Traveling Light

In this edition of the Smart Investor newsletter, we examine a tourism industry disruptor. But first, let us delve into the latest Portfolio news and updates.


Portfolio Updates

❖ Super Micro Computer (SMCI) has continued to display high volatility over the past week. SMCI is a high-beta stock (extremely volatile) so large swings are to be expected. Despite falling strongly from its March high, the stock was the S&P 500’s best performer in H1 2024 with a return of ~190%, even outperforming NVIDIA (NVDA). Notably, Supermicro is one of the Portfolio’s strongest-conviction buys, and we expect it to continue on its choppy upward trend for at least the next 12 months (barring a market crash). However, we will be closely watching the developments at the company prior to its fiscal Q4 and full-year report scheduled to be released on August 6th. After several blowout quarters expectations are soaring, as SMCI projected FY24 revenue growth of 580% year-on-year. In other company news, as a result of the annual reconstitution of the Russell indexes that took effect on Monday, Super Micro Computer’s stock was added to the large-cap Russell 1000 index.

❖ Several Portfolio stocks from the Industrial sector have been under pressure in the past month as a result of the general market nervousness and profit-taking from the names that have clocked in notable increases. These include EMCOR Group (EME), GE Aerospace (GE), IIT Corp. (ITT), Parker Hannifin (PH), Howmet Aerospace (HWM), and General Dynamics (GD). All these companies are expected to post strong results in their upcoming quarterly reports, as they did before their inclusion in the Portfolio. However, we are closely watching their stock behavior, as well as market sentiment and economic developments that may impact these stocks.

❖ EMCOR Group (EME): the company’s Board has authorized an additional $500 million for common stock buybacks under its existing share repurchase program.

❖ Howmet Aerospace (HWM) announced a full redemption of its outstanding 5.125% notes due in October 2024 ahead of time. The early redemption has utilized the company’s available cash reserves, reflecting HWM’s financial strategy.

❖ KKR & Co (KKR) was among the names added to the S&P 500 index at its quarterly rebalancing last week.

❖ Visa Inc. (V) has seen its shares decline after a federal judge rejected the $30 billion settlement for the dispute over settlement (swipe) fees reached between Visa, Mastercard, and retailers. The settlement was viewed as a win for the credit card processors due to the small fee reduction and the temporary nature of the fee cap. The federal ruling means that the companies will have to make larger concessions or continue their legal battle. A less favorable settlement may temporarily harm Visa’s and Mastercard’s revenue growth, but the effect should be marginal given the companies’ scale, economic moat, and cost-management flexibility.


Portfolio Earnings and Dividend Calendar

❖ The Q1 2024 earnings season is over, with no Portfolio companies scheduled to report over the next week.

❖ The ex-dividend date for for General Dynamics (GD) is July 5th.



New Buy: Airbnb (ABNB)

Airbnb, Inc. is an online platform that connects hosts and guests, allowing would-be travelers the ability to book travel services and accommodation facilities worldwide. The company provides apartments, villas, bungalows, private homestays, and tourism services. The company was founded in 2007 and is headquartered in San Francisco, California.


High Demand for Unique Experiences

Airbnb provides a convenient and far more diverse alternative to hotels and has disrupted the travel industry through the power of technology. Since its launch, the popularity of the online platform has skyrocketed, thanks to its wide choice of properties for all budgets, as well as many travelers’ preference for the “home-like” stay abroad.

As opposed to hotels, Airbnb offers personalized accommodation, providing unique experiences to international and domestic travelers alike. In addition, the platform’s properties are often far more cost-effective and casual than hotels, especially for families and large groups. In addition, the platform often offers rentals in areas with low hotel density that would be hard to visit otherwise. For example, at the time of the recent total solar eclipse, travelers could stay in the U.S. cities with the best view but without an abundance of hotels.

The platform connects 150 million website users with over five million hosts worldwide, offering millions of properties in more than 220 countries and regions. On average, six renters check into ABNB rentals every second; about 500 million room nights a year are rented through the platform. The vast scale of its operations underscores its ever-growing relevance and supports the company’s revenue growth, as the company collects fees from both hosts and renters.

Despite the success of its core business, Airbnb constantly innovates and expands its offerings. Thus, it has expanded its revenue streams by offering users the option to book activities and tours guided by locals. In addition, it offers luxury rentals and experiences, as well as “Airbnb for Work”, verified property rentals, “Go Near” domestic travel experiences, and other services carrying additional or higher service fees. While rental services remain the core of its business model, the company is exploring additional revenue streams, such as professional cleaning and photography.


A Winning Business Model

Airbnb was “born and raised” in the U.S., but most of its revenues come from overseas. North America is responsible for 47% of total revenue, with another 36% derived from Europe and the Middle East, while the Asia Pacific and Latin America regions supply 8% each. The continued trend of emerging market openness, with many developing countries striving to attract tourism, is expected to provide a fertile ground for further expansion and revenue growth for the platform.

Despite legal and regulatory challenges faced by the platform in various travel destinations such as New York and Barcelona, its popularity continues to grow thanks to its wide reach, diverse accommodations, and focus on trust and community. The latter two factors are key in the megatrend of the “sharing economy”, on which Airbnb has successfully capitalized.

Airbnb’s business model is that of an aggregator, meaning that it is light on assets, featuring growth at low cost. Its largest costs are marketing, sales, and technology development and maintenance, while its most important asset is the host and renter community it has fostered over the years. Thanks to its strict verification policies with a focus on transparency, the ABNB platform has gained users’ trust, creating a sticky customer base. The company’s main competitors, such as Booking and Expedia, have been unable to replicate its growth rates and gain market share at the expense of ABNB, thanks to its powerful network effect.


Enviable Growth and Cash Generation

Thanks to its agile, cost-effective, and capital-light business model, Airbnb has succeeded in reaching industry-beating financial metrics and profit margins. Thus, it has no net debt (it has more cash than its total liabilities). Its ROE, ROA, and ROIC are unbeatable, coming in the top 3% of its industry. Its gross profit margin of 83% and net profit margin of 48% are in the top 5% of the Travel & Leisure industry.

ABNB has demonstrated an enviable profitability growth trend ever since the platform’s launch, registering a ~30% revenue and ~80% earnings growth in the past five years. As these figures account for a near-total travel withdrawal during the COVID-19 pandemic, they look all the more impressive. Despite revenue growth deceleration from the triple-digit percentages it saw in 2022 and part of 2023 on the back of the post-pandemic rebound, it has continued to post double-digit year-on-year revenue growth in recent quarters.

In Q1 2024, Airbnb reported 18% revenue growth, despite a tough comparison to a strong Q1 in 2023. Moreover, its earnings-per-share grew by a staggering 128%, with the company registering its most profitable Q1 ever. ABNB ended the quarter with $1.9 billion of free cash flows in Q1, which represented 89% of revenue. The company’s excellence in cash generation adds to optimism regarding its near- and long-term prospects. While the company faces risks stemming from possible economic downturns, it has proven its ability to navigate the economic cycle.

While the Q2 outlook was tepid, disappointing investors, it was based on the assumption of a worse economic slowdown in the U.S., Canada, and other destinations than apparently was the case. As the company reports its Q2 results on July 31st, investors may well be positively surprised. In addition, we are entering a summer travel season, and ABNB guides for an acceleration in year-on-year growth in Q3. Besides, this year’s global events – the summer Olympics in Paris (taking place in August) and the ongoing UEFA Euro 2024, are expected to provide another positive jolt to booking and revenue growth this current quarter.


Shareholder-Friendly Travel

Airbnb has a broad capital allocation strategy, which prioritizes investments in organic growth, strategic acquisitions where relevant, and return of capital to shareholders. Its strong balance sheet and significant cash flow generation permit the company to pursue all three of these capital allocation priorities.

In May 2023, ABNB announced a share repurchase authorization of up to $2.5 billion, which was completed by the end of Q1 2024. Over the first quarter, the company repurchased $750 million of common stock to help manage the impact of share dilution. As a result, at the end of the quarter, its outstanding share count declined by 3% from Q1 2023. In February 2024, Airbnb’s Board announced a new buyback program, allowing it to repurchase up to $6 billion worth of shares.

In the past year, ABNB stock has risen by 17%, underperforming the S&P 500 and most of its peers in the industry. All this occurred despite stronger bookings, revenue, and EPS growth, as well as better cash generation ability. However, things are looking up for the stock, as Wall Street analysts shake off the negativity caused by the company’s conservative outlook and the ongoing NYC rentals saga. In another positive sign, Airbnb’s insiders have been heavy buyers of its stock in recent months.

The stock trades at a reasonable valuation, with its current P/E of 20.7x coming in at the middle of the scale of its peers in the industry. At 32.5x, its forward valuation is higher than that of its competitors; however, the premium seems more than justified given Airbnb’s strong growth track record and outlook.


Investing Takeaway

Airbnb is a high-quality business with sound management, a strong market position, a stellar brand reputation, and an innovative drive. It also boasts industry-beating profitability and expectations for further earnings growth. Considering these factors, along with its moderate valuation and alignment with shareholder interest, we believe that the stock can be a valuable addition to the Smart Investor portfolio.



New Sell 1: Stellantis (STLA)

Stellantis N.V. is one of the world’s largest automotive corporations. The multinational group consists of 14 auto brands: Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram, and Vauxhall.

Stellantis boasts stellar financial health, solid profitability, and robust cash flow generation ability. Despite its bright long-term prospects, the company has been on a rough patch in the past quarter, with several negative developments impacting investor sentiment towards its stock, including two recent massive-scale vehicle recalls.

Besides, Stellantis’ CEO, Carlos Tavares, admitted to making “arrogant mistakes” that led to bloated inventory and sales declines in the U.S., harming the company’s business results. The recognition of past mistakes, as well as of the fact that STLA must do more to successfully compete with Chinese EVs, is a positive development – but also one that may mean more stock turbulence in the near term, as investor trust has been harmed.

Meanwhile, some Wall Street analysts reduced their ratings on STLA, citing pricing challenges and slow EV adoption in the U.S., as well as heightened international competition. These factors are expected to pose headwinds to Stellantis’ earnings this year. Specifically, according to Bernstein analysts, excessively high inventory levels in the U.S. market, where the company tried to hike car prices more aggressively than competitors, will reduce its 2024 EPS by ~25%. The company has recently projected H1 2024’s FCF significantly below the prior year period.

STLA’s technical indicators confirm the stock’s downward direction in the near term due to the strong selling pressure; its exponential moving averages signal a strongly bearish current trend. We will certainly revisit the auto conglomerate’s stock in the future, as the expectations are that it will return to growth in 2025. However, for now, we believe it’s prudent to lock in the gains and sell the stock.



New Sell 2: Crane NXT (CXT)

Crane NXT, Co. is an industrial technology company that provides technology solutions to secure, detect, and authenticate physical products. It supplies coin, banknote, and credit card payment devices, self-checkout and vending machines, and back-office cash processing equipment for financial services and gaming. In addition, it serves central banks by providing technology that secures and authenticates banknotes.

Due to the nature of CXT’s business, it has a very sticky customer base and stable revenue streams. However, its operating and net income have been choppy in recent quarters, registering year-over-year declines. Its Q1 EPS also fell year-on-year, although the second quarter’s results are expected to improve.

All in all, Crane NXT has a solid business, but its recent lack of earnings growth has led investors to worry that the stock has outrun its fundamentals after rising ~14% up to June 21st. In addition, the company’s market cap is just $3.4 billion, making it vulnerable to market sentiment. Besides, the company is undergoing a leadership transition, which can result in downward pressure on the stock.

Analysts are optimistic regarding CXT’s prospects for the coming year, but we may see more of a downside on this path. As a part of our efforts to consolidate the Portfolio around strong-conviction stocks of best-performing companies with robust earnings growth, we believe it is time to lock in the gains and sell CXT.



Portfolio Stocks Under Review

❖ PayPal (PYPL) remains under review as we assess the potential impact of Apple’s introduction of new features simplifying money transfers and expanding BNPL options. Although we believe that PayPal’s new management is capable of dynamizing the payments giant once more—and we have welcomed the news regarding its AI-powered advertising business plans—we have yet to see a strategic turnaround that would help it increase FCFs and maintain (much less grow) its market share. Analysts from Susquehanna have recently raised their rating on PayPal from “Hold” to “Buy”, believing that the company is now focused on profitable growth, which they believe will expand margins. Although this process could take some time, we are awaiting the company’s Q2 earnings report on July 30th for some signs that PYPL is indeed back on the growth path.



Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets continued on a rollercoaster in the past week, with particularly large volatility engulfing some technology and industrial stocks.

However, although the Winners list underwent some changes, it still counts 12 stocks: SMCI, GE, AVGO, ANET, TSM, AMAT, ORCL, EME, APH, GD, VRTX, and CHKP.

The “fallen angels” PH and ITT are now the closest contenders for re-entry, with 28.2% and 27.7% gains, respectively, since their purchase dates. Will they close their minute gaps, or will someone else outrun them to the finish line?



Smart Investor Portfolio

 Portfolio YTD Return
Portfolio Volatility (Beta) Portfolio Dividend Yield
20.74% 1.2 0.84%


New Portfolio Additions

Ticker Date Added Current Price
ABNB Jul 3, 24 $154.34

New Portfolio Deletions

Ticker Date Added Current Price % Change
STLA Sep 6, 23 $19.66 +8.26%
CXT Oct 25, 23 $59.48 +14.91%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $837.17 +227.79%
GE Jul 27, 22 $161.45 +188.92%
AVGO Mar 22, 23 $1657.48 +162.71%
ANET Jun 21, 23 $357.01 +135.63%
TSM Aug 23, 23 $175.70 +87.33%
AMAT May 31, 23 $240.86 +80.69%
ORCL Dec 21, 22 $143.28 +75.80%
EME Nov 1, 23 $356.86 +72.92%
APH Aug 9, 23 $67.56 +52.78%
GD Dec 22, 21 $285.81 +40.27%
VRTX Aug 2, 23 $473.78 +36.25%
ITT Oct 18, 23 $126.81 +32.77%
CHKP Jul 19, 23 $167.73 +31.74%
PH Oct 11, 23 $510.03 +28.21%
MCK Dec 13, 23 $584.83 +26.55%
TPL Jun 5, 24 $735.00 +25.75%
DELL Mar 27, 24 $143.47 +25.14%
CI Jul 12, 23 $325.91 +21.30%
ADBE May 29, 24 $567.71 +18.66%
HWM Apr 10, 24 $78.07 +18.56%
AIT Dec 6, 23 $191.93 +16.50%
REGN Feb 7, 24 $1044.66 +11.39%
IBKR Jun 19, 24 $127.70 +6.65%
PNR Jun 26, 24 $74.74 +0.58%
AIG May 1, 24 $75.33 +0.03%
DOV May 8, 24 $176.96 -2.68%
V May 15, 24 $268.23 -3.42%
KKR Jun 12, 24 $105.93 -3.88%
EMR May 22, 24 $109.27 -3.90%
PYPL Apr 17, 24 $58.97 -7.03%






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