Motley Fool Hidden Gems Investing - About That Guidance

Episode Date: November 16, 2023

For both Walmart and Cisco, expectations for the future don’t tell the whole story. (00:21) Tim Beyers and Deidre Woollard discuss: - Cisco’s move into the software space. - If AI can improve the meeting experience. - Walmart’s strengths as a global player. (21:29) Ricky Mulvey interviews ACV Auctions Chief Operating Officer, Vikas Mehta on the ever-evolving business of selling used cars. Claim your five free dividend stock ideas here: www.fool.com/dividends Companies discussed: WMT, AMZN, COST, CSCO,ACVA Host: Deidre Woollard Guests: Tim Beyers, Ricky Mulvey, Vikas Mehta Producers: Ricky Mulvey, Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee, to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. Sometimes it's all about the execution. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool analyst, Tim Byers. Tim,

how are you doing this morning? Fully caffeinated, ready to go. Glad to hear it. We double dipped on you this week, but I think for good reasons because there's so much interesting stuff to talk about. We're going to mix it up today with a little bit of tech and a little bit of retail. So a little something for me and a little something for you. I want to start off with a networking company, Cisco. I have owned Cisco since before the dot com bust and have held it through horrible, horrible years. I'm maybe a little optimistic about where they're headed as they get deeper into the AI infrastructure. The revenue was solid. their software and subscription business that's growing, but man, the market just hated the

guidance. So I'm trying to figure out where Cisco goes from here. Should I be optimistic? Well, let me give you a reason to be optimistic. I mean, normally in situations like this, there's a market overreaction. I think that probably is the case here. There's a couple of things that are going to be interesting indicators, but let's talk about first things first here. What Cisco said is that orders are not coming in at the rate that they want them to come in. The street did not like that. The guidance is going to be muted. Ultimately, what this means is that they have customers who have bought a lot of stuff over the prior two quarters, and now those customers have to digest those orders. That's what happens with the

technical tech business that ends up selling a lot of hardware, which is what Cisco does. So this is going to happen from time to time. This is not, I think, a cause for optimism here, Deidre, is that this isn't unusual. This is something that does happen from time to time. So the question is, how does Cisco handle it? So they owned up to it. That's the first step. Admit you have a problem so you can address it.

So they've done that. And I think the thing that they've done to address it is they are moderating inventory. So when you look at the balance sheet, they are drawing down inventory some. When we get the quarterly filing, you can expect that there's probably going to be a little bit less in terms of inventory build. When you look in a quarterly filing, you'll see three buckets for inventory. One bucket will be raw materials. We bought a bunch of components. We're going to build some stuff. Works in process. Hey, we're building stuff. Then finished goods, we got stuff to sell. When the finished goods line is the majority of the inventory, it just means they're

trying to clear stuff out. It's almost like retail with the clearance sale. And that's kind of where Cisco is right now. So fair enough. That's where they are in the cycle. Overall, I think the bigger thing we want to focus on is how soon can Cisco get more of its business onto a subscription-based model whereby the revenue is a bit more predictable, the gyrations are fewer, and it's just like a smoother process they want to do it but it's not all their business yet it's still this is a this quarter is a good reminder that cisco is still very much a hardware business well yeah that's the thing it's they they are a hardware business they want to be less of a hardware business they're trying to get software going they're trying to get the subscription

revenue going and they're seeing they're seeing good results from that but what you said is such a good point because we've got this cyclicality and and you know on the call they mentioned like one customer had hired 200 people in 90 days to integrate tech. So, imagine people getting all of this software, getting all of this stuff. I'm also thinking about it with other companies, too, that this is going to continue to be lumpy because a lot of the tech companies are investing in AI infrastructure and all kinds of infrastructure, but then it's going to take a while to integrate that stuff, right? Of course it will. Yeah, it'll take a while to integrate it. It'll take a while to prove value. It'll take a while to show that there are meaningful use cases for things that

Cisco wants to sell, very high-value software and hardware that customers must buy. You really have to be addressing what I like to call a migraine-level problem. Right now, when it comes to AI, I'm not sure there are a lot of migraine-level problems yet. Now, there may be some migraine-level problems that do get solved by things like AI. And there are a lot of companies that are going to chase solutions in addressing those migraine-level problems. Cisco will surely be one of them. But right now, they have a bigger problem, which is just like, let's match up what customer demand actually is with what it is that we're building while trying to get more and more customers onto cloud-based subscriptions. Let's do more of that. Really, the story about Cisco

from here is less about AI and more about execution. I want Chuck Robbins talking about execution. So he's the CEO. I want him talking about execution. That's what I care about if I'm a Cisco shareholder like you, Deidre. Yeah. Yeah. I think that is a good point because right now we've got everyone trying to say AI and on the call, Chuck Robbins, he made sure to emphasize that he met with Jensen Huang, the CEO of NVIDIA. You know, they announced a collaboration a couple of weeks ago, mostly around this room thing, which is like a better WebEx, which I think you think we'd get a better WebEx. I would agree with that. But how much weight are you putting on this? Because it was obvious on the call that he very much wanted to give the

illusion that this is two CEOs and two top teams getting together and they're going to do stuff. But I feel like everybody's saying that they're doing that with Nvidia these days. Partnerships aren't real until there are salespeople assigned to sell a joint product. Let me say that again, because it really matters. This is particularly true in tech. I've written partnership press releases in the past, Deidre. They mean nothing, zero, until there are salespeople assigned to a joint account. I'll believe it when there are commissioned salespeople assigned to a joint account. Now, do I think that WebEx needs a lot of help? Yeah. Yeah. I have used WebEx. It needs a lot of help. So if NVIDIA can help, absolutely.

Let's not forget that WebEx was such a bad product, so hopeless, that at a point in time several years back, Eric Yuan, who was with WebEx, now the CEO of Zoom said, this product effectively is hopeless. I'm done here. There's nothing more I can do. I need to go start a competitor. And that's how we got Zoom. So yeah, WebEx needs a ton of help here, but let's wait for the joint sales agreement where you have sales reps on both sides coming together and you have referrals, you have people working together, you have joint engineering. When there's real money involved, then we get excited. Until then, nice press release. Yeah, that's how I feel about it too. A while back in my career, I remember when Cisco tried

to do this. It was like a television for meetings. I don't know if you remember this, but it was sort of like a precursor to the Facebook portal. When I worked at AOL, we actually gave one away. And they saw this as the future of connectivity, and it just wasn't. So I feel like the most important parts of Cisco at this point are still the same things they've been doing for years, the networking and the hardware. And that is just going to be a smaller thing as time goes on. That's probably the part of me that gets more pessimistic about the business. Well, there's incremental value in improving the products that you know people need. And that's a big part of Cisco's business. But the graveyard of products that were the future of

something is so vast. I mean, you and I both have seen that over our careers, Deidre. I can't even name the number of products I've seen that were the future of something. In fact, I would almost say if a product is called the future of something, it's a contrarian indicator. Yeah. I'm feeling a little bit like smart glasses is that now, but people seem to be optimistic about them again, so who knows? Right. I mean, we don't know, but the good news for Cisco is that it doesn't have to be that WebEx, let's focus on WebEx for just a second here and this arrangement with Nvidia. It doesn't have to be that Cisco has an amazing partnership with Nvidia and they completely remake WebEx and WebEx starts taking massive amounts of share

from Zoom for Cisco to succeed. If that happens, it would be great, it would be an interesting tailwind. It would certainly help the shift, the mix shift in Cisco's business towards more subscription-based product because that's what WebEx is. So that would be really interesting and it would be healthy for Cisco's business. But it isn't something that is essential for Cisco to succeed. They have to move step-by-step, make small improvements. This is a lot more of a story about effective use of capital and making marginal improvements. If they improve their operating margins as they're going through these cycles, they're going to generate a lot of cash flow. Soon enough, institutional investors will recognize that and start bidding the stock back

up again. It's an execution story. Don't forget that. This is no longer a tech story. This is an execution story. Important to remember. Let's switch over to Walmart because I think that's an execution story too, because today we're talking about two massive companies that move slowly. This is a company I know you follow. I own it. I follow it too. I feel like people always lump Target and Walmart together, but I don't see them as the same thing for a variety of reasons. But you talked about Target yesterday. Revenue was down, but the market felt better because it beat expectations. Walmart, revenue up 5%, good quarter all around, but guidance wasn't so great and the stock is getting slammed. I kind of don't get it. Well, I kind of do only because

Walmart has been on a rally. They set a new bar with expectations with analysts, and this happens all the time. The street says, oh boy, look out, this thing is an unstoppable machine, and we're expecting in the coming quarter that the earnings per share, it's going to be at least $6.50, and then Walmart comes out and says, actually, it's between $6.40 and $6.48. Everybody says, oh, no, and sells it off. This is very much a tale of two expectations, one very low, Target, one higher than it's been in a while. I think the level of disappointment with Walmart, the drawdown today does seem to me, Deidre, reflective of, you know what? We don't really give Walmart a lot of credit. They really haven't done all that much. Let's not get too excited

about them. And then they deliver, and then they deliver it like, oh, okay, maybe they are different. And then you have a quarter like this, which is really solid, and expectations and guidance that are really good, but not quite good enough. And then it feels like, oh, no, it's the same old Walmart. Actually, nothing has changed, which does feel like a big overreaction. I will tell you, I look at these results, Deidre, and I'm very encouraged. My thesis, and I mentioned this on the morning show, Kirsten Gerda and I, who run Interconnected Opportunities together, we made a bet on Walmart. One of the keys to the thesis is that the expectations were so low in the stock price that Walmart didn't really need to do anything. But

if they manage to do what they said they were going to do, which is move the needle on operating margins, if they got it from where they had been historically around 4% and just add it and strategically move up a little bit, not a lot, if they get to 5%, they've been at 4%, if they get to 5%. This is not just a wildly undervalued stock, it will just be a massive winner for many years. I still believe that. A year to date, where is the Walmart operating margin now? It's at 4.1% and improving. As far as I'm concerned, Deidre, this is thesis intact. I understand the reason for the different reactions to Target and Walmart, and it's entirely cooked into expectations and real disappointment that Walmart hasn't changed. But I look at the financials and say,

no, Walmart has changed. Digital ordering is still a big deal. The operating margin is going up. This is one of the biggest companies in the world as far as just the volume that it handles. And it seems to me that it's handling that volume very, very well. Well, and you just said something interesting, which is world, because this is an increasingly an international business and their investment in, in Flipkart, I think is a huge part of that. I mean, Walmart international is about a quarter of the size of the U S business. Revenue growth was up about 10%. Their global advertising is becoming a bigger part of the business. I mean, we've seen the advertising be a bigger part of retail in general, but I feel like this is far

more of an international business than people give it credit for. Well, and the international operating income was up 29.7%. If you're going to grow at that level, you're going to move the needle on the overall business. I mean, look, it's off of a small base. For the quarter, net sales in the international division were $28 billion. That's up from $25.3 billion in the prior year, but that's up 10.8%. And your operating income, look at the operating leverage here. Your operating income up to $1.1 billion from $900 million, and that's up 29.7%. So like Walmart overall, the international division is really getting underneath its skis here and generating massive operating leverage on the kind of base we're talking about here.

That is enormous. That's absolutely enormous. Now, to be fair, I mean, this is a fraction of Walmart U.S. because Walmart U.S. was $109.4 billion. That was up 4.4% year over year. But still, your point is a good one. This is an increasingly international business and it's doing quite well here. I would say as long as Walmart continues to demonstrate that operating leverage, the thesis is intact here, and the stock, at least for me, remains undervalued. One last thing I'm thinking about with them, on the earnings call, they talked a lot about the Walmart marketplace. It seems to me like they're getting a little bit more into that Amazon space of, you know, having people sell on the platform. It seems like more of a platform.

They talked about the Walmart connect ads up 20%. Should we be making more comparisons between Walmart and Amazon and, and are they sort of becoming each other's business in a little bit? In a way? Yes. Because of the advertising comparison you just made, but in a way, no. And here's where I'm going to draw the distinction. I'm going to draw the distinction in grocery. I do think that Amazon at its core is a delivery business. I think it is absolutely a delivery business. And they do so well in terms of logistics that it is a driver of income. It's a driver of revenue for them. And it will be for a long period of time. That really isn't true for Walmart. They are a logistics business on the back end between their own stores.

but not really a last mile logistics business. That's not really who they are. They have partners for that, but they are, boy, are they really good at drawing you in to their stores and providing a really interesting experience for things like grocery pickup. And they are killing it in that business. Pickup as a proportion of orders, I think is going to keep growing. So that's a distinction that I think is interesting, Deidre. I really don't expect Amazon to be nearly the player in that business that I believe Walmart can be. So I believe that you could have a lot of business. So here's how I'm thinking about it. I think as a consumer, let's say as a U.S. consumer, you could do a ton of business with Amazon and also do a ton of business with Walmart.

I think those two things can be true. And I think share of dollar, it is possible that those two can squeeze out some of the smaller retailers. And the one that's at risk there is Target. But I would suspect that most people will only have one membership. So it'll either be Prime or Walmart Plus. Probably so, but you don't need the membership at Walmart to get the benefits of pickup. Yeah, absolutely not. I think it's really interesting. I think both of these companies can succeed. I also think, though, there are probably three big players here, with the fourth being Costco. I think Costco being its own unique animal that I don't think anybody is going to disrupt.

I think Costco is an experience in and of itself, but in terms of where U.S. consumer share of dollar goes. I think it's a real bare-knuckles fight between Walmart and Target. I think Amazon has a really good position in logistics. I think Costco has a really good defensible position in big box, and Walmart and Target are going to slug it out for things like pickup. You're more more in-store shopping experience for things like sundries, gifts, and grocery. Yeah, absolutely. Well, thanks for breaking it down with me today, Tim. Thanks, Deidre. If you're a regular Motley Fool Money listener, you're probably well aware of how dividend stocks

have the potential to really supercharge your portfolio's returns. Dividends have accounted it for around 40% of the total return of the S&P 500 since 1930. And of course, it's been an important tool for all-time greats like Benjamin Graham and Warren Buffett. Our top-notch analysts at Motley Fool Stock Advisors certainly agree and have put together a list of five quality dividend payers that are also recommendations in our Stock Advisor service. The report is free to you just as a thank you for listening to our podcast. No purchase necessary. Just go to fool.com slash dividends and we'll email it directly to your inbox. That's fool.com slash dividends to claim your five dividend stock recommendations now. The used car economy has

been on a rollercoaster ride over the last several years. ACB Auctions is a B2B marketplace for used car dealers and has been on that journey. Ricky Mulvey sat down with ACB Auctions Chief Operating Officer Vikas Mehta to explore the ever-evolving business of selling used cars. This is a company that, well, listeners might have interacted with, but may not know. It's disrupting auctions, but it's on the dealer-to-dealer side. So for those who are unfamiliar with the company, what is the, we like to call it the migraine level problem, what is the migraine level problem that ACV is solving? So Ricky, let me first start off by talking about what is dealer-to-dealer wholesale and

why that's important. And then I'll talk about ACV's role in trying to transform that industry. So, about 40% to 50% of the time an individual buys a car, they trade in their used car. The dealer that acquires the trade-in makes a decision, do they want to hold on to that vehicle and try to retail it to the next customer that walks into the door, or do they actually want to sell it to someone else and actually just get cash for it? That second piece is about 10 to 14 million cars a year annually, higher pre-COVID, and And then, with all the COVID supply shortages, that number's gone down.

But basically, it's a huge TAM. And the traditional way of dealers wholesaling used cars was, about 20 years ago, they would take them to what is called a physical auction. And a physical auction generally is extremely inefficient, extremely unpredictable. And it was hard for both sellers to get high price realization and conversion, and for buyers to get an asset that they felt great about. Why is that? Because these are once-a-week local get-togethers. Supply comes in, demand comes in, and you essentially have an auctioneer transacting these vehicles. Independent dealers would bid on the cars. They're great at selling

cars, probably not as good as assessing condition, especially in a high-pressure auction backdrop. up. And for the sellers, the amount of buyers that will come in on any given day would be sporadic, great day, good weather, bad weather, too many cars of a certain type. So, long story short, unpredictable, not very efficient, very time-consuming. So, back in 2014, the founders of ACV decided, looking at some of the Ebays, Amazons of the world, why don't we take this wholesale marketplace element and look to digitize it? And essentially, it needed to solve a few different things. It needed to solve the classic marketplace scaling problems. How do you build supply and demand at the same time? How do you establish a level of

trust and transparency? So, car dealers looking on the app or looking on the website are comfortable bidding and buying an asset that is several thousands of dollars, that they're buying it remote completely virtually and then how do we create an end-to-end ecosystem of financing transport title transfer to accommodate this transaction the product market fit completely resonated we now have scaled to where acv is about seven to eight percent of the us dealer to dealer wholesale market and growing so migraine level problem efficiency price realization conversion, and trust gaps that existed in the traditional physical channels. So, how does ACV fit into the competitive landscape? Not the only online auto auction

company, especially thinking of competitors like Copart. Yeah. So, Copart actually plays in a slightly different vertical, or slightly different slice of the horizontal. Copart does primarily damaged salvage, what is considered not whole cars. So, it's usually cars that are salvage vehicles that are typically sold for parts. They have a small whole car business relative to the big marketplace that they operate. But from a digital perspective, ACV is the leading digital marketplace. There's a few other competitors out there, but our biggest competitors are really physical auctions. One big problem I would say that you face at ACV is pricing cars. When you have a lot of cars

rolling in? How do you find an accurate price for it, especially to give bidders an idea of what they should be paying for? You recently introduced a system or purchased a system, it's called ClearCar, to use AI to price cars. This is one where I didn't know that there was disruption necessary. What is AI doing better than past systems for pricing cars? We launched ClearCar a few months ago. It was an opportunity that was, I would say, almost perfectly designed for ACV to try to disrupt. Our traditional marketplace model essentially meant we as ACV needed to fully understand the asset we were trying to sell on the wholesale channel. So, that meant inspecting the car, that meant understanding

the condition, being able to look at things like trim, make, mileage option, but also some of the secondary aspects of condition. Is there structural damage? Is there mechanical drivability, transmission issues. So, we essentially got millions and millions of cars of experience to try to assess the condition of the car. And then looking at initially third-party data around, you know, average good or bad pricing, depending on the condition for the car, we basically leveraged a pricing engine that ended up connecting both the car attributes, but also the car condition. And that actually has been launched in our marketplace for a few years. it allows dealers to make selling and buying decisions efficiently. So, it was only a natural

one step forward for us to say, can we make this technology accessible to other use cases? So, especially during COVID, I mean, it's always been a case, but especially during COVID, dealers were extremely short of cars. So, massive amounts of buying cars from consumers, big priority of dealers running marketing campaigns to try to get consumers to sell their cars to dealers. I mean, I, for one, got several such emails, would you want to sell your car? And essentially, it was the same problem statement, right? What does a consumer value their car at? What is the appropriate disclosure with all the damages and all the conditions and all the options? So, we essentially took our pricing engine and our

intelligence that we built on the wholesale side and leveraged it for the consumer use case. Why AI? Because this industry is still extremely not transparent. People aren't extremely sure what their cars are worth. Depreciation is a bit of a black box. And our ability to really connect condition, not just to the actual physical car, but the marketplace dynamics. What are similar cars selling within your area in the last week or two to get a much more accurate, much more relevant, much more dynamic price? Your younger company, still in growth mode, still gaining market share, but unprofitable on an operating basis. What do you think, not a date, we're not going to hold you to that, but what's the story where ACV Auctions is profitable on an operating

basis? So that's definitely a key priority for us. We've been very much operating with the network effects, growth, scaling benefits that we expect most marketplace companies to have. Our story is we started in 2014. And sort of my background, I spent a majority of my career in marketplace companies. So, I've seen the power of the marketplace model once you hit scale and once you hit network effects. At some point, I'll tell you about the story about how I landed at ACV. But predominantly, it's about growth. It's about an established playbook. We have a good number of territories that are already profitable today. And it's about scaling the holistic marketplace. Some of the investments we've made to get us there, it's really a lot about leveraging

technology to create efficiencies, both on the inspection and the marketplace side of things. It's about investing in infrastructure, everything from title automations to payment scaling to AI and pricing to try to drive efficiency across every part of the company's execution. And it's fundamentally about getting to scale in local and national marketplaces. 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 Deetra Willard. Thanks for listening. We'll see you tomorrow.