Motley Fool Hidden Gems Investing - “$5 Billion Feels Like Overkill”

Episode Date: November 23, 2022

Nordstrom is facing a problem with its customers, while Autodesk faces a problem it created. (0:21) Asit Sharma and Tim Beyers discuss:  - Questions about Autodesk’s capital allocation strategy.  - Nordstrom's plans for a tough retail environment.  - Favorite Thanksgiving traditions! (12:44) Tim White joins Tim Beyers for an audio version of “This Week in Tech.” They discuss the fundamentals of software platforms, and how they could change over the next five years. Stocks mentioned: ADSK, JWN, CRM, TWLO, MDB, AMZN Host: Asit Sharma Guests: Tim Beyers, Tim White Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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You're listening to Motley Fool Night. I'm Asit Sharma, and joining me from Colorado, senior analyst and advisor, and my good friend, Tim Byers. Tim, how are you? I'm well, sir. Fully caffeinated, ready to go. Good to see you, Asit. So, Autodesk earnings, stock is down about 6% as we're taping here around noon on the 23rd of November. Looks like, to me, Autodesk had a pretty decent quarter. Revenue was up, billings were up double digits, but the market didn't like something that management had to say about the revenue composition going forward. So, what exactly didn't the market like, Tim, and what do you make of it?

Well, they expect full-year billings. So, billings is kind of, you just alluded to it, is what you might expect in revenue to come. These are billings that are to be expected. So, the guidance is for between $5.57 billion and $5.67 billion, and that's down from their own guidance of $5.71 billion to $5.81 billion. So, anytime you lower the guidance, that smells like warning sign. And I can see investors responding to that. I can see the logic of it. Apparently, this is, according to Barron's, analysts surveyed by FactSet, we're expecting on the order of $5.74 billion. So, it's not only shorting their own guidance, which I think is the bigger concern, asset. It's shorting the streets guidance as well. So there's a concern that Autodesk just

isn't growing as fast. Now, to be fair, this is a very well-heeled company, certainly well-positioned. It has an incredibly strong market in computer-aided design. It's been that way for decades. It is the dominant player in this area. It's a cash flow generator. If there's something in this report that I don't like, I'll say it's not the billings guidance. It's the $5 billion in buybacks. I mean, maybe, okay. I would have said if you're going to buy back shares in your Autodesk and you already have a gross $3 billion in debt on your balance sheet, and you have a net debt balance of well over a billion dollars, so you're already in the hole, why are you going to add $5 billion. You're not going to be able to fund all of that through existing free cash flow.

If they wanted to send a strong signal that, look, this is temporary, I could have seen, you know what? We'll take the billion dollars in cash flow that we generate every year, and we'll put that towards buying back shares. But $5 billion feels like overkill. It feels like, it feels reckless, Asit. That's the thing I don't like. I sometimes wonder about this, Tim, when companies that are maturing throughout these large authorizations, where it almost seems that to complete the authorization, they'd have to lever up some more at some point. This is something that I used to see in the consumer packaged goods world when I spent a lot of time researching that area. I don't

like to see it so much with tech stocks. I want to ask you one more question about what you just went over, and then we'll move on to our next topic. But this idea that Autodesk is seeing less demand for multi-year contracts and more customers coming to it saying, hey, we would like to get on annual contract plans. This is something larger and external that we're seeing with many companies. You and I were in an analyst meeting yesterday and We were talking about something similar with a big, large-market capitalization tech company. Are you seeing this from more than just Autodesk and, say, Zoom, which is a company I was just alluding to? Yeah. You want to see longer-term deals. You're right, that's another warning sign

here. The billings guidance and some of the softness that they're seeing is like, look, we're hearing from customers that they want to be on annual plans. They do not want to sign up with us for a three-year plan, a five-year plan. And you would prefer, as an investor, I personally prefer to see a company make a multi-year commitment to a software platform. That's usually a good sign. Like, look, we're in, we're committed, we're staying with this. And so, the yoke back to, look, we only want to go on an annualized basis, the presumption underneath that is we want to be able to get out at any time. It's a little bit like you refuse to sign the year lease with your landlord. You'd rather go month to month.

Even though it's not quite like that, it feels a little bit like that. And so that lack of commitment may have some investors a little bit skittish, but it's not surprising. If you are in a recessionary environment or if you are looking to optimize your capital spend and you're a company of any size, one of the first places you'll go is to your agreements. What do we need? What do we not need? What can we renegotiate? So, is this a bad sign for Autodesk? Not necessarily. It feels fairly normal, Asit. I think what you want to see is, once these maybe moves to year-to-year annualized contracts persist, does that Billings number keep going up, or does it retrace, or do you see Autodesk perpetually changing its guidance because customers are just refusing to

commit to the platform? That's what you want to watch. So, Billings guidance next quarter, and Billings growth next quarter and beyond. Nordstrom reported earnings yesterday. Headline, net sales decreased a bit, 3%. Our producer, Ricky Mulvey, exerted a few quotes from the earnings call, which I want to put in front of you, Tim, for some commentary. Ricky points out that Nordstrom Rack sales also declined 2%. Here's the first quote, across both banners, the softening trend was more significant in customer segments with the lowest income profiles, while we saw greater resilience in the higher income cohorts. What do you make of this quote from management, Tim?

I mean, this makes sense too, doesn't it? I have fewer dollars. I want to be judicious. And I actually want to put my, let's say, holiday spending dollars, because you know this is coming. The holiday shopping season is coming. Black Friday is coming. I want my dollars to go further, which makes a lot of sense in a market where you could see recessionary forces coming, inflation is there, the people getting laid off. I would fully expect, and they just said it, at the lower income portion of the spectrum, they're seeing a bit of softness. Of course, they are. Of course, they are. You're going to have people who have their dollars not going further than they used to, making choices about where they want to spend money. Nordstrom is

traditionally a high-end brand. It's not necessarily a universal brand. Because it isn't, you're very likely to ... If you're lower income, it may be an aspirational brand, but your aspirations change, Asit, when your income changes. I don't think this is all that surprising. If there is a surprise here, it's that the part of the business that is also seeing some weakness is the one where it is actually catered to the lower income side of Nordstrom business, which is Nordstrom Rack, the outlet portion, where you can get the aspirational wear, but at the discounted price. And that that's not happening either is a little bit concerning. it may speak to the broader environment. It may also speak to the mix of inventory that Nordstrom's

got. But whatever it is right now, they don't have the right mix in order to scale up and meet these customers where they are. The plan being to give Nordstrom Rack some more premium brand offerings and clear that lower price point inventory by the end of this year. Tim, we're seeing a lot of this in the retail space. We've seen companies load up on inventory only to find that they're overstuffed and need to clear it out with promotions. We've seen some companies that are able to manage through this, but not knowing where the consumer is, still having some hiccups left in the supply chain. It's been a very difficult season for retailers like Nordstrom in just trying to gauge where inventory should be, what type of mix they

should have and what the price points should be. Well, they're gearing towards more higher-end offerings, which is know your customer. When your customer has less to spend and they're going to make choices, go back to your core customer. And who's your core customer? It's the one that is not suffering nearly as much right now, has more disposable income, might be a little more frugal, might be tightening their belt a little bit, but doesn't mind. Instead of buying the polo shirt at Nordstrom Proper, buying it at Nordstrom Rack, hey, you know what? You're still appealing to your core buyer. And I think that's smart. I think that makes a lot of sense. The economics of the environment we're in have just changed. So Nordstrom recognizing that,

I think, is a good thing. Tim, before I let you go, tomorrow is Thanksgiving. So I would be remiss not to ask about favorite Thanksgiving traditions. I will start with one of my favorites, which is doing something stupid on the grill. Every year, you know, we have this plan for Thanksgiving. It's well organized. It could be well executed. And I start looking out this door I have onto my deck and the grill that's sitting out there. And inevitably, I want to do something on the grill, which throws a kink into the works.

Sometimes, I burn something. Sometimes, it's like 35 degrees outside. Luckily, we're going to have a warmer Thanksgiving here in North Carolina. But that's one of the traditions my family so fondly looks forward to. How about you? I am 100% going to be watching the Detroit Lions on Thanksgiving Day. I've always loved that. I'm not a Lions fan, but on Thanksgiving Day, I am all in on watching the Detroit Lions. I think they are the team that gets adopted every year by those of us who like, you know, the NFL and American football in addition to world football.

And I do. I love both. Man, I'm all in. I want to see this adorable little team do something amazing on Thanksgiving. You know, like I never quite like the Cowboys. They always play on Thanksgiving, too. Yeah, whatever. But the Lions, give me give me more Detroit Lions.

I love that. The Detroit Lions plus stuffing my face with pumpkin pie and coffee on Thanksgiving Day. I'm all in. I'm all in, Asit. Can't wait. As always, your optimism and enthusiasm are infectious. So nice to be able to chat with you right before Thanksgiving, buddy. You too.

Tim Byers is sticking around. He joins Tim White, his co-host on This Week in Tech, to discuss the fundamentals of software platforms and give some reckless predictions on how they could change over the next five years. Let's talk some platforms. Yes, platforms, meaning enterprise software that you can build on top of. Right. And in order for something to be a platform, it has a series of tools. It has an interface. It has some way to say, hey, here are the guidelines. Basically, this is the playground that you're in. If you want to do something, if you want to make a game

or build something of some sort, here are the tools you have. Go crazy. Classic platforms would be the Macintosh operating system, the Windows operating system, things that are fundamental building blocks that are required for software. Software runs on a platform. In the cloud, There are some common platforms. Probably the biggest one, Tim, would be, let's say, AWS has a whole bunch of tools. Amazon Web Services. Amazon Web Services. Essentially, they provide a number of different tools that companies can use to deploy their software into the AWS environment, which sometimes we call the cloud. The cloud having the colloquial definition of just someone else's

computer. In this case, it's Amazon's computer that you will be deploying your code onto. And they have a huge number of offerings of different ways for you to get your software into their environment, which then they turn around and expose that out for your customers to connect to directly. And so the prevalence of these platforms, particularly in the cloud, so AWS is probably the biggest one. It's not the only one. There's Azure, there's Google Cloud Platform, there's purpose-built platforms like Twilio

or even some automation platforms, say like ServiceNow. Why do you think there's so much interest now in letting other people provide the platform in the cloud and then letting developers just like, hey, we'll write some software and let somebody else run it in their cloud environment? What makes it so attractive to do that? So, let's use the example of Salesforce, which is ticker CRM. Salesforce is a customer relationship management product. Essentially, it lets you have a database of your customers. But early on, they opened themselves up as a platform for other companies to build on top of. So, if you need a specialty solution to manage your relationship with a particular kind of customer, let's say you're a surgeon and you

need to have specific information captured about patients who are coming in for surgery. There are folks who can build an add-on for Salesforce that rides on top of that Salesforce platform and provides that additional functionality. And the reason that's attractive is as the company building the surgery-specific product, you don't have to reinvent all of the whole idea of how to capture customers and all the things that Salesforce does out of the box. You also can advertise on Salesforce's marketplace and get a leg up there for people who might want to use Salesforce and just want a few add-ons. And much like the whole idea of with iOS, you can have an iPhone and add apps to it. Platforms like Salesforce, like Twilio have add-ons, they go on top of them.

HubSpot is another good example of a platform that has core functionality that other companies can add on to. So those companies have to write a relatively small amount of software to just add little extra features. So from like Salesforce or HubSpot's perspective, they get a whole bunch of other people developing software for their platform, and they get a small cut of other people buying the core product as well. So, everybody gets benefits there. Part of the allure here on the developer side, having been a developer for so many years yourself, is that, is the process fundamentally different? Let's say you're writing software for, say, the Windows operating system, or for iOS, or for Android, and then you're tapping

into that operating system versus writing some software that might exist in a cloud platform. How different is that process? The whole idea of adding onto any stack of software, whether that stack is an operating system or a platform like Salesforce or a cloud platform like AWS is you have to learn how they do business, right? And the way they do business is typically some set of APIs, right? Application programming interfaces. So they'll give you a set of things like, hey, if you just want to add an extra field for every customer, here's how you do that. If you want to deploy your software for a cloud to make a web service, here's how you do that. If you want to be able to send people text messages in the case of Twilio

or send emails. Here's how you do that. So you go and learn their way of doing things, and then you write your software to take advantage of that. In the case of a full operating system install product, like an app for an iPhone or an app for an Android phone or Windows or macOS, that ends up with a packaging step where you have to package the whole thing into an app, get into an app store, all that. Typically with cloud things and whatnot, you're doing all that yourself internally, pushing it out into their deployment, and you don't have to package it up into something that someone can buy and sell individually. I think that packaging step is where things differ primarily.

Otherwise, it's really just about learning the set of APIs of how that particular platform does business. Right. The attractiveness of the cloud model is the scale, because the cloud is so prevalent, it's so pervasive around the world, and it scales very quickly because there are millions of other people's computers that exist that are running software. Going global is a little easier in the cloud. But let's talk about where things go wrong here. In a cloud platform, generally, these things have a few purposes. You talked about the stack or how the platform does things. In the case of some platforms, they can be very focused. There was a point at which, for example, Twilio was a very focused platform. It was a cloud communications platform.

Twilio is a good example of a company that was very focused at one point and then became kind of unfocused and is now trying to focus again. I think this is one of the ways, Tim, where a platform can go wrong. A platform, if I'm thinking about it right, and you tell me how you think about this. It should be very focused. I should be able to know exactly what I need to do without any hesitation whatsoever. The guide should be really simple. My process of getting software onto your platform ought to be easy. But if it gets confused, if there's a lot of things going on, it gets a little more complicated, which kind of corrupts the platform. I agree. I think there's a point at which a platform can shift into just being a toolbox,

right? So instead of being something that you're standing on top of, so you don't even have to think about what's below you. Instead, you have to root around through the toolbox of different options. In the case of Amazon Web Services, there's hundreds of options now of things you have to rummage around between to figure out what you want to use. And when there's so many options, it starts to become less of a platform and just more of a toolbox, which I think does diminish the value. You tell me, but that's where I think Twilio has gone. Twilio has become more of a toolbox, less of a platform. Now, because of that, because it made that shift, and it was a lot of things to a lot of people, a

lot of acquisitions, a lot of money spent on a whole bunch of different things, it's now had to come back and refocus, and now the focus is on customer data and first-party customer data. But it seems to have corrupted that thesis just a little bit. Now we're waiting to see whether or not the refocusing will get people back to the simplicity of the platform that was originally very elegant about Twilio. Let's talk about an incredibly focused platform, which would be something like MongoDB, right? Which is essentially a specific kind of database that has no schema inside of it. But they have added onto that the MongoDB Atlas product, which lets you then host that database and some code that runs on top of it and deploy that.

So you essentially have that core platform that you're standing on top of, of the MongoDB database, and then you can stand up on top of that with your own code and deploy it. They've got a very narrow platform, but it is one that millions of developers are finding very useful. Fair. Then there's a third way, which is the platform that does start very focused, but then strategically branches out, which would be more like a Salesforce or a HubSpot. But there's a very standard way in which you know how to address and integrate with HubSpot. If you're using it, you may be using it for inbound marketing, or you may be using it for sales, or you may be using it for

support, or you may be using the operations hub, but that hub interface is still very common. Right. So the interoperability of these things, I think, is where you start to see the difference between a toolbox and a platform. If everything is very interoperable, right? Like I can get to my customer data from anywhere within Salesforce and everything is interoperating between passing that data around versus a toolbox like AWS, where I just have a whole bunch of different things that I have to pull together and connect. That's, I think, what the difference is between that toolbox and platform model. Yeah. It's really interesting. Enterprise software platforms, if I had to ask you to handicap it, and I won't leave

you hanging and just make you handicap it, I'll make a prediction here, too, but since we tend to be in the business of reckless predictions here, enterprise software platforms over the next five years, do you think greater commitment in the cloud, enterprise cloud platforms, greater commitment to those enterprise cloud platforms, or maybe a bit of a normalizing and pulling back over the next five years? I think there will be an overall greater commitment by the industry. But what you're going to see is a lot of these platforms have a per-seat license model. So each person who uses them has to pay, essentially, for a chance to use that software. I think those seats will probably have a short-term decline over the next year,

which will probably lead to a decline in revenue for a little bit. But I think from a developing perspective, you'll see that pushing forward overall. I agree with that. Where I'll fine-tune the prediction that you just made and where I think this is heading is more towards some real experimentation in pricing models. I can easily see there being some hybrid modeling around, not just per-seat licenses, but usage-based bursting or maybe even some prepayment, like along adopting the Snowflake model, where you have a certain amount that you're buying and then drawing down over time. I think that's a very efficient way for a developer to actually have access to tools that they know they're

going to need, but then have them available on their terms. But I agree with you. I think the combination of pricing pressure, prevalence of tools, and maybe some normalizing around, hey, do we want to go all cloud or maybe some more hybrid cloud, will create some creativity amongst some of these enterprise software platforms. I also think that we had a big push the last couple of years to get the best tool regardless of integration. You might have 20 different tools that you're working with on a daily basis. And I think all those tools have sort of caught up to each other a little bit in many of the segments of this market. And so it would not surprise me if we saw some serious

consolidation over the next couple of years where either acquisitions happen or people just decide, you know what, I can use the second best tool here because this one's better integrated with something else I'm using. As always, people on the program may have interests in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Asit Sharma. Thanks for listening. We'll see you tomorrow.