🗞 Airbnbank?

WHILE YOU POUR THE JOE… ☕️
Eating Our Dogs

In case you missed this week’s top entertainment event, here’s a snapshot:

• Kamala answered nothing but spit a great deal of words; she’s truly an artist at this. “Let’s understand how we got here” was her favorite starter. She ended by pledging to stuff she did not even mention or answer.

• Trump dropped a bomb when saying that Haitians are eating cats and dogs 🐕️; he’s probably not wrong (I’ve seen a few), but at least he answered questions with facts.

In other news, both CPI and PPI came in hotter this week, just like we told you they would. The S&P 500 took it on the chin for a couple of days before running to near-all-time highs again.

Speaking of how the S&P might fare in the coming weeks, let’s get on with today’s email 📧…

MAPPING IT OUT
History Always Rhymes

I would love to give them the credit they deserve, but Bloomberg is wrong.

Sure the pace of inflation might be slowing, but it doesn’t erase the damaging 4 years we have had to live with since COVID-19, some price hikes might never go away.

Look at grocery, rental, and insurance inflation across the United States; none of it seems to be returning to normal.

Newsflash, it won’t, ever.

So, with hotter-than-expected inflation, how will the Fed decide to move next week during FOMC? I have two scenarios in mind 👀:

That’s right. For the first time in a while, we have a one-directional bet on the S&P 500, which will be announced in a few days.

The market is expecting the Fed to cut by 50bps, but recent data only justifies a 25bps cut, if any.

The market's disappointment could trigger a selloff 📉 as investors ditch everything when they realize they’ve been duped. Believe it or not, though, a 50bps cut is just as bad.

Why? Cutting rates by 50bps means the Fed has basically admitted that the economy is in trouble, and unless bad news continues to equal good news, this also warrants a market selloff.

Here’s where we see the S&P 500 hitting and running.

Before we even get to the FOMC, we could test the previous highs starting at $563. 🎯 

If we get some responsive sellers at that point, we should move back toward the $552-$550 area and settle there or just sell right through.

If that fails, then all other levels below could be triggered, starting with $543, then $525, then $518.

This is the same scenario that took place in late 2007, and in late 2018 as well. You have CPI first, then PPI, then retail sales data with neither moving the market by much.

Finally, you come up against the final boss, FOMC, and then you meet your maker (if you’re a bull). 🐂 

TRADE OF THE WEEK(END)
A Very Skilled Host

So you know how banks take the money you give them and make more money for themselves before giving it back to you?

Airbnb does the same thing with your pre-funded vacation money, and it could make this stock one to keep for ages to come, here’s how:

Interest income of $226 million 💵 for the quarter in Airbnb, or roughly 8.2% of revenue. As far as we know, Airbnb doesn’t hold any income securities or lends money out as a part of its main operations, so where is this money coming from?

They deposit this cash in safe places like certificates of deposit (CDs) or treasury bonds, collect the income generated between your booking and when the host gets paid, and go home a bit richer.

Let’s do some math to figure out how this alone can boost Airbnb’s stock value through the roof in the coming years.

A 40% return on invested capital means that Airbnb generates that much of a return from each dollar they invest into the business.

So, when they reinvest this $226 million back into the business, that amount grows at 40% moving forward. Keep in mind this is per quarter, not per year, so the effects are much bigger.

Okay, let’s compound this $226 at 40% for, say, five years and see what that ends up being

Roughly $1.2 billion after five years… Sheesh.

If we divide this $1.2 billion by the number of shares out there for Airbnb, which is 632.4 million, we get a per-share value add of $1.9.

It doesn’t end there, though. As Airbnb stock trades at a P/E ratio of 15.8x, you can multiply that value-add by this and get $30 in additional value for Airbnb stock.

Remember that this is only one quarter of interest income, invested by itself for five years.

Four quarters a year, five years, that’s like 20 quarters of $226 million in interest income being invested at these rates of return.

Someone, please call my former boss at Goldman, because I think I should take his job in investment strategy (JK, I don’t like working office hours). ⏱️ 

NOW GO AND MAKE IT HAPPEN
A Must Have

Investing is one thing; value investing is another. You can come up with assumptions and potential paths for a stock to compound its value, as we pitched here for Airbnb stock, by understanding the art of value investing.

Today’s book recommendation 📖 is no Buffett work. However, it still covers some of the most important things to keep in mind when hunting for that next deal, as well as some of the math that goes along with it.

To your success,

G. 🥃