Motley Fool Hidden Gems Investing - $279 Billion Lost In A Day

Episode Date: September 4, 2024

The Department of Justice has some questions about Nvidia’s business. (00:21) Jason Moser and Ricky Mulvey discuss: - The subpoena that instigated the chip maker's selloff. - A record amount of share repurchases by corporations. - Earnings from Dick’s Sporting Goods and Dollar Tree. (18:10) Motley Fool contributor Matt Frankel joins Ricky to take a look at real estate brokerages Redfin and Zillow, and discuss what lower interest rates mean for the industry. Companies discussed: NVDA, GS, DKS, WMT, DLTR, RDFN, Z Register for our live event in Denver, CO on September 18 here: https://www.meetup.com/biggerpockets/events/303028272/?utm_medium=referral&utm_campaign=share-btn_savedevents_share_modal&utm_source=link Host: Ricky Mulvey Guest: Jason Moser, Matt Frankel Producer: Mary Long Engineers: Dan Boyd, Chace Przylepa, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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You're listening to Motley Fool Money. i'm ricky mulvey joined today by jason moser jason are you are you ready to take a dip ready to dive into the dip ricky i'm always ready i'm always ready for a good deal all right so summer is over and you know what i thought after last week i thought we were done talking about nvidia for a sec until the chip designer reared its head back for the next earnings call but then they decided to go over and lose nine percent of its value in a single day because the company received a subpoena from the justice department this is notable because 280 billion dollars is the most amount of money lost by any company in one day we'll reflect on that price drop but

First, the story. What's the new big tech antitrust thing going on here? Yeah, $280 billion is a lot of cabbage, for sure. We've talked about with Nvidia, given the run that it's had, at some point or another, you get to a point where you're like, OK, we have to beware the burden of great expectations. We were talking about this on the radio show last week. The company's performing very well, but the market continues to up the ante there and they expect more. And at some point, that becomes a little bit more unreasonable. And then you add to that this news here that they've received the subpoena from the Department of Justice.

So, it's an antitrust investigation. It hasn't actually reached the stage of a formal complaint. But ultimately, they're inquiring about whether NVIDIA makes it more difficult to switch to other suppliers of AI chips, right? I mean, I think that's been the argument for NVIDIA to this point and its performance is that this is the company that has the best technology for this amazing thing called AI that is going to change everything. Listen, I'm not saying AI is some flash in the pan. I firmly believe it is not. But it is something that's going to take a lot of time to develop. It's going to take a lot of time for us to really understand the implications and how it's going to impact our lives and how it's going to impact all of these companies that do so much

for us. So, you know, I mean, at this point, they have 80% of the market, I think, on the data center AI chips. It seems reasonable, at least for an inquiry into this. Now, whether it reaches actual investigation, I think that's the next question. I think the interesting thing to me is that this is what you said. It's an inquiry. It's not evidence of a cooked balance sheet. It's not something it's it's the start of an investigation and yet it's led to the largest drop in value of a company ever according to bloomberg regulators are also inquiring whether nvidia gives preferential supply and pricing to customers who use its technology exclusively basically all right if you buy a lot of our products we put you to the front of the line

i i'm not a legal expert jmo but that sounds like a fine that doesn't sound like the company shutting down here? I think that's likely the outcome if this pursuit continues. That remains to be seen. The good news for NVIDIA, and with so many of these big tech companies, is typically these fines are just drops in the bucket. It doesn't really impact the business. For a company like NVIDIA that's very well capitalized and obviously is, let's just call it, one of the most important companies out there right now, yeah, I think a fine would be the most likely outcome if there's any outcome at all. You start seeing some leather jackets on Poshmark, we'll know that Jensen Huang is

raising money to pay that off. Stock's up more than 120% year to date. I mean, I understand the news story here. I understand that it's real, but maybe the market was just looking for an excuse to sell off. What do you think? I think there's probably something to that. To me, profit-taking, that's part and parcel with the market. Obviously, we take a little bit of a longer-term view, but the whole point of investing is to make money. It makes sense to see some profit-taking. Even after this $280 billion haircut, the company's still valued at 28X sales and around 50X earnings. That's not as lofty as before, but it's still pretty glass half-full.

For a company that really is in firm control of this market at this point in time, I understand the market opportunity and I understand the enthusiasm behind it. It wouldn't shock me at all to see this trend downward a little bit here in the near-term as some profit-taking continues. But we'll wait and see for sure. Let's zoom out on the market as a whole, as we look back on August. And something interesting to me is another story in Bloomberg showing that companies authorized $107 billion in new buybacks last month. That's the most of any August. NVIDIA was certainly a part of that. They authorized, I think, $50 billion in new share repurchases. For context, Goldman Sachs, which does corporate

repurchase orders, saying that they were more than two times higher than a year ago. The point of all of this is that a lot of companies are buying back a lot more stock, even as the market is scratching all-time highs. What's the signal to you? Anything at all as you look at the macro picture? There are a couple of things there. Let's do remember that the overall market performance has been very concentrated. We've seen essentially a handful of companies, around 10 companies, are responsible for a little bit more than a third of those market returns. So, it is something where we'd like to see a little bit more breadth, as they say. We want to see this performance reach beyond

just these 10 companies, and most of them are the Magnificent Seven and a few more. But yeah, I think up to this point, companies have been playing defense to an extent in this environment. It's a little bit of an uncertain environment. It's a higher-rate environment. The cost of capital has gone up. So, they're protecting their balance sheets, being a little bit more mindful of debt. They've had the ability to build up some cash to put to work. It's nice to see shares repurchased at attractive prices. But with that, you want to see the share count come down. If we look at Nvidia specifically, Nvidia's repurchases are essentially just offsetting dilution at this point. That's just going to be the way it is.

Investors are going to have to weigh that. In a case like this, I wouldn't mind seeing them pull back a little bit on that share-based compensation to see those repurchases have a little bit more of an impact there on bringing that share count down. Otherwise, you have the income investors really getting out there and saying, hey, listen, where's my dividend? Dividends are cash in the pocket, there's more certainty. Repurchases are theoretical to an extent in that they're supposed to increase the value of that share because it whittles down the overall share count. But in the case of companies like Nvidia right now, where it's not really whittling down that share count, you have to ask yourself the question,

is that the best use of capital at this point? Sounds like you're subtweeting Matty A. Well, probably. Matty and I work very closely together, so he and I think alike on a lot of things. Let's move to Dick's Sporting Goods. It's another stock on fire that's taken a breather. Dick's Sporting Goods handedly beating earnings estimates, but investors did not like that the company basically maintained its full year sales guidance. Let's look at some highlights from the quarter. Earnings per share, almost $4.40. Importantly, that's up more than 50%, 5-0 from a year ago. They're opening five more locations. They're calling the House of Sport, which are two times larger than a normal

Dick's Sporting Goods store. Also, the company disclosed that it was the victim of a cyberattack and certain confidential information was breached. J-Mo, I want to focus on that earnings growth. Where is that coming from, the sporting goods retailer? J-Mo Yes. They noted in the release that the comps growth was driven by growth in average ticket and transactions. Those are two metrics we pay attention to a lot with things like retailers and restaurants, because you ultimately want to see more people coming through the store, buying more stuff. If you see greater traffic, and then you see that traffic spending more, well, that really helps offset that fixed cost base that comes with operating those stores.

And in Dick's Sporting Goods' case, of course, that's a lot of stores to consider. They definitely realized a benefit there. They realized some gross margin expansion thanks to a higher merchandise margin. They're able to buy prices as well as the mix of the merchandise that they're selling. They realized a higher merchandise margin there. And then, they're also leveraging their SG&A, and pre-opening expenses were considerably lower versus a year ago. They just haven't opened as many stores. So, when you put all of that together, that's what really helped boost those earnings per share of the score. The retailer focusing on larger physical retail stores.

So we're looking at more than 100 square feet. If you watch the marketing presentation for it, J-Mo, it's a place to call home. You know, it's not just a place to go by. It's a place to go by cleats. It's a place where they know your name. It's a third place. But, I mean, are you surprised to see Dick's Sporting Goods here opening much larger physical retail stores? Well, I'd like to see them line up some chips and queso, maybe a tap with some

cold beer there. NFL season's starting, right, Ricky? That's the place we're going to go watch the game? I don't know, maybe. I'm not terribly surprised to see them opening these larger physical stores. That's mostly because, as the internet has disrupted everything, and retail is no exception, one word that you hear in retail all the time now, it's omni-channel. It's ultimately being able to serve your customer how they want to be served, whether they want to be in the store, whether they want to order online, whether they want to buy online and pick up at store. With Dick's, it's one thing to think about, well, they're opening these larger stores and opening more stores. Does that make sense? But let's also remember that with

the omni-channel approach there, with the online sales that the company continues to present, These are not only shopping locations, but they're also fulfillment and distribution locations. They do fulfill the overwhelming majority of their e-commerce via their stores. Building out these stores, particularly these bigger ones, not only are they stores where we can go shop, but they're also helping the business fulfill those e-commerce aspirations as well. I'm going to grab my laptop and a cup of coffee, see how long I can work from Dick's Sporting Goods there on the show. This is my third place. First slide, bold letters when you look at the earnings presentation. In fact,

they put it on two slides in case you missed it the first time. We are a growth company, Jamo. This is a retailer that has been around for almost 100 years, I think. It's been around since the early 1900s. Is this really a growth company? I see you grimacing. You're biting your bottom lip. No, I think it's just all companies like to be able to say that they're growth companies, regardless of their size. I think that when you consider Dick's Sporting Goods and the market that they're serving, they're talking about a $140 billion market opportunity that they're focused on, and they brought in $13 billion in revenue over the last 12 months. I absolutely understand that they want to be one. They've grown revenue at just

under 10% annualized over the last five years. That's nothing to sneer at. I don't know that I would call it a growth company necessarily. I mean, there is going to be some growth there for sure. It's not going to be some kind of a SaaS business, right? I mean, this isn't software, this isn't tech, it's just straight up retail and pretty easy to understand. So there is going to be some growth there. I think what's encouraging for investors interested in this business, at 1.9% dividend yield, we're going to go back to that dividend conversation there earlier with Nvidia, 1.9% dividend yield with this business, I think is really interesting. So maybe they really just kind of want the best of both worlds.

Start writing in dividend above we are a growth company. Let's move on to the other side of the consumer retail story. That's also a company reporting this morning. Dollar Tree down about 20% after cutting its full year outlook. You know, Jason, we're seeing Walmart get in love from the value-conscious shoppers. They're all going to Walmart. But you're not seeing that at Family Dollar, Dollar Tree stores. Why don't you think they're getting a similar effect?

Well, to me, when I think of these two concepts, the dollar stores and then something like a Walmart or a Target, it feels like those are two different types of consumers, and that's evolved over time. If you look at Walmart, Walmart, over the last several years, really, they've cited this growing customer base of higher-income earners, folks who are feeling the pinch and maybe trading down, so to speak, and looking for more value at something like a Walmart, as opposed to other places. And in regard to dollar stores, they're just much more sensitive to the economically sensitive consumer. They are focused on those lower earners. When you add to that the fact that these stores are expanding their pricing strategy,

they're embracing this multifaceted pricing strategy now, where it's not really a dollar store. You can go in there and get stuff for $7, I think now, up to $7 at Dollar Tree stores, for example. So, it does feel to me like they're two different consumers, but then when you add that to the scale that Walmart has, and their ability to essentially offer that value pretty much as long as they want to. What did Jeff Bezos say? Your margin is my opportunity. These companies have that advantage. As I'm looking at this stock, certainly unpopular fell off a cliff this year but previously it was a decent performer i want to be clear the dollar tree still makes a profit on an operating and a net income basis so i was

looking this morning you know the ceo rick dreeling will tell you a lovely bedtime story of transformation and refocusing the company stop me if you've heard that one before i mean the stock is below what it was in march of 2020 and i don't know i like i like running towards a dumpster fire any any interested in playing a cyclical game with this one? Well, I absolutely could understand why some investors would be interested in this. Value investors would probably be looking at this and thinking, hey, you know what? Shares down over 50% year-to-date. They're valued around 12X full-year estimates on that revised earnings guidance. There probably is a compelling value thesis here.

Now, it's not really my cup of tea personally, but I certainly understand the interest there. I don't think this is a company, I don't think this is a concept that's going the way of the dodo bird. I think one thing to keep in mind, I appreciate the fact that this company, they're repurchasing shares where they feel like they represent a good value. It's worth keeping in mind, they have $3.5 billion in long-term debt versus only about $600 million or so in cash and equivalents on the balance sheet. And it's not really a cash flow machine, so to speak. Now, on the flip side, the coverage ratio is like 17, I think, today.

So, that's good. That just ultimately means they're earning enough in operating income to cover that interest expense many, many times over. So that's positive. So yeah, I absolutely could, you know, this strikes me as maybe Jim Gillies, maybe we need to Gillies about it. Let's reach out to Gillies and see what he thinks about this. Let's put it all together. We've talked about Dick's sporting goods. We've talked about dollar tree, talked a little bit about Walmart, but any of these stories as we put these earnings together, signal something to you about how Americans are shopping as we get to the latter half of 2024. Well, yeah, I think there are two very different markets for sure.

I think you look at something like Dick's Sporting Goods, sports equipment and apparel, it's very resilient. Particularly this time of year, we're going back to school, kids are getting all set, got college football season starting. Sporting equipment and apparel is quite resilient. While consumers do want value there, they also want brand. Brand really matters in a space like that. That commands a little bit of pricing power. That's a good thing. When you look at the dollar stores, those are absolutely less about brand and far much more about value, which I think we're just watching that play out right now. It makes a lot of sense, these results, and it'll be interesting to see how they wrap up the year.

Jason Moser, appreciate you being here. Thanks for your time and your insight. Thank you. all right before we get to our next segment i wanted to tell those in denver we've got a live event coming up in a couple of weeks we're going to be doing a show with our friends from bigger pockets on wednesday september 18th starts at 6 p.m at the denver press club the show is going to be a look at airbnb as a stock and then they're going to do it from the side of real estate investors. We'll also have some networking, time for Q&A. Tickets are $27 and include your first alcoholic or non-alcoholic drink. I'll put a link to the registration in the description. Hope to

see you there. All right. It's a slow housing market, but the Fed says that rates are coming down. So what's all this mean for discount brokerages, including Redfin and Zillow? Motley Fool contributor Matt Frankel joined me to break it down. So Matt, real estate brokerages are in an interesting spot to say the least. The macro story with houses is you have high prices, high mortgage rates. And even though mortgage rates have declined a little bit, home sale activity is not going up. Many homeowners really like that 2% mortgage. And even housing starts are about where they were in June of 2020, in the middle of the pandemic. It's a very detailed macro picture. But what does that mean

for the real estate brokerages like Redfin and Zillow right now? I mean, the real estate industry in general needs rates to come down. Let me give you a quick example. If you were to buy a house with a 30-year mortgage and a 20% down payment, and I were to give you the choice of two scenarios, one, your house could be 10% cheaper than it is right now. Or two, you could have a 5% mortgage rate instead of the 6.5% you can currently get. Which would benefit you more as a buyer? Because it's set up this way, it's the mortgage rate question. By far. It would result in a much bigger reduction to your monthly affordability. So, everyone is focusing, I think, on the wrong issue. They're

focusing on, okay, real estate prices went up another, I think, 0.5% last month, and now they're at a new all-time high. That matters a lot less than the cost of financing. Really, we need mortgage rates to come down. It looks like it's going to happen, which is, as we're going to get into, why a lot of these stocks have reacted so favorably. But it's not necessarily the home prices. People would buy million-dollar homes if they could finance them at 0%. But when you're at 6%, 7%, 8%, people in my generation have never had to deal with this. And I guess that's what's happening with the new builds too, is even though you have a pandemic going on, you have a really low interest rates, a little bit easier to build. The other big story

going on right now is the, uh, NAR settlement, the national association of realtors. This is the month that that takes effect. And basically the main thing is that realtor commissions are going to compress and the high level outcomes are that sellers agents can't advertise the buyer's commission on multiple listing services. So, if you're going out to look for a house, a buyer's agent would probably direct you to the one where they get a juicier commission. The other thing is that buyers must sign a representation agreement before they start touring homes with an agent. This is the spot where commissions become more negotiable. And now, sellers have an option to not pay the buying agent's commission. People in the class

action lawsuit saying, wait, I'm selling a home. Why am I paying the counterparty's agent commission. High-level overview, but what are the effects from this settlement that you're watching as it takes effect in August and September? A few things. Number one, sellers are going to still pay the buyer's agent commission, in most cases, for now. If you are refusing to pay a buyer's agent commission, that's like you saying you don't want to sell your house. Imagine a realtor. I'm going to show you two houses today. This one, the sellers are covering my commission. This one, you're going to have to pay me 3% of the sales price out of your own pocket. It's a no-brainer for the buyer. A big positive effect that we are seeing

is that consumers in general are becoming a lot more fee-conscious of what real estate transaction costs. Most homebuyers have no idea what their agent makes, because the seller pays it, it's not really publicly disclosed. And it really paves the way for fees to gravitate downward over time, kind of like you saw in the brokerage industry, how brokerage commissions really gravitated down over time. It wasn't like an instant effect. But it creates a lot more fee pressure, especially as technology evolves and makes a lot more of the process easier to automate. Some of the companies that make a lot of money from those fees are the brokerages, like Redfin and Zillow. What do you think these rules mean on that side of the business?

If anything, Redfin is set up to compete better in a more fee-conscious environment. For example, they charge a 1.5% commission to sellers instead of the standard 3%. They've been doing this for years. But no one was really that fee-conscious, so it didn't really make as much of a growth business as Redfin would have liked. But with traditional real estate brokers starting to feel the pressure a little bit from buyers, and Redfin offering an industry-best compensation structure that they're just starting to roll out, it's an interesting time for Redfin in terms of what the settlement means. Let's take a look at Redfin. It's a wildly volatile stock. It's one I own and got my

attention because Jerome Powell made some dovish comments, and the stock just took off. What do lower interest rates, or even just the specter of lower interest rates, mean for Redfin's business? Why are the investors so excited about it? Well, Redfin agents deal with both the buy and sell side of transactions. You can get a Redfin buyer's agent, Redfin selling's agent. They basically position themselves as a way to sell your house more cost-effectively. Right now, existing home inventories, meaning homes on the market, are at a generational low because, like you said, people want to hold onto their 2%, 3%, 4% mortgage rates and aren't willing to list their houses. If mortgage rates come

down, more inventory floods onto the market, that's a big deal for a company whose bread and butter is selling real estate, seller's agents. That's really why you're seeing Redfin react so positively just on the interest rate front. Glenn Kelman, always colorful in his earnings calls when asked, what happens if rates don't come down? This is what he said. I'm quoting. Plan B is to drink our own urine or our competitors' blood. Stay in the foxhole. I don't know if you remember, but the last earnings call ended with me singing a line from a Who song, Won't Get Fooled Again, where I said, we're not banking on low rates when other people thought they might come down, end quote. This is also a company that doesn't really make

an operating profit. It's got some balance sheet issues. Is Kelman right here? Is this company good no matter which interest rate cycle it's in? The short answer is maybe. That was all a really colorful way of saying that they're doing the best they can in a bad environment. Basically, they need interest rates to come down to be profitable, but their losses are narrowing very, very rapidly as the company's really doubling down on efficiency and figuring out how to run a business that doesn't rely on a strong real estate market to be profitable. It's inching toward profitability. They were breakeven on an adjusted EBITDA basis in the second quarter, by the way, which is impressive in a terrible market. They don't necessarily need

interest rates to come down. They're hoping they will, but they're planning for the worst. Then when we look at its competitors, Zillow, home buying activity with lower interest rates should rise, but the stock hasn't gotten a similar boost as Redfin has. Why do you think it's only happening with one but not the other? It's gotten a boost. Zillow is up 33% in just a few weeks. Not quite what we've seen with Redfin, but it has gotten a boost. It gets less of a direct benefit from interest rate activity and more of a potential impact from the NAR settlement. Zillow makes almost half of its money from fees it charges to buyer's agents, not selling agents, but buyer's agents, which, as you mentioned, is the core

group that is potentially affected by the settlement. Buyer's agent commissions are in flux right now. But at the same time, a rising tide lifts all ships. If home selling activity doubles in the next couple of years, which is entirely possible from a low floor, Zillow makes their money from agents. Agents will give Zillow more fees, and they win. So, it's definitely a benefit, but not nearly as much as we were seeing with Redfin. And then, as we look at these two companies, Redfin or Zillow, maybe there's another company you want to bring into the mix. Do you think either of these brokerages are worthier of an investor's attention? I own Redfin. I sold Zillow shortly

before the NAR settlement went into effect. I'm just not that inclined to be in a company that relies so much on buyer's agents right now. Redfin's balance sheet issues are not as concerning as they sound. You correctly pointed out they have a lot of debt, about a billion dollars worth of debt. About $700 million of that is convertible notes that pay almost no interest for right now. This was during the 2020-2021 free money period. They have 2027 convertible notes that pay 0.5% interest. It's not like a giant interest expense. It is sitting on their balance sheet, but this isn't debt at 10% interest for the most part. Yeah, it's also eating a lot of cash, though. Redfin's cash and equivalents went from

$1.2 billion at the height of the pandemic down to about $200 million today. It's burning cash, even though we're adjusted EBITDA break-even. Oh, they burnt a lot of cash. They made some acquisitions that they clearly overpaid for, like Bay Equity Home Loans and Rent.com. They clearly overpaid for those. That's where a lot of their cash went. But they do still have over $200 million of cash. They have debt that is at a pandemic-era interest rate, thankfully. I think Redfin has a lot of different ways it can benefit in the next couple of years. That's the one that I own in my portfolio. I'm keeping it as a speculation. Matt Frankel, appreciate you breaking it down with me. Thank you for your time and your insight.

Always good to be here. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.