a sustainable business framework is a positive sign. I’m not advocating for recklessness, but founder leadership is crucial. Secondly, cash flow positivity is essential. Most great public market companies are already cash flow positive. They might not have massive positive cash flow, and they may reinvest heavily, but they aren’t simply striving for profitability; they’re already profitable. They recognize a substantial opportunity and reinvest their profits into the market. So, a founder-run company that’s cash flow positive is a good indicator. The third attribute, considering the companies you mentioned, is a worldwide user or customer base—the potential to impact the world. This could be Starbucks with coffee or Google, driven by advertisers but powered by users. This landscape may shift with AI and search tools like perplexity, which challenge Google. However, when evaluating small companies, consider their potential for a global user or customer base. Lastly, although Airbnb hasn’t yet proven this aspect, early signs indicated substantial top-line growth. In 2021-2022, Airbnb achieved $6-8 billion in sales, reflecting a 33% top-line growth rate. While that hasn’t continued at the same pace, monitoring top-line growth is crucial for evaluating long-term business success. In public markets, there’s a close relationship between top-line growth and stock performance. While cash machines may not grow their top line significantly, they can drive valuation higher by generating substantial cash. However, at some point, you need more than just squeezing profits from a single source; you need multiple sources of growth, like a vineyard, rather than just one orange. Currently, it doesn’t seem that Airbnb will achieve 20%+ top-line growth. If I were advising Airbnb or addressing their management, I’d ask, “What can unlock 20% top-line growth for this already large business? How can we accelerate from 10-12 billion to 15, 18, or 23 billion?” Without pursuing this, Airbnb may become a cash cow, dividend-paying company, which can still perform well from today’s valuation. These are some factors, John, along with others, such as founder leadership, cash flow positivity, global customer base potential, and high top-line growth. Lastly, as a portfolio management tool, diversification is essential. At the Motley Fool, from Rule Breakers to Hidden Gems and services, we’ve emphasized diversification for over 30 years. You’re bound to make mistakes, and you won’t consistently hit 70%. Therefore, diversify, accept some losses, and celebrate when you discover a significant success.
Brian Stoffel: Tom, I’m going to put you in the spotlight because you’ve shared the four characteristics you look for. If I were Brian Chesky calling you right now, do you have any insights? As a stockholder, I thought experiences might provide the boost, but it doesn’t seem to have the desired effect. Is there anything that stands out as low-hanging fruit, or is it simply a question that needs to be addressed?
Tom Gardner: Well, I have two contrasting thoughts, and I’m still exploring the second one. However, on the first, we have substantial resources at Airbnb. Despite our stock’s decline, we aren’t facing cash problems. With $11 billion in cash and $2 billion in debt, we’re in a stable position with $9 billion at our disposal. My focus is on making Airbnb a beloved presence in neighborhoods. We want people to appreciate having an Airbnb in their vicinity rather than questioning the constant comings and goings of unfamiliar faces. On the other end of the spectrum, how can Airbnb engage with people even when they’re at home? While I don’t have a ready-made answer, we have a strong brand. What can we do in the experience category to make Airbnb a part of people’s everyday lives, whether they’re staying in someone’s apartment or not? With $9 billion, we can experiment with various ideas. I’d have a team dedicated to making Airbnb an everyday brand, although I don’t have the answer just yet.
Brian Stoffel: I understand. My lighthearted suggestion would be a robotic cleaning solution. Perhaps partnering with Tesla for a robotic cleaning agent to reduce cleaning fees that everyone complains about. I’d use it in a heartbeat, but that’s a future innovation.
Tom Gardner: That’s a great point. The challenge with robotics lies in standardization. Robotic cleaning works well in hotels with uniform rooms, but when adapting to different homes with varying layouts, it becomes more complex. However, cleaning costs are a significant issue, impacting customer experience and enthusiasm.
Brian Stoffel: Our final question comes from Luke, and it’s an intriguing one. Luke asks about encouraging someone in the family to act as the chief technology officer (CTO) to stay updated on the latest innovations. He also mentions having a family CFO and wonders if you could elaborate on these roles or suggest other C-suite positions within close circles.
Tom Gardner: That’s a fantastic question, Luke. I’ll emphasize the importance of having a CTO and CFO, and if it’s not someone within your family, seek someone in your community. As an investor and for professional growth, connect with an advanced AI engineer or specialist to ask questions and gain insights into emerging themes. Digital agents are rapidly becoming a reality, and soon, companies will employ not just full-time staff and contractors but also digital agents. These bots, which excel in tasks like chess and code correction, are transforming industries. Understanding their potential requires engaging with those creating and using them. I know individuals who claim to have 20 full-time software developers, all digital agents. This shift is reshaping salaries and opportunities, with AI experts in high demand. As for the CFO role, I spoke with a money manager who noted that every extended family has at least one person who spends recklessly. This underscores the need for financial oversight, both in families and companies. CFOs ensure prudent capital allocation and identify trustworthy individuals within organizations. While I restate these roles, Luke, my third suggestion isn’t a traditional C-suite position. Instead, consider the “synergist quiz” by Les McKeown. It helps identify traits like idea generation, task execution, social interaction, and system optimization within teams. Understanding these traits can improve family dynamics and team collaboration. Identifying strengths ensures balanced teams with diverse skills, enhancing overall success.
Brian Stoffel: I appreciate that. I’ll definitely explore the synergist quiz for my family. Let’s wrap up with two quick questions, aiming for concise answers. First, with small caps making a comeback, do you have any compelling small-cap names?
Tom Gardner: I anticipated this question, and I have four small-cap companies in mind, all part of real-money portfolios within the Hidden Gems Universe. Here they are quickly: Sezzle (ticker: SEZL), a mission-driven buy-now-pay-later company. Dream Finders Homes (ticker: DFH), with high insider ownership, operates in the Southern homebuilding sector. PACS, which runs post-acute care facilities, stands out with high insider ownership and a commitment to quality care. Lastly, Cellebrite (ticker: CLBT), specializing in digital forensics for law enforcement with strong economics. These companies offer intriguing potential for the next decade.
Brian Stoffel: Final question. What story or development excites you for the future that we haven’t discussed yet?
Tom Gardner: Internally at the Fool, we’re developing databases and scoring systems for public companies using AI tools. These tools enhance our evaluation process and offer unique insights to our members. I’m excited about the potential these tools hold for our community. Externally, I’d emphasize exploring dividend companies, well-managed small caps, and cautious investments. While I don’t foresee any major market upheavals, it’s wise to maintain prudence. I have no issue with having 10-15% of an equity portfolio in cash today.
Brian Stoffel: You seamlessly integrated internal innovation into your response. I’m looking forward to those tools as well. That concludes this month’s bonus episode. Tom, thank you for joining us.
Tom Gardner: Thank you, Brian.
Brian Stoffel: For our listeners, here’s what’s coming up next month. On Thursday, September 5th, you’ll receive a recommendation from Tom and Team Hidden Gems. A week later, on September 12th, we’ll provide quarterly updates on our foundational stocks and penalty box. As always, individuals on the program may own stocks discussed, and Motley Fool may have formal recommendations for or against mentioned stocks. Don’t make any investment decisions based solely on this information. Thanks to our producers, Matt Greer and Austin Morgan. On behalf of the entire Stock Advisor team, I’m Brian Stoffel. Thanks for joining us this month, and we’ll see you at the next Stock Advisor Roundtable in September. Fool on.
Mary Long: If you’re not a Stock Advisor member, you can join to access Stock Advisor Roundtable, monthly bonus episodes with Tom G, and the Stock Advisor Fool scorecard by visiting www.fool.com/signup. Existing members of our premium US services can catch the latest episodes and the Fool’s Stock Advisor Roundtable archive in the TMF app or by linking your account on Spotify. We’ll include these links in the show’s description today.
