Motley Fool Hidden Gems Investing - An E-Commerce Trifecta

Episode Date: August 3, 2023

Shopify pushes merchant services, Etsy tries to find its footing, and MercadoLibre continues to dazzle. (00:20) Tim Beyers and Deidre Woollard discuss: - If Shopify is actually a fintech now. - The imbalance in Etsy’s platform. - How MercadoLibre’s services are taking over Latin America. (22:06)  Jason Moser and Matt Frankel break down some of the stocks that help them sleep well at night. Companies discussed: PINS, O, BRK, PSA, MKC, HD, ETSY, MELI, SHOP Host: Deidre Woollard Guests: Tim Beyers, Matt Frankel, Jason Moser Producer: Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGaming Ontario. Is e-commerce still booming? It depends on which company you ask. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard, here with Motley Fool analyst, Tim Byers. How are you today, Tim? Fully caffeinated. Ready to go, Deidre. Awesome. I'm ready to go, too. I'm excited to dive into e-commerce. This is maybe like a little amuse-bouche, a little appetizer for Amazon, because we had earnings from Shopify, by Etsy and MercadoLibre. All e-commerce, but all in different places. I want to talk about e-commerce in general for just a quick sec. This is the summer of travel. We've talked

about it before. It isn't the summer of spending a lot on consumer goods. I always see when everything goes one way, it's going to go back the other way. What are you seeing? That's probably right. I love that you called it the amuse-bouche of earnings season. I guess it is the teaser, isn't it? Overall, we are long past the revenge travel season and the revenge spending season because we were locked up due to the pandemic. Things look a little bit more moderated. What I think we're seeing is a collection of results that demonstrate that consumers are maybe getting, they haven't stopped spending, but maybe they're a little more discerning. Yeah, I think that's right. Well, let's start with some earnings. I feel like I'm

one of the rare fools who doesn't own Shopify. Sometimes I've been glad of that. I'm not sure I'm as glad of it today. Maybe you can give me some color on that, but revenue was up 31%. They had an operating loss. That's expected. They've had some layoffs, they were selling the logistics business. Is this company on track? That's a really interesting question, but I think we probably are at a moment where we have to admit that Shopify may not be what we think it is. We think it's an e-commerce company. We think of it as a company that benefits from a lot of merchants selling stuff. You know what it is, Deidre? Shopify is a payments company. Can we just have a moment and just admit that Shopify is a payments company? That's what

it is. That's what's driving it. The reason I say this is because gross merchandise volume was up 17% to $55 billion. But every single time, the gross payments volume as a percentage of that GMV goes up and it keeps going up. So that gross payments volume, so of that $55 billion, $31.7 is gross payments, meaning that Shopify now gets 58% of its gross merchandise volume from payments. And that was up from 53% over the prior year. This is going to keep marching on, Deidre. I'm not saying that it's going to be all payments. It's not all plastics, not all ball bearings. It's not all payments. It's not going to be all payments. But what is going to happen is that march of payments being a greater proportion of GMV does seem to be on the

way. So when Shopify talks to me or Harley Finkelstein starts talking to me about AI and AI-enabled experiences and suite of AI-enabled features for merchants to make the experience better and Shopify magic, ooh, you know, that sounds really great. And it's probably a lot of arm-waving. I have no doubt that there's a lot of stuff that's getting injected into the Shopify platform. But let's be clear here, the big things that are going on, let me just name a few things. Of the things that were mentioned, here are other things towards the end of the number of things that were rolled out. Shopify credit, ShopPay installments, ShopCash, ShopBillPay. That's four things of all of these new things. So they had Shopify Magic, Sidekick, Collective,

marketplace and checkout. Almost half of the new things or enhanced things have 100% due to and are tied to Shopify helping you pay merchants and getting a little slice of that money flowing through the platform. Is that bad? No, but let's just admit that Shopify is different and changing so we thought it was going to be a logistics business. It isn't. I think Shopify is morphing silently and maybe intelligently into a platform that is enabling payments for a lot of merchants around the world. So does that mean we should be thinking about Shopify as a fintech company? I think it does. I think it absolutely does. I think you should be thinking of Shopify as a fintech company that is generating interesting margins, that is investing in

generating margin. And so when we think about this, certainly the gross merchandise volume makes sense. But really what we want to be looking at is what percentage of Shopify merchants are adopting things like shop pay or the shop point of sale system or the installment plans or shop cash or even the credit card. All of this stuff is important to think about. What Shopify really wants is to be embedded in the transactions. It's not a bad thing if it is possible that they add enough value that they increase the amount of the take that they get from transactions, then you don't have to increase transaction volume at the same rate. But if you do increase transaction volume at the same rate while you're increasing the take by virtue of being involved in

the payment, so much of the payment, then you can really compound value. So it's an interesting way to think about Shopify. It's slightly different. It's not completely off-brand. It's slightly different. And maybe it's really, really interesting. Could accelerate growth. I don't know. But I keep seeing this growth in gross payments volume, Deidre. And I start thinking, you know what? Let's just call this thing a fintech. Can we just do that? Why don't we just do that. I think we could just do that. I think the interesting thing, like you said, you got a little skeptical about the Shopify magic, which I totally get. I mean, we're shoving AI into everything. But is there potential there with the sidekick? Everything is positioned as an

assistant now. We've got the co-pilot with Microsoft. We've got the sidekick with Shopify, which is supposed to talk to merchants. It sounds like you're cynical on that. Well, I don't think I'm cynical. I think I want you to prove it to me. If you can prove it to me, then I'm good. But as with all things, just because you layer an algorithm on top of something doesn't mean that it automatically provides value. The value provided of the algorithm is going to have a lot to do with the quality of the dataset and how much that algorithm understands the context of the data that it's chomping through. Yeah, maybe it's awesome, but I'm at the prove it stage. I wouldn't call myself cynical, I would call myself skeptical because a co-pilot

that steers you in the wrong direction isn't much of a co-pilot. That's a bad front seat driver. Indeed it is. Where I'm skeptical with AI, I think is with Etsy. Moving on to them a little bit, because they talked about it too, and I'm just like, I don't know. Etsy worries me a little bit. They feel a little bit like Pinterest to me, where they have something great, but they're not finding the opportunity on it. So buyers and sellers were up overall, but sales were flat and down in the main Etsy marketplace. They're selling off ELO 7, which they bought. One of the things I pay attention to with Etsy is the reactivated buyers. They always talk about it every quarter. It was up 21%, but I don't know. It just feels to me like they're not connecting

with customers aside from sort of like, oh, I need a gift. What do you think about Etsy right now? Well, I guess it depends on how you define customers. But because it's a two-sided marketplace, it's enabling buyers to connect with sellers. And I think what's interesting here is that gross merchandise sales was down 0.6% year over year, which is not great. But I think the big problem that I see here, Deidre, is that total marketplace revenue, I think total revenue was up 7.5%. Marketplace revenue is up 3.1%. But then services revenue, so like marketplace revenue, enabling that two-sided marketplace, connecting buyers with sellers and really getting something out of transaction volume and value. Then services revenue, essentially what Etsy delivers to sellers

and what they get, it was up 20.8%. What this feels like to me, Deidre, and I may be wrong about this, but Etsy is really focusing on trying to improve the buying experience because they're not getting enough buyers. In the meantime, sellers are paying a lot for the Etsy experience and not getting enough from it. Another way to look at this is active sellers were up 12.3% in the quarter year-over-year, active buyers up 2.5%. If you're Etsy for the health of the business and to make the ecosystem stronger and more vibrant and honestly way more attractive for a seller who really depends on this platform, you want that equation to be reversed. You want the active buyers to be growing faster than the active sellers. You don't want to be in an increasingly

crowded marketplace where you are trying to fight for the eyeballs of buyers who might spend at your shop, but that does seem to be what's happening. Yeah. This one worries me for that reason, because I think about other two-sided marketplaces like an Airbnb or an Uber, And it seems to me that it's very easy for them, once they get more hosts, more sellers, whatever, they're able to moderate the demand in really powerful ways. I don't see that with Etsy. I see them trying. I see plenty of the ads, but I don't see it necessarily paying off the way I would have

hoped. Well, and they launched things like, so they have something they call Make an Offer. So this is apparently a feature in the U.S. It allows vintage shop owners the option to just get an offer from a buyer. And so they can drive some sales and maybe build a relationship. So that sounds not like auctions, but more like, you know, a buyer happens upon using the Etsy search engine. They happen upon a vintage deal. They say, I'd like to make an offer on this. and then maybe they strike up a distinct relationship. That feels like a good thing, but boy, they need a lot more than this, Deidre. On the other hand, I wonder whether or not Etsy

is going to be materially motivated to make a lot of changes here because they do have a fairly strong balance sheet. Over the course of time, Etsy has been able to generate plenty of cash flow. Now, they do get quite a bit of contribution from stock-based compensation, but on a pure basis, cash from operations minus your capital expenditures, they've been a cash generator for a really long period of time. Do they need to make a bunch of changes to their platform in order to make this far more attractive to the sellers? I mean, I think they do. I think they should want to do that. I feel like they're saying they want to do that. From an economic perspective here, Deidre, they don't have a huge incentive because they are making a lot of money

and they're going to continue to make a lot of money off the sellers. It would be better if the balance between making money off of buyers and making money off of sellers was a little bit more even, I think it's becoming disaggregated. And the fact that it's becoming disaggregated is a bit of a worry. Yeah. Yeah, I think so. And it may just not be as big of a platform as we originally thought. I mean, the idea that buyers are not showing up at the rate that they were showing up does speak to that. It does create an incentive, not that there are a bunch of alternatives to Etsy right now, because I really don't think there are, but it does create an economic incentive for somebody to come along and say, I wonder if we could

do this better. If that happens and there is something that strikes, it puts Etsy in a pretty vulnerable position. So yeah, I'm not actively worried about this business, but I would not ... Let me put it this way, I think some water has been drained out of the moat. Yeah, I think that's fair. Well, let's move on to a company that I think the water is still definitely in the moat. For sure. MercadoLibre, that's Latin America's e-commerce giant, and yeah, giant. Really strong e-commerce numbers, net revenue of 57%, total payment volume, and we talked about payment volume with Shopify, but total payment

volume here up 97%, gross merchandise volume, not great at Etsy, but here up 47%. These are just some incredible numbers. This company just seems to be growing by leaps and bounds. What should we be worried about? That's a great question because the numbers are so good, you want to look at what's underlying those numbers. I think MercadoLibre, we talked about Shopify having to just admit that it's a fintech, needs to go to group and say, hi, my name is Shopify and I'm a fintech. MercadoLibre is unapologetically a fintech, Unapologetically so. Mercado Pago is an incredible payments platform that is becoming increasingly relevant all the time, particularly in economies where MercadoLibre does most of its

business, particularly Brazil and Argentina, which have from time to time some stability issues, particularly currency issues. Mercado Pago is sort of a flight to safety for some, I mean, it appears to be at least, for some residents in those countries to be like, I'm keeping my money here because this is the thing that sticks around and is stable and is ever-present in my life. It's like a companion. I do think this thing has become absolutely essential. So what should you worry about. If you're so dependent upon this and MercadoLibre is all in on this, then they do create exposure for themselves in how much money is lent out. How much are they dependent upon credit card receivables, loan receivables? How well are those loans paying back to MercadoLibre?

So over the course of the last couple of quarters, they'd seen a big jump in the number of loans that were, I would call them, in dangerous delinquency territory. Now, I asked Bill about this on the morning show today, and he said that's basically just the cost of doing business in Latin America. But I would say this is one where you want to look for the quarterly filing, the 10Q when it comes out and take a look at the loan profile and see if MercadoLibre has been able to do some good work to decrease the percentage of loans that are maybe 180 days, 120 days, 91 or more days overdue. It would be better to see at least some moderation in the growth of that loan profile. Because overall, the credit card receivables, as long as they keep working on this

strategy, those loans are going to grow, but you would like to see the portfolio maybe moderate a little bit. You don't want to see a ballooning of really delinquent loans. We're not going to see that until we see the 10-Q, Deidre, so that's a little bit of a worry. But overall, I would say just looking at the numbers here. If you were to take a look at the balance sheet, credit card receivables, for example, $2.8 billion in June of 2023, $2.9 billion in December, down a little bit. loans receivable, $2 billion versus $1.7 billion. Those are not alarming numbers. On longer-term assets, loans receivable about $1.1 billion from $1 billion. This does not look like it's overly inflated or they're taking on a lot of new debt or debt risk. I'm at least somewhat

cautiously optimistic looking at the balance sheet, but I got to see the 10-Q. Makes sense. We've had an e-commerce company that is a fintech. We've had an e-commerce company that is, we don't know. It's still basically not 100%, but mostly an e-commerce company. Then we've got MercadoLibre, which is a fintech and an e-commerce company and other stuff now. It's doing some other things. They just announced that Mercado Play, which is video on demand, they're in credit cards, as you mentioned. They're doing life insurance and warranties and all sorts of interesting stuff in Mexico. Are they doing a little too much? Is there any concern that they're spreading out? Or are they like Amazon, they can kind of go in

any direction? I think two things can be true at the same time. I think they can be doing too much and they might be stretching themselves a little bit too thin. Having said that, when you look at the cash flow numbers here, but this is a company that does generate quite, yeah, here we go. As I'm taking a look at them now, $2.3 billion in cash from operations in the six months ended in June. And some of that is due to just good, solid working capital. So are they stretching themselves too thin? Maybe. But I'll make this point, Deidre. They've become so essential to people in and around Latin America for payments, for so many things. They're just this constant companion. And you and I were talking before we came on air here

about, does MercadoLibre become kind of the super app of Latin America? And I think the odds are, yeah, we are trending in that direction. So if you are going to make that your strategy, then these sorts of things, done right, you don't want to overcommit your capital, But done right, it makes sense to go down this path because, boy, there are so many residents around Latin America that are increasingly dependent upon MercadoLibre. Why wouldn't you want to capture as much attention as you possibly could to keep them captive to this super app that you're building? Yeah, absolutely. Well, thanks for talking through this with me today, Tim. Thanks, Deidre.

For every action, there is an inverse and opposite reaction. For every high-risk stock in your portfolio, there should be others that help you sleep at night. Jason Moser and Matt Frankel discuss how to balance your portfolio with the boring stocks that can bring sweet dreams to investors. Hey, Matt, it's great as always to sit down with you, so to speak. today, we want to talk a little bit about balance in investing. Matt, you remember that quote from the Karate Kid back in the day, right? Balance is key. Balance, good. Karate, good. Everything good. Balance, bad. Better pack up, go home. Right? Yeah, you remember that, right? I do. Balance is definitely important, and it's a lesson that too many investors

don't learn the easy way. Yeah, well, yeah, exactly. Sometimes you got to learn the hard way. And I mean, as investors, I mean, this balance we're talking about today really pertains, I think, to sort of the level of risk in your investments. But it's something always to keep in mind that in investing, I mean, ultimately, balance really does matter. But let's talk about exactly what we mean by balance, because this really boils down to allocation, I think, more than anything. When we look at our portfolio and the stocks that we own and the funds that we own, there are some ideas that are more risky than others. Striking a balance between the two, I think we both would argue is key to good long-term investing. Let's just kick

this off. First question, when you think about balance in your portfolio, why is it important to balance those exciting or maybe riskier stocks with some of the more boring ones? The past couple of years are actually the perfect example of why that's important. When you think of what's happened with some of the tech stocks that went parabolic during the 2021 boom and then collapsed afterwards, a few stocks in my portfolio I call my heart attack stocks, that if I end up having a heart attack, I'm probably going to blame it on them. Now, I'm going to say it wasn't the cholesterol, it was these stocks I invested in that did it. It is important to have your portfolio should let you sleep soundly at night. The exciting stocks

grab all the headlines, and for good reason, because their businesses could legitimately 5X or 10X or even more over the next few years. But they're exciting for the same reason that it's exciting to go into a casino in some respects, because there's a chance that things are are going to go really well and a chance that things are going to go really bad. And you have to keep that in mind. These aren't some of my most volatile stocks, but just to name some that I really like watching, Pinterest is one of the stocks that's pretty big in my portfolio. Over the past three years, compared to its current price, Pinterest has been down as much as 65% or up as much as 220%. Those aren't numbers that really let you sleep soundly at night.

you're sitting there awake wondering what my stock's going to do next. There are other stocks that have moved even more. Lemonade is one that we've talked about on the show that has been way down from its current price or has been about eight times its current price in the past three years at various times. It's important to not rely on stocks like that for your entire investment portfolio, especially because so many of us are investing for long-term goals like retirement and putting our kids through college. You have a daughter starting college. Can you imagine if college funds were invested in stocks that could triple or be cut in a third within a year? I don't think many people would buy into that. That would be, I think, a very

short-lived investment product. It wouldn't work, and for good reasons. It's important to balance that with stocks that, as Warren Buffett has said, that the stock market could close for 10 years and then reopen and you'd be fine knowing that those companies were good and the value would be just fine. I like that sleep at night litmus test. It's a pretty easy one. If you're not able to sleep at night because you're worried about your portfolio, then that's the clearest sign of any that maybe you need to do something. Maybe you need to rebalance or rethink your strategy. A lot of that boils down to where you are in your investing journey, and we'll get to that point a little bit later here in the show. A lot of this,

to me, really ties back to time. I think a lot of people, they just want to get rich quick. That's sort of a normal human desire. They just want to get rich quick. Most people want that. Now, we know that that really isn't the way it works. That's one of the things we try to do is educate people on how it does not work that way and how it can work over the long haul. But typically, people want to get rich quick, so they gravitate towards those exciting ideas and you can overdo it there. But there is this whole world of quote-unquote boring stocks that can deliver big returns. It just requires longer periods of time. You need to have that longer-term outlook. What are a few examples that stand out to you of those boring investments,

those boring winners, so to speak? What are some of those examples that stand out to you and why? Yeah, I have a few good ones to talk about. First of all, before we got on this show, I looked, and about two-thirds of my portfolio is in what I would call boring stocks. Nice. My three biggest boring stock positions that I have are, No. 1 is Realty Income. It's a real estate investment trust I've owned forever and ever. I mentioned those big swings that stocks like Pinterest have had over the past few years. Realty Income, the maximum it's been down from its current price is about 28% in the past three years. The maximum it's been up is about 33%. I wouldn't call it a tight

range, but not those big swings that are going to make you have a heart attack over what the stock's doing. Over the long term, it's handily outperformed the stock market. It's delivered about 15% annualized returns since it went public in 1994. It's been, I think, a 20X for long-term investors so far, or even more by the latest calculations. Stocks like that are great. Berkshire Hathaway is another one. I mentioned Warren Buffett already, so that should be a dead giveaway. Another one, talk about a boring business, public storage is one that I wanted to mention. Ticker is PSA on that one. We all know those big orange storage facilities. I'm sure you have some of those near where you are, Jason.

Oh, there are a couple. There are just a few of those around. But what people don't realize is that since 1990, that stock has been a 300X performer or thereabouts for long-term investors. I don't have the exact long-term returns in front of me right now. But what's more boring than just a warehouse-like business where you store your stuff? It's handily outperforming the market because of good management and a good business. Those are the kinds of stocks that I would own if you told me I had to own them for 10 years, no matter what. Those are the kind of stocks that I own. That's the test on what I would consider a boring business. A stock that if I told you that under no circumstances, you could sell it within

the next decade, would you own it? Yeah, that's a good way to look at it. A couple that stand out to me, I am getting a little bit more boring as I get a little bit older, just getting closer to retirement at some point. I don't intend to retire anytime soon, but I do start thinking about that a little bit as I get older. I want to build out some of that dividend exposure and really reap the benefits of that down the line. I look at companies like McCormick, I've talked about that one all the time. A long track record, a very storied history as a company, but a long track record and honestly probably a presence in every kitchen in this entire country, not to mention the global business that it's built. Then another one is Home Depot.

you look at just the position that housing maintains in our economy. Home Depot is going to always, I think, play a role, and Lowe's as well. I think home improvement is just generally speaking a very attractive long-term market, and Home Depot is certainly one way to play that. Those stand out as a couple of boring ideas that I own that I'm happy to own pretty much indefinitely unless something tells me down the line that there's a fundamental problem with one of these businesses that is cause for concern. But typically, with boring businesses, you're not going to run into those problems all that often. We talk about individual stocks a lot, but there is also another way to get boring exposure. Some boring exposure that

can pay off down the road is in ETFs, exchange-traded funds. As a quick reminder for our listeners, just give them a quick 15, 20-second lowdown. What is an ETF? How does an ETF differ from a mutual fund? Then also, why can ETFs be a key part of the foundation for, ultimately, is an exciting portfolio? Yeah. ETFs and mutual funds are both pools of investor money that are used to invest for a certain objective. In other words, it's not practical for you and I to buy all 500 stocks in the S&P 500. An ETF or mutual fund that invests S&P 500 will pool investors' money, buy the 500 stocks and give each investor a cut of it. The big difference is that an ETF trades on the public markets just like any other stock.

They're a lot easier to buy. There's no real minimum investment requirements. If your broker doesn't allow fractional shares, the minimums give the cost of one share. It's a great way to just add broad exposure that you don't even need to think about. I mentioned some boring stocks earlier, but I still need to do my research on them. A boring business isn't always a good investment. Boring does not mean no-brainer. Right. You still have to do your homework. ETFs, eliminate that. You can buy an S&P 500 index fund, know your money's going to be fine. It could be a great backbone to a portfolio, especially if you lean toward the exciting stocks and really, that's your passion. You want to research the next big thing and things like that.

ETFs can really have a great way to add exposure to just the broad stock market into your portfolio, so you know that part of your money long-term is going to be just fine. You don't really have to worry as much about what your exciting stocks do. But like you said, still maintain an age appropriate mix. I'm in my 40s, so I invest less in exciting stocks than I used to. I invest in different ways than I used to, like in IRAs instead of brokerage accounts, because I know I'm not going to use the money anytime soon. But yeah, age-appropriate investment strategy is definitely key. I guess wrapping this up, how does this all tie back to allocation for you? We're all at different stages in our lives,

we have different investing goals and such. You noted, as we get older, our investing strategies or investing behaviors change and evolve. What would you say to investors regarding investment allocation in regard to exciting versus boring? The great thing about exciting stocks is they're very adaptable in your portfolio. In other words, you generally buy them with a relatively short time horizon. A stock like lemonade, for example, that I mentioned earlier, either the business is going to start doing well in the next five years or so or it's not. It's not like a company like Berkshire Hathaway where my investment thesis is going to take 30, 40 years to really play out. It's easier to naturally

reduce your exposure to these speculative stocks over time. But as far as allocation goes, like I said, my portfolio is roughly two-thirds in what I would consider boring businesses. boring, but good businesses. I want to be very clear on that. The other third is in exciting businesses. I plan to reduce that gradually as I get older. With exciting businesses, you don't have to invest in exciting stocks if you don't want to. There are ETFs for that, too, if you don't want to do all the homework. It's important to mention. If you have the time, knowledge, and desire to research exciting stocks, go for it. If not, there are tech-focused ETFs and things like that that might be more your cup of tea.

Well, Matt, I think that's about all the time we have this week. It's a great conversation as always. Thanks so much for being here. Yeah, thanks for having me. We'll have to do it again soon. 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 Deidre Willard, Thanks for listening. We'll see you tomorrow.