Joel Greenblatt (Trades, Portfolio) is a legendary investor and the founder of Gotham Asset Management, an investment fund that recently reported its 13F for the fourth quarter of 2022, which recorded $3.55 billion worth of U.S.-listed common stocks as of the quarter's end.
Greenblatt’s strategy focuses on investing into stocks which have a combination of both growth and value characteristics. Greenblatt is also famous for creating the "Magic Formula," which he first detailed in his book, "The Little Book That Beats the Market."
In the fourth quarter of 2022, Greenblatt's firm was buying shares of a staggering 195 stocks, which is an astonishing amount. There are two in particular that caught my attention as promising technology stocks: Airbnb (ABNB, Financial) and DocuSign (DOCU, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Airbnb
Airbnb (ABNB, Financial) is one of the largest travel companies in the world, but it doesn’t directly own any hotels or accommodation units. Its founder Brian Chesky started the company as an “air bed and breakfast," which consisted of a few air beds on the floor of his San Francisco apartment. Chesky originally did this to help cover rent payments, before moving into offering accommodation services for sold out events. That experience inspired him to create the Airbnb platform, which connects hosts and guests to facilitate the renting of spare beds, rooms and even homes. Airbnb has grown rapidly and now offers a vast plethora of accommodation types from beach houses to tree houses. Its Airbnb “Summer Release” in 2022 focused on highlighting the unique accommodation Airbnb hosts offer all over the world.
This also helps solve a problem in the hotel industry. A major hotel provider will only build its hotels in a big city or at a popular resort where foot traffic is strong and people are likely to stay in the coming decades. However, Airbnb’s business model benefits from inventory flexibility, as people don't need to be in a city to host and can provide accomodations even in rural areas. The business also got a boost from the pandemic, which sparked the company to go public.
Super financials
Airbnb reported super financial results for the fourth quarter of 2022. The company generated revenue of $1.9 billion, which increased by a rapid 24% year over year and surpassed analyst forecasts by over 2%.
Its growth was driven by the continued pent up demand for travel, which resulted in a staggering 88.2 million nights booked, up 20% year over year. This makes complete sense to me, as even though we are in a recessionary environment, many people still haven’t traveled much since 2019.
As mentioned prior, travel habits changed over the pandemic, but in the fourth quarter, Airbnb noted a “return to cities” and “cross border travel." In fact, cross border travel rose by a rapid 49% year over year and city bookings increased by 22% compared to the prior year.
The company also introduced a range of new product features to help ease the friction associated with traveling via its platform. This includes Airbnb’s comprehensive travel insurance policy called “Aircover,” which would now be included as standard for all Airbnb bookings. This was a great move in my eyes, as it covers a customer's Airbnb booking against cancellations and offers a 24 hour “safety line." This may not seem like a big deal, but imagine booking an Airbnb in the middle of the desert, then when you arrive you find you cannot get inside and have no keys, etc. Or imagine you book a place months in advance, only for the host to sell it before you get there. Hotels don’t have these issues as most have a 24 hour concierge.
Moving on to profitability, Airbnb reported a positive bottom line with $237.2 million in operating income for the quarter. This represented a substantial increase from the $76.2 million reported in the year-ago period.
Airbnb also has a robust balance sheet with ~$9.8 billion in cash, cash equivalents and short term investments compred to debt of $1.99 billion, the majority of which is long term debt.
Valuation and guru investors
Airbnb trades at a price-sales ratio of 10.04, which is substantially cheaper than its historic levels.
Greenblatt's firm added 26,026 shares to its Airbnb position in the fourth quarter of 2022, during which shares traded at an average price of $101, which is approximately 30% cheaper than where the stock trades at the time of writing.
Growth stock investor Ron Baron (Trades, Portfolio) of Baron Funds also purchased 80,360 shares of Airbnb in the fourth quarter of 2022.
2. DocuSign
DocuSign (DOCU, Financial) was a pioneer in the world of e-signatures or electronic signature solutions. This may seem commonplace today, but when DocuSign was founded in 2003, many companies and legal firms especially were resistant to the idea of electronic signatures. Even today, I personally still have some companies asking me for physical signatures or to come into the office to sign paperwork, so despite the partial adoption of e-signatures, DocuSign still has a large total addressable market.
In fact, Markets and Markets forecasts a blistering 35.6% compounded annual growth rate in the digital signature market. The research firm predicts it to reach a value of $25.2 billion over the next five years.
DocuSign is not stopping with signatures though; it is expanding its products to address adjacent markets. This includes automated agreement or contract generation, ID verification and even post signature analytics. This offers major potential for the customer to expand through cross selling of its products to existing customers. I believe this is especially important given the vast competition which has entered the e-signature market with many free solutions online.
Strong financials
DocuSign reported strong financial results for its fiscal third quarter of 2023. The business generated $645.46 million in revenue, which beat analyst expectations by over $18 million and increased by 18.33% year over year.
This was driven by solid global expansion with international revenue increasing by 23% year over year to $157 million. The company also increased its billings by 17% year over year to a solid $659 million. For a software as a service company, “billings” is the amount invoiced to customers and thus can be considered as the “top line” metric.
DocuSign continued to grow its larger customer base with its enterprise customer growth clocking in at a rapid 50% compounded annual growth rate since 2013. In addition, the company reported over 1,000 “high end” customers which each pay over $300,000 each year for DocuSign’s products. This is amazing considering its solution is fairly simple, but enterprises often pay for extra features such as security and privacy, so it is also not a surprise.
DocuSign is still struggling with profitability , as it recorded a loss per share of $0.15 for the quarter. A positive was this metric still surpassed analyst expectations, as they were forecasting a loss per share of $0.19.
Valuation and guru investors
DocuSign trades at a price-sales ratio of 5.29, which is 67% cheaper than its five-year average.
The GF Value chart indicates a fair value of $304 per share, making the stock undervalued at the time of writing, but the system does warn of a possible “value trap" due to the recent share price decline combined with the lack of profitability.
Greenblatt's firm purchased 94,187 shares of the stock in the fourth quarter of 2022, increasing its total stake to 122,607 shares. The stock traded for an average price of $48.67 per share during the quarter.
The world's largest hedge fund, Ray Dalio (Trades, Portfolio)'s Brigewater Associates, also purchased 62,637 shares of the stock in the fourth quarter.
Final thoughts
Both Airbnb and DocuSign are two fantastic but very different technology companies. Personally I believe Airbnb offers the greatest prospects as DocuSign is in a heavily competitive industry and is unprofitable, despite the large market opportunity. Airbnb has a strong brand and a unique scalable inventory which should give it a long term competitive advantage. In addition, the company has found a renewed focus on profitability and the fact it is founder led should also help with keeping perspective long term.
