Motley Fool Hidden Gems Investing - 5 Stay-at-Home Stocks Revisited

Episode Date: June 25, 2022

Jason Moser and Matt Frankel take a look at some of the companies that soared during the pandemic, and offer some takeaways from the surge in investor interest, including: - Pandemic stocks that got ahead of themselves - Which stay-at-home stocks are worth a 2nd look - How these businesses could evolve from here Stocks mentioned: DOCU, ETSY, TDOC, PYPL, NFLX Host: Jason Moser Guest: Matt Frankel Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Great news, the federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. The question I've been asking, regardless of valuation with all of these businesses, is, is this fundamentally a better business now than it was then. Just ignore the rollercoaster that the share prices have been on here over the last couple of years and just ask yourself that very basic question, is this fundamentally a better business now than it was then? I'm Chris Hill and that's Motley Fool Senior Analyst Jason Moser.

Today, we're revisiting five stay-at-home stocks that soared during the pandemic and have since it's fallen back to earth. Jason and Matt Frankel discuss the beaten down stocks that still have some tailwinds and some lessons from the pandemic for investors moving forward. We're going to talk today, Matt, about themes. Investors love themes. They help tie things together. They can often help us visualize the potential that companies may have. One One theme we've talked a lot about here over the past couple of years, of course, is stay-at-home stocks, a phrase I'm sure a lot of people are familiar with now. There were a number of companies that really took off here over the past couple of years, thanks to their

business models and the conveniences that they afforded us as consumers. Now, you fast forward to today, we've seen things more or less come full circle, haven't we? Those share prices that took off really have all come back to reality. Unfortunately, reality now is that we're in the middle of a pretty nasty bear market. Today, we wanted to take a look at some of these stay-at-home stocks that were front and center and see where things stand with these businesses. In particular, we're going to talk about five companies today. We're going to talk about DocuSign, Etsy, PayPal, Teladoc Health, and Netflix. Let's just go ahead and start things off with DocuSign. This is a business that has just witnessed

a little more headline breaking news here recently as CEO Dan Springer has agreed to step down. They are now searching for a new CEO. I don't think it'll take all that long, but you never know. The CEO changes, they happen for myriad reasons. But let's look at DocuSign the business here and see where things stand today. This was a business that really made our lives a lot easier at the beginning stages of this pandemic. You can certainly understand why it was of interest to so many investors. Where are we today with DocuSign versus where we were two years ago? DocuSign is one of those interesting cases where they're not necessarily a pure disruptor. In a lot of cases, it's still convenient

to sign documents in person, especially after people are returning to offices and things like that. But it did make a clunky process easier. You know, if I was closing on a house, I used to have to drive across town to go to my realtor's office and sign every time there was an addendum. And now they can just send it on DocuSign. And this was going on, you know, obviously before COVID started. But when COVID started, we really had to pivot to doing everything remotely. And that's where DocuSign was a big winner. A lot of people credit DocuSign for keeping the real estate market going during most of 2020 because you literally couldn't go anywhere and sign anything. Just comparing where the business is, revenue is more than

double. When I'm comparing it to the last quarter before the pandemic started, their last fiscal quarter of 2020 ended in January of 2020, of their 2020 fiscal year. Based on that, their revenue has roughly doubled. But what they're not doing is making money. That's one that has not come from the pandemic. They're still on a gap basis, they're still unprofitable, they're still losing money. This goes along with the CEO's departure. There are very few near-term catalysts. Where does DocuSign go from here? I know they've ordered some things like a mobile notary service, which if you ever have to get a document notarized, that is valuable. Where do they go from here with the return to office? As we know firsthand, a lot of companies

are still gradually rolling out their return to office. As companies return and as more things can be done in person, will growth slow and what new products will people adopt, if anything? Yeah. You hear and see they talk a lot about in the earnings calls about this agreement cloud. I'm glad that you said, where do they go from here? Because it does feel like there's plenty of opportunity out there to capture, but it's going to be something that happens more slowly. We knew the conveniences of DocuSign before the pandemic ever hit. It's something that we use, for example, internally here. It works sometimes when we were signing agreements for whatever it may be, used it for other

things, real estate related, going to the doctor's office, for example. There's plenty of use cases there, but it feels like it got ahead of itself. It does feel like going forward, see the opportunity there, but it's not a space without competition. Adobe, for example, a much larger business, obviously far more resources at their disposal. They've got Adobe Sign as well. It's not a space where DocuSign basically just go out there and capture all this market. They do have to compete for that market share. I guess it's proprietary technology, but it's not something that can't be replicated. At the end of the day, you're putting an electronic signature on a document. That's something, like you said, Adobe can do. There are a few other

companies that have similar offerings. When I closed on my vacation home that I bought during COVID, we signed most of the documents electronically. It wasn't DocuSign, it was one of their competitors. There are other programs out there that do the same thing. The Agreement Cloud is interesting, but I'm not totally sold on the value it will add. To your point there, the competition that's out there. One thing I will say, having used DocuSign and having used services from other competitors, I will give DocuSign the nod for having a more seamless and easy-to-use interface. Maybe that's just because I've used it more, but I've used other services before and they just don't seem to be as seamless, they seem to be clunkier. Hopefully, they noted on

the call that they're around $2.5 billion in revenue today annually. They feel very confident that they are on this path to becoming a $5 billion revenue business. The potential is certainly there. We see the goal. It is a matter of, number one, can they actually get there? Then number two, what is this business model? What do the financials look like if and when they do? Because to your point, they're in profitability. I will give them a little credit there. They are cash flow positive, so that's something at least to give them credit for. But yeah, ultimately, it really does boil down to profitability, and we want to make sure that this is a business that can get there and stay there. I think they can, but that remains to be seen. Let's talk about Etsy,

another business here that has made a lot of waves in retail, certainly a business that was very successful pre-pandemic, but also a business that has witnessed a lot of tailwinds here over the past couple of years as well. Something that just really stands out to me with Etsy, you saw over the past couple of years, if you go through their conference calls, this was really a pandemic play in many ways, because if you look at their transcripts, over the past couple of years, you would hear them talking about just the contributions from masks. The sellers on that platform, they sold a lot of masks, and those were points that they noted in the calls over the last couple of years. But you fast-forward to today, it feels like they have more or less passed that

opportunity. I don't know that it necessarily represents much of an opportunity going forward. But let's take a look at Etsy. Where were they before and what kind of progress have they made? The masks were definitely a genius move, the whole pivot to masks and the focus on those. But it was a short-term thing. It was like PPP loans were to these fintech companies. It's not like a long-term driver of revenue, but it's nice to have for that year or two where everything was shut down. The real difference between Etsy now and before the pandemic is that they were the beneficiary of pulling a lot of merchants that sold offline into their ecosystem. Think of all these craft vendors who sold at artisan markets in 2019

and suddenly weren't able to do that when the pandemic hit. Just to name a couple of the numbers. Etsy going into the pandemic had 2.7 million active sellers on its platform. Now it has over 7.6 million. About triple what it had going into the pandemic. The number of active buyers on the platform because people couldn't get these unique and handmade goods in person, that has more than doubled since the beginning of the pandemic. Just a couple of other quick statistics. Their pivot toward mobile ordering has been impressive. 66% of their orders now come from mobile. That was 58% before the pandemic. They've also done a great job of expanding into international markets during the pandemic. 44% of their sales are now international,

and that was about one-third before the pandemic. Etsy is a different business now in terms of scale and the makeup of where sales come from before the pandemic. Yeah. They've made a lot of investments too in the Etsy payment side of the business and Etsy ads as well. All of which creates just additional avenues of revenue ultimately, and typically pretty high margin revenue. When you look at this business then versus now, I mean, you go back to the first quarter of 2020, they brought in $228 million in revenue. revenue. This most recent first quarter for 2022, that was $579 million. Along with those numbers in the sellers and the buyers that you're quoting, it certainly seems like business

is following along. One thing to keep in mind, and it does feel like this is something we'll see play out here over time, it seems like some of those sellers have a little bit of a problem with some of the costs that Etsy is charging in order to do business on their platform, is that something that you feel like they come to a negotiation there and ultimately figure out a way to keep doing business, or is this something that poses a longer-term risk to Etsy? You got to keep it in perspective. The number of sellers that were actually really throwing up big red flags about this, it's a very small percentage of the sellers on the platform. It's all about the value that

they deliver. If Etsy is offering things like two-day shipping to buyers to get more buyers on the platform, that could be well worth paying a little bit of an extra fee if your customer base is expanding. It remains to be seen how much of an effect that will have, but all indicators are that it's a very small percentage of merchants that are actually upset about this enough to pull products. Let's move on over to PayPal, another business that you and I have enjoyed talking about through the years. This is one that seems even now to be such an obvious play on that quote-unquote war on cash that we love to talk about, even pre-2020. This move towards a more cashless society was already

well underway. PayPal, as many of these other stay-at-home stock names, the stock really took off here, but we have seen a tremendous pullback. It feels almost as if this was more self-inflicted than anything else, but let's talk a little bit about the fundamentals of PayPal and get a better understanding of where they are today. What do you think is driving the pessimism or the uncertainty in PayPal today? Unlike the first two companies we mentioned, PayPal was an enormous business before COVID. They had $20 billion of annualized revenue before COVID. They were very profitable, billion in quarterly free cash flow before the pandemic, over 300 million active accounts,

$800 billion in annual payment volume. That was at the end of 2019. Really big business and big profitable business before the pandemic hit. Yes, they grew quite a bit during 2020 and 2021. Obviously, the surge in e-commerce adoption helped them. Venmo was adopted because people couldn't didn't physically hand cash to their friends anymore. When you're in lockdown, you need a good way to send money, so that was a big beneficiary. If you look at the numbers now, it looks like a standard growth story. This doesn't seem like a giant pandemic pulled forward growth. Revenue is about 30% higher than it was before the pandemic. Earnings are about the same actually. Active accounts are up by 125 million between PayPal and Venmo,

is solid, but that's not a gigantic growth rate when you think over two years. Payment volumes at about 1.2 trillion today. It's a solid business, but this really wasn't a big pandemic story. It was just a solid continuation of growth that was already happening in this case. It felt like management perhaps made some forecasting errors. Maybe they felt almost like their success was going to be a little bit more automatic. Maybe they took things a little bit for granted. That ultimately falls down on the shoulders of leadership. We were talking earlier about DocuSign and Dan Springer stepping down. As these businesses have witnessed so much pressure here, when

they, from the outside looking in, seem like such no-brainer long-term winners, those tailwinds just continue to form. You can also understand with share prices being depressed, and let's face it, we're in the bear market, nobody is immune. All of these shares are just getting hit. Investors start wanting results. They want to see management deliver. The longer that management fails to deliver, the more pressure that comes down on leadership. You have to wonder if CEO Dan Shulman isn't feeling some of that pressure. One of the most recent calls, he noted the top three things that they really need to do to get the trajectory of the business going back in the right direction. It was really three simple things, but they take me back to that

notion that these were self-inflicted errors. Number one, they say they need to rethink their philosophy and methodology around forecasting. Ultimately, I think they more or less need to perhaps guide a little bit more conservatively, guide a little bit more realistically and be beat those numbers. Because when you start putting out those big targets and you start missing them in consecutive quarters, the market takes note of that and starts wondering if you really have what it takes to meet those big targets. Second, he noted there are less things that they need to do extremely well. In other words, they need to focus, they need to really focus on what they do well. That is ultimately the opportunity in checkout

and they also want to double down on the digital wallet. Both make sense to me. Then the third thing he noted is ultimately, they need to put more and more accountability into the hands of their managers and drive ownership and accountability across the whole business. It really does sound like this became a bit of a Dan-centric story. It seems like PayPal almost became a very Dan Shulman-centric company here. That really isn't good for the long haul. You want to get your employees and your managers in on that ride as well and really utilize the talent that you have to be able to grow that business. So if they're able to execute there, I like the chances of this thing coming back. But again, yeah, I mean, it feels like those cashless tailwinds aren't

abating. It really does feel like the opportunity is still out there front and center for PayPal to capture. And frankly, that's one of the companies that I feel like stands to do very well as long as leadership can hold themselves accountable. They're in the process of pivoting from growth to value in a way. If you notice all those three points you just mentioned, nothing was said about user growth. And that had been the story for years and years and years was we're going to hit, you know, 750 million users eventually or something to that effect. Now they're focusing on maximizing the value of their current user base, which is like, you know, it's a, it's a pivot, but if it pays off, it could work out. Absolutely. Well, talking about big

user bases and realizing value from that base, let's talk a little bit about Teladoc Health because this is another one that has pulled back considerably from the heights of the pandemic. This is one that really took off. I think for obvious reasons, it really did put virtual healthcare on the radar of all investors and consumers alike. But Teladoc, I think, too, has suffered from some self-inflicted errors there that perhaps they can recover from. But let's look a little bit at what the business looked like before we got into this versus now. What do you think about Teladoc? Well, it's an interesting company, At one point, this stock was priced like we were never going to go to the doctor again.

And that's kind of where they kind of lost me on that. So, one interesting thing about Teladoc between the pandemic and now, or before the pandemic and now, is that it's not necessarily that it's a lot of user growth. They had about 37 million members before the pandemic. They have about 55 million members now. But it's how often their members are using the service that really changed. It's a total of about 1.2 million visits in the last quarter before COVID, about 4.5 million visits now quarterly. About quadruple the amount of quarterly visits, even though the user base

only grew by about 50%, which is really interesting. That's translated to about 4X growth in revenue for the company. The question is, where do we go from here? Because people want to be able to go to the doctor, which is, I think, what a lot of investors were missing about Teladoc at the height of the pandemic, is that there's a lot of things that people are just, for lack of a better explanation, more comfortable doing in person. I mean, use your imagination on that, but there's certain things I don't want to do in front of a webcam when it comes to my health. The reopening was really, really hard on Teladocs from an investor standpoint, because it's not a peer disruptor, because a lot of medical services are better performed in person.

There's definitely a place for telemedicine, just the stock definitely got way ahead of itself at one point during COVID. Yeah. I think you're right. I think the one thing, the share price was reflective of people thinking it was completely disrupting and changing the way healthcare is delivered, when that's never really been the idea behind this company at all. It's been more to bolster the healthcare system, to make the healthcare system better and to ultimately be able to scale healthcare. We've got ultimately this shrinking number of providers. We need more doctors in the world, and yet we have this population that continues to grow. The demand for their services continues to grow, and yet the supply, the

providers, that continues to shrink and that becomes a problem. But if we can find ways that can scale healthcare and get it to users more quickly and efficiently, well, then you can see how they can make our healthcare system better. I think you can use online therapy as a good example. They made an acquisition of a company called BetterHelp years ago. This has been a tremendous acquisition. They acquired it for just basically a song and have turned it into a $750 plus million revenue driver. One of the things that I think took the market by surprise on the most recent call was they were talking about the competitive environment in this area in online therapy. Ultimately, you see a lot of these startups that have ultimately gotten themselves

on regulators' radar by over-prescribing medications. That's a very touchy subject, and understandably so. For an example, there's a startup out there called Cerebral that is under investigation for over-prescribing controlled substances. That's something management noted on the call. It was contributing some pressure to that side of their business, but they also said that's one thing that they will not fall, that's a trap they won't fall into. They won't play that game of joining in the crowd and just starting to prescribe medications in order to be able to capture that market. So hopefully that means they're maybe willing to accept a little bit of short-term pain ultimately for that long-term gain. It's been a very successful business up

to this point. And so hopefully that continues. And then the other thing really, this is just thing that continues to stand out to me is this acquisition of Livongo. I don't necessarily begrudge the acquisition, but I definitely begrudge what they paid for it. The only thing that they've got going for them on that regard, I think, is at least that there was a share component to that compensation, to that acquisition price, and they were able to use their shares at that high price, which ultimately means it's cheaper currency. but regardless, it really does feel like they paid an awful lot for Livongo that's not really bearing the fruit that they thought it might. Yeah, I think they took a massive

impairment charge for that in the most recent quarter, actually. I want to say that their acquisition price of Livongo was bigger than their current market cap. I think it is. Yeah, I think it was. I mean, that says a lot right there. So that just kind of tells you how much value the market was placing on these stocks in the middle of the pandemic. But I mean, like you I like the acquisition. I think it adds value to the brand and adds utility. Hindsight is 20-20, but they clearly overpaid for it. Well, let's wrap things up with Netflix. This is obviously a name very familiar to probably all of our listeners. In fact, we probably have many listeners that own shares in Netflix. It's been a tremendous performer in

our Foolish universe over the years. But Netflix is starting to run into some headwinds themselves. I mean, for a company that has been able to grow that subscriber base so consistently for so long, it looks like those days, they're not just numbered, Matt. It looks like those days might be over. Well, I would argue that Netflix wasn't a beneficiary of the pandemic in the sense that the other four companies on this list were. And the reason I say that is because I think the pandemic was better fuel for its rivals than it was for Netflix. When you think of, say, I mean, the big one, Disney+, essentially started from scratch three months before the pandemic started. It really fueled the competitive landscape of streaming rather than helping

Netflix build on its lead, which it didn't. If anything, it cost Netflix market share. But just looking at the before and after, their quarterly revenue is up by about 30% since before the pandemic started. The paid membership base is up considerably, a lot of of growth in 2020. They added a ton of members, but not anymore. In the most recent quarter, they lost 200,000 members. It's still at about 221.6 million, which is about 50 million more than before the pandemic. They clearly pulled a lot of growth forward. Like I said, I just feel like some of these other competitors, you have HBO Max, Disney+, Paramount's offering, NBC's Peacock, whatever. There's a lot of different streaming offerings that I feel like were big

beneficiaries of the pandemic. And Netflix just kind of continued doing what it was doing. Yeah. Yeah, I think you're right. And I think we can see also just in this move towards ad supported video on demand, right? I mean, we are seeing more and more competitors in this space with those ad supported models, whether it's Peacock or Paramount Plus, Disney Plus coming out with their own ad-supported model. It sounds like Netflix is finally committing to doing that as well. That's going to be an interesting pivot for this business because it's one that has been built on no ads. That really was a point of pride for Reed Hastings for a long time. Advertising, it can be very lucrative, but it really adds complexity to

the business model that they never really had to deal with before. Now, they're faced having to deal with that, while there's a lot of competition that's already been built on that foundation. It's going to be interesting to see the competitive jockeying here in the video streaming space over the next few years. It'll be interesting. I think Disney is actually coming out with an ad-supported version as well. I think that's really what forced Netflix's hand, is that their highest momentum competitor is embracing that model too. too. Especially internationally, that model could really resonate, where Netflix memberships are generally lower cost anyway. A model like that can really help the business take it

to the next level. But they really have some work to do if they want to maintain their status as the leader of streaming, because you don't know if they are the clear leader anymore. Matt, what's the takeaway from all of this for you as an investor? We talked about five businesses here in that stay-at-home stock theme. There are plenty more we could hit on, but our time is limited. Ultimately, what's a takeaway from all of this for you as an investor? Is there something you've learned between then and now that you feel like has made you a better investor? It's five very different businesses. If things had gone differently with, say,

vaccine development, if we hadn't been able to develop a successful COVID vaccine or something like that, this would have been a very different show today. But just because of the way it worked out. The lesson I learned is, be careful when the market is pricing in a best-case scenario, like Teladoc is one that comes to mind. Be careful when a best-case scenario is being priced in, because if that best-case scenario doesn't work out at the end of the day, you still have to have a business that makes money. Some of these are going to do that. PayPal is still going to be a very profitable business, reopening or no reopening. There are a couple on this list that are great businesses no matter what. And those are where the opportunities, I believe, lie in

the current market, in the companies that will become great businesses and continue to grow and continue to adapt no matter what the economy or stock market is doing. Yeah, I'm with you there. I think for me, recognizing when a lot of growth gets pulled forward and then ultimately why that's happening. If it's more secular in nature, then that's great. But if it's more event-driven, like we've seen really with most of these businesses, you need to start thinking about what things look like after that event. That's why maintaining a focus on the actual business and the business fundamentals is key. A question I've been asking regardless of valuation with all of these businesses is, is this fundamentally a better business now than it was then?

Just ignore the rollercoaster that the share prices have been on here over the last couple of years and just ask yourself that very basic question, is this fundamentally a better business now than it was then? That I think can really help dictate the path going forward for you as an investor. Obviously, we like to hold indefinitely if we can, but if you see signs that this business is not a fundamentally better business, then that could lead you to another decision. That certainly helps to dictate investing strategies for years to come. Well, Matt, I think we're going to leave it there. Thanks as always for joining the show this week. It was a lot of fun talking stocks with you again. Of course, always fun to chat with you.

As always, people on the program may have interest in the stocks they talk about, and 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 Chris Hill, thanks for listening, we'll see you tomorrow.