Motley Fool Hidden Gems Investing - Adobe's No-Win Situation

Episode Date: March 23, 2022

Offering guidance to Wall Street analysts can be a tricky proposition. There are downsides to being either too vague or too specific. (00:22) Tim Beyers discusses: - Adobe's 1st-quarter results and the $75 million hit to its business in Russia and Belarus - How worried Okta's corporate customers should be - Why no one should expect Okta's public communications on its recent security breach to be highly detailed (14:56) Ricky Mulvey talks with Alicia Hammond about the psychological forces that encourage you to sell, and some actionable ways to make calmer, better decisions about your money. Stocks: ADBE, OKTA, SHOP Host: Chris Hill Guests: Tim Beyers, Ricky Mulvey, Alicia Hammond Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Your summer travels deserve an upgrade. With select Chevrolet, Buick, GMC, and Cadillac vehicles connected by OnStar, you can stream, game, and more on the go. Whether you're headed to a music festival or a cottage getaway, you can access hundreds of apps on Google Play right from your center display. Explore OnStar tech today at OnStar.ca and discover how to take your summer to the next level. OnStar. Better never stops.

Chris Hill. If you're a Star Trek fan, you know Captain Kirk doesn't believe in no-win situations, so it's a good thing he's not the CEO of Adobe. If you'd like the explanation to what I just said, it's straight ahead. Motley Fool Money starts now. I'm Chris Hill joined by Motley Fool Senior Analyst, Tim Beyers. Thanks for being here. Tim Beyers. Thanks for having me, Chris. Fully caffeinated, ready to go. Same. I want to start with Adobe because there are things about Adobe today that I think we're going to be seeing and hearing from other companies. Let me be more specific. They came out with their first quarter earnings report. On the surface, things look good. Adobe's revenue

was a little higher than expected. So were their profits. Here's the part that I think we're going to be hearing more from other companies. They cut their forecast because they are expecting a hit to their business, specifically their business in Russia and Belarus. Shares of Adobe are down 8%, 9% today. This is on a day when a decent number of Nasdaq stocks are down. I say this as a shareholder. I'm not reading too much into the stock movement today. How much should I be reading into what they're saying about Russia and Belarus? How big a hit to their business do we think this is? it's not that big. I mean, let's be clear. They're talking about a $75 million hit to

their business. So this is from the call. They said they've ceased sales in Russia and Belarus. And this is for all new sales. It shouldn't have much of an impact on digital media. And they say the impact on the digital experience side of their business is de minimis. But digital media annual recurring revenue of $75 million. That is the existing business in Russia and Belarus for that side of their business. That's going away. They also say there is a $12 million hit in other parts of their business, so total about $87 million. Remember, this is a massive company that generates billions upon billions of dollars of revenue. So it's material enough that they mentioned it during the earnings call, Chris. It's not so material that you should think that

this changes the thesis for Adobe. And what I will say is I think the thing that really got maybe the market spooked and analysts did not like is Adobe did give guidance for the first quarter. I'm sorry, not the first quarter, the second quarter of fiscal 2022, but then said no guidance for the fiscal year. So they're not doing that. And you could see the analysts peppering management with questions about this, like trying to get around it, talking about margins, trying to suss out anything having to do with figuring out what the full year might look like. And as we know, when the market doesn't get clear answers, that's when things start to get wonky and investors start to sell here. So I think it's

a little bit of an overreaction, to be perfectly honest here. But you're right. This is the first time we've seen something where we've seen Russia and Belarus and a number. And I think that's the thing that's important. There's a big difference between there's a lot of heartbreaking uncertainty in Ukraine, and we have ceased our business in Russia and Belarus, and then no number. This is, yes, all of those things, and we're giving you a number, and that feels different and new. I think that spooks some people, Chris. It sounds like it did. To go back to a theme I've hit a number of times, nobody's getting the benefit of the doubt. You can look at it that Adobe's management team, it seems overdramatic to say it was a no-win situation, but if they come

out and they say, we're going to take a hit, but we're not going to give the $75 million figure, then they don't get any credit for that. When they do, then it's like, well, you gave us that number, why won't you give us a number for the full year? Exactly. I don't think you're wrong. I don't think it's wrong to say that this is a little bit of a no-win situation. And I'm going to say I applaud Adobe's management for being a little bit conservative here because the street always likes when management gives guidance. But as fools, we tend to say this a lot. We kind of like it when management sticks its thumb in the eye of Wall Street and says,

look, we don't know everything yet. and so we're not going to give you clear guidance on this and you know what that's actually better we want them focused on the business tell me what you can tell me but don't make something up because you're trying to satisfy me and that feels like what this is so let's just for clarity's sake just to be you know kind of tick on on what maybe did give the streets some pause so for the fiscal second quarter, Adobe gave guidance of $3.30 per share. Street's looking for $3.35. And on a revenue basis, gives guidance for $4.34 billion. Street's looking for over $4.4. So that in and of itself is probably a little bit wonky. Street doesn't like to see that. You couple it with some

uncertainty in the comments about Russia and Belarus and ceasing business in those regions. And I think that adds up to something. But Chris, I think you're right. This feels like Adobe being very conservative, appropriately conservative in my view, and getting like, well, you didn't give us enough, so we're going to sell your stock. That feels a little, it does. It does feel a little bit like a no-win. I'm going with you. I think it feels like a no-win situation. I agree with you. For context, it's a $220 billion software company. They're profitable. This is not some of the companies that we've seen taking a hit recently. Right. Let's be clear, the segment we're talking about where there was an $87 million hit, which is digital media. Let's be clear about

what we're actually talking about. The digital media segment in the fiscal first quarter reported revenue just in that segment of $3.11 billion. That's 9% year-over-year growth. I think that's pretty good, Chris. It seems pretty good. I want to go back to Okta. I know Asit and Ari talked about Okta yesterday, but I wanted to discuss this with you. This is the ID management and authentication software company. If you didn't catch yesterday's show, they had a security breach. How big and impactful the security breach was appears to be a little bit up for grabs at the moment because a group posted pictures online saying they hacked Okta. Okta's management says, we've investigated, we found no evidence of ongoing malicious activity.

got 15,000 customers. By the way, one of them is the company you and I work for. Before I talk to the people at our company responsible for cybersecurity, I'm going to ask you, generally, if you're a customer of Okta, aren't you reaching out to them? Aren't they getting calls and e-mails from all of their customers saying, okay, I know what you're saying publicly, I'm not other people. I'm actually paying you money. Right. Right. And they are 100% getting calls. And I think in some of the response to this, so let's be clear on what Okta does. Okta does what's called single sign-on, SSO. And what single sign-on means is that you sign into Okta, Okta allows you to sign into other apps. It's a warehouse for passwords, authentication.

It's a way to manage authentication, authenticating you to use apps inside, say, your company's environment. You work for a company, company has an Okta license, you get orchestrated into your computer, all of your permissions, and a lot of that gets orchestrated through other services, but also Okta, which allows you to do logins across the company network. If Okta gets compromised, the worry is that, well, geez, a lot of other things are going to get compromised. That's very bad. What seems to have happened here, the way Okta described it, is that there was a third party in January that it may have been compromised. This third party, one of our security engineers, Aaron Torgerson says,

it sounds like an incident of social engineering. Basically, an attacker tricks someone into giving some credentials that attacker shouldn't have. And then once they do that, then they get in. And that may be where these screenshots, where the hacking group called Lapsus came from. They posted a bunch of screenshots. They're worrying screenshots. And then you had some other companies, Chris, like Cloudflare, which is not in the same business, but is a security provider.

And so the CEO, Matthew Prince, going online, going on Twitter and saying, we're resetting the Okta credentials of any employees who've changed their passwords in the last four months out of an abundance of caution. Does that not sound bad to you? I mean, it sounds appropriate to me. It sounds appropriate, but it also sounds like this is a big deal, right? So when the CEO of a security company says something like that publicly, I think that's why Okta felt like, okay, we need to respond. We need to respond swiftly. And so what they've said is, here's what happened in January. Looks like an unsuccessful attack. None of our stuff was

compromised. But there may be some security holes here. The fact that there was maybe some successful social engineering might reveal some holes here. So this is both, I think, a problem product for Okta, maybe some things they need to patch up and reaffirm a bit, and also a little bit of managing the narrative here as well. If they and their customer relations team spend the next few weeks being overly communicative with customers and walking them through how this is not a problem, and they keep all those customers and continue to gain more, then everything is fine. I found it interesting that you mentioned the hacking group Lapsus. I found it interesting that they said they didn't access or steal any databases from Okta,

but instead was focused on accessing its customers, which to me is like, Tim, I'm going to break into your apartment. I'm not stealing any of your stuff. I'm just breaking into your apartment so I can steal stuff from your neighbor's apartment. Right, right, right. Because I know that you have the spare key to your neighbor's apartment. Because of that, when I steal from your neighbor, they're going to think it's you or whatever. I don't know what the actual intent there is. But the value of Okta is that it has credential data for a lot of people. It has a lot of credential data for a lot of people, which makes it a ripe target. I think the worry for Okta here, if I had to paint the picture, not trying to be bleak here,

Chris, but this is the worrying picture. The worrying picture is now that this is out there, we hear say three months later that there has been some compromised data from an Okta customer or maybe multiple Okta customers and then that that is deeply deeply problematic it's kind of like so if there's a worrying scenario here it's a little like the Chipotle scenario of years ago like people got sick and they're like nah that's okay it's a one-off thing and then like oh more people got sick. What's going on here? And then it became a thing, right? Like that's the worry. A one-off thing is fine as long as it remains a one-off thing. If it becomes a two-off thing or three-off thing, now you got real problems. That's exactly right. So the way that Okta

communicates to its customers, I don't think publicly, we shouldn't expect to hear this publicly, but for customers, for sure. And if you're an investor and you work at a company that uses Okta, you know what you could do? Talk to your security engineers. Hey, what is Okta telling you? Are they being really communicative? Have they given us some patches, things to fix things up? That will tell you a lot about the response of the company. Because as a security company, the one thing you should expect Okta not to do is to say a lot of things publicly about what it's doing to give information to people who would like to know what those things are. All right. I'm going to go talk to our security team. Tim Byers, thanks for being here.

Thanks, Chris. If you're looking to understand the psychological forces that encourage you to sell or just some actionable ways to make calmer decisions about your money, this next segment is for you. With more, here's Ricky Mulvey. Thanks, Chris. We often talk to investors about psychology, but today we're taking a little bit of a different spin. We're talking to a psychologist about investing, a concept called conformity, and why it's a little different than the herd behavior you often hear investment analysts talk about. Joining me now is Alicia Hammond, a user experience researcher at The Fool and a psychology

instructor at Cuesta College. Alicia, I thought, great, we're going to have a psychologist talk about herd behavior and what that means for you as an investor, but you bristled against that term. Why? Well, Ricky, I'll be perfectly honest. I have never heard anybody say the words herd behavior across my like 10 years of studying, teaching, and researching psychology. Humans are very social creatures and the term herd behavior is comparing us to animals such as sheep typically. But let's be honest, there's a huge difference between a human and a sheep. Just on the most basic level, our brain ratio to our body is just way bigger. Like we have much bigger brains and sheep. There's a lot more going on when we make decisions, whether those decisions are

conscious or non-conscious. When a psychologist is talking about humans changing their behavior in order to align with a group standard, we're talking about conformity. Now, this is different than herd mentality because conformity sort of encompasses a wider range of human behaviors rather than just changing your mind. Sometimes we change our behavior because we simply want to gain acceptance by the group, but that's not usually what's happening when we are investing. When we're investing, what we are trying to do is we're trying to gain resources, gain money. And the social resources are not exactly, they don't translate one-to-one to the emotional resources that we usually think about when we're engaging in a certain type of conformity

called normative social influence. Normative social influence is when we as humans are more interested in gaining acceptance from others. But when we're investing, we're typically engaging in a process called informational social influence. Now, this type of conformity is a little different because we're seeking information from others. We're not just blindly accepting like, oh, it's time to sell the stock because everybody else is selling the stock. We are looking at other people and we are seeing that they are changing their behavior. And the little, you know, little voices in our head go, oh, no, they know something we don't know. They have information that I don't. So instead of just like accepting like this is the cool thing to do, informational social influence

allows us to sort of leverage the fact that humans have been good sources of information for us generally over the course of our lives. So it's not quite the same as just following the herd. It's the other people have information that I don't and I don't want to be left behind. Conformity can be beneficial to us as a society. So what's, outside of investing, a real-world example of where you might see conformity in a group of humans? To be honest, humans are engaging in conformity processes all the time. So let's say you get in your car right now and you go drive to Target. Imagine if you were going to be like, oh, I don't want to be a conformist to these norms of driving on the right side of the road.

Can you imagine the chaos that that would create just immediately? Like, it would be so dangerous. There are so many norms that we adhere to in society because others do, because that allows us to, you know, live in a social group, to cooperate, to engage in social harmony and be able to sort of live our lives without having to overthink every decision in order to, like, maintain our own safety. There's been some specific research on how conformity affects us as investors. Alicia, what was that research? So a 2021 study out of Zhejiang University had people rate how willing

they were to invest in a crowdfunding project. And right after they showed them the group's level of interest in investment. So first round research, these participants were rating how interested they were in investing in a project. Then right after that, each decision they made about investing, they showed that person how willing the group was to invest. And the group in this case is just all the other participants. But all the other participants, it wasn't a real number. It was just this imagined group, right? It was something that was manipulated by the researchers. But that manipulation affected the participants. When they went through a second round of reading the exact same projects, the researchers found that people whose interest was very different from

the group's, either it was much higher than the group standard or much lower than the group standard, changed their willingness to invest in order to align with the group's willingness to invest. So what this shows us is that these conformity processes, even when the group is removed, really impacts the decision-making process. What's likely going on here is that sort of the fear of not having the right information starts to affect your decision-making. And when we don't have a lot of information, we really heavily rely on those social processes to give us more information, right? These people

had just seen these crowdfunding projects for the first time. It's not like they were given an in-depth analysis where they can make a really balanced decision. They read a little blurb about the project and then moved on. I think there might be some real-world implications of this, which is, let's say you're thinking about buying or selling a stock, and then you see what people are doing on Twitter. Whatever FinTwit is saying, you see a couple of users on there saying, oh no, let's say I'm selling Shopify. Regardless of what you know about the stock or whether or not you think that it's a great company, you would say, okay, these people on Twitter might know something I don't know. So that way I'm going to use whatever information I think that

they have. Is that a fair interpretation? Yeah, absolutely. When we feel fear, it becomes a lot harder to make the sort of balanced decisions that we are hoping to make. So it's really important to take yourself out of that fear, to really remove yourself from those negative feelings in order to sort of reduce the narrowing effect that fear has on attention. So let's look at some actionable ways to reduce fear and anxiety as an investor. There's a psychological theory that we've talked about in previous conversations called broaden in build? What is that and why is that important for an investor to know? So, broaden and build is actually a theory of emotions. And basically, what I just told you

about fear and negative emotions narrowing the attention span, broaden and build is the opposite. So, broaden and build is positive emotions broaden your attentional processes and your mindset, which allow an individual to build upon the physical, social, and intellectual resources that a person has. And those resources allow the person to improve the odds of successful coping. So this theory came out of the University of Michigan by a researcher named Barbara Fredrickson. And it's a really cool theory because a lot of times in psychology and in the media in general, a lot of the information we're always focused on is very negative. And that's a byproduct of our mind. Humans have a negative attentional bias because generally the negative information is

the stuff that could potentially harm you and we want to avoid harm. However, there is so much research out there that if we move past just avoiding harm and we start to look at sort of the strengths in the human experience, that's just as important because it allows us to, you know, broaden exactly that, broaden our sort of view of humanity and of what humans are capable of. and more conscientiously utilize those resources. So, broadened and built theory is really cool because it gives you sort of a response, a next step. You're feeling scared, you're feeling negative, you're feeling bad, and you know that that's impacting your emotions or your decision making. How do you make better decisions then? Make yourself feel better. So, let's talk about

some actionable ways to do that because it's very easy to say, make yourself feel better, It's a little bit tougher in practice. Right now, investor anxiety is up. Check the VIX, check your blood pressure, and you have some actionable ways to reduce that stress. The most common being meditation, something that Ray Dalio, he's a big fan of. He does transcendental meditation, which is focusing on a mantra for 10 to 20 minutes, two times per day. Is this something investors should try? Absolutely. Meditation is great because It allows you to really understand how your body and how your mind feels in the present moment.

And when you practice meditation, when you do it regularly, it allows you to utilize those skills in the moment when your emotions are changing. So you see that stock sell off, you feel your stomach start to drop and you feel your little hamster wheel in your brain start to go faster. Those are clues to you. Those are clues that your emotions are changing and you can use that to be like, whoa, I need to stop and take a step back and sort of change my mindset before I make a decision about whatever is in front of me. And this has been shown to be really helpful in investing. So research out of the Wharton School of Business at the University of Pennsylvania showed that a 15 minute mindfulness meditation improved decision making by reducing sunk cost bias in investment decisions.

That research really showed that meditation, just a 15-minute write before, can really help in making a better, more informed decision about selling a stock or de-investing in some sort of asset. But, you know, not everyone's into meditation. I personally don't find it very helpful. I'm more into more physical practices of mindfulness. Things like yoga incorporate mindfulness aspects. and so does a nature savoring walk, which is a type of mindfulness meditation that takes you outside. Let's talk about the mindfulness walk for a second because we both work from home and I think it can be difficult to just say, the way I'm going to relax is to just sit in another part

of my apartment or my house and then close my eyes for 15 minutes. Literally, what is this mindfulness walk and how can it make you a better investor? A mindfulness walk is when you go and it doesn't have to take very long, anywhere from five minutes to 20 minutes, whatever you have, you can practice this mindfulness walk. Basically, you go outside and you take a walk. And anytime you see something that promotes awe in you, that makes you think like, wow, that's a really like, that's a really nice thing that I am experiencing. So you see a really pretty flower and you're like, you take a stop, you take a moment to appreciate that flower. You're like, wow, that's a great flower. Or you move on, you see a cool tree. You're like, that's a great tree. And you're

really present. You're listening to whatever sounds you have. Maybe it's dogs barking or cars humming. Or in my case, I live near cows, cows mooing. And that sort of mindfulness practice and consciously directing your attention to what's around you helps you build those resources that you need for later when you are in you know seeing something change in front of you that causes fear just knowing how your body changes in those circumstances is really helpful for making a better decision but in that moment like you can also go oh wow I sense myself tensing up because of fear maybe I'll go on a five minute mindfulness walk before I take any action and then I can reevaluate if taking an action is actually what I want to do at this time.

Any final thoughts for investors feeling scared, anxious right now? Absolutely. There's a lot going on in the world right now. And so you might be thinking, Alicia, how could I possibly feel good right now? There's just too much going on. It's scary. I'm worried about people in other parts of the world. You don't have to feel good right now if you can't. it's okay to not feel good right now. Just try to, when you're in the moment, when you're thinking about your personal finances and your financial future, just try to take yourself out of that feeling bad for a moment. Start with just less bad. And if you can't get to good, less bad is an okay place to be right now. Alicia, thank you so much.

Thank you, Ricky. That's all for today, but coming up tomorrow, we're going to talk about interest rates and we're going to do everything we can to make sure you don't fall asleep while we do. 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. Thank you.