Motley Fool Hidden Gems Investing - Another Wild Day in the Market

Episode Date: August 7, 2024

(00:21) Kirsten Guerra and Mary Long discuss: - Why SuperMicro stock is down bad after boasting nearly 150% revenue growth. - Whether Airbnb's slump is due to a company problem or a macro one. -The importance of celebrating wins, even when you’ve got losses. Then, at (15:59), Rick Munarriz and Ricky Mulvey take a look at Roku, and what needs to happen for the company to finally turn a profit. Companies mentioned: SMCI, NVDA, META, ABNB, AXON Host: Mary Long Guests: Kirsten Guerra, Rick Munarriz, Ricky Mulvey Engineers: Dan Boyd, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

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here. Great to be here on such a news-filled day. Yeah, we are certainly not at a loss for things to talk about today. But one story out of the many that I wanted to hit with you was about Supermicrocomputer because you and I last talked about this company in the spring when the stock shot up effectively overnight. And this is a company, for those that don't know, that makes server and storage systems for data centers. They specialize in what they call green computing, so that's highly efficient, energy-saving infrastructure that's customizable to the needs of different businesses. They reported earnings yesterday, and the stock dropped about 17% last I checked this morning as a result. Again, this is a company that is no

stranger to big swings in its stock price in either direction. But before we look at the reaction, I want to look at the results. So fourth quarter revenue up almost 150% year-over-year for Supermicro. Full year revenue also up over 100%. Looking ahead to the first quarter of 2025, management's guiding for revenue growth between 183% and 230%. I am not a mathematician, but here's what I know. Those are big, big percentages. Kirsten, how in the world does that happen? I'm here to confirm those are big percentages. How does it happen? Well, you start with selling a lot of rack scale server solutions, which you beautifully laid out. That is what this company's core competency is. Add to that a record high backlog. Everyone is clamoring

for super micro solutions. Then in all honesty, add in a sprinkle of delayed revenue recognition for roughly 800 million of product that couldn't be delivered until just after the reported quarter because of a component shortage. So we will see that actually show up the next quarter that they report, which is their Q1. That's why it looks like revenue is accelerating even further from the 100% to what you said, somewhere around 200% in the next quarter. Either way, wherever that revenue landed, it was going to be incredible percentages. Even without that, absolutely incredible growth numbers. Something that stuck out to me when looking at this company, there's a chart on the second page of their earnings presentation that compares Supermicro's

growth to that of the industry. It's a pretty easy chart to describe over audio. Basically, you have two lines, one which represents Supermicro's growth, the other that represents unnamed competitor's growth. The competitor's growth is effectively a flat line. Supermicro's is a flat line until it shoots way up. And that's basically the chart. I'm not going to cast dispersions about the design or the style of this chart, though I have a few. But you can say it. It's not the most beautiful chart. Yeah. It's clear that these are maybe not creatives that designed this chart. But looking at that, Kirsten, is that an accurate representation? Again,

these competitors remained unnamed. So who are Supermicro's competitors in this industry, and how does growth realistically compare? Yeah. Their main competitors are going to be other value-added resellers, the likes of Cisco, Dell, HPE, Lenovo. Basically, what all of these companies do is put together other manufacturers' parts into a whole. As you said, these full rack scale server solutions. Their competitors tend to build sort of simpler off-the-shelf configurations. And hey, there's nothing wrong with that, right? They're cheaper for the end customer. And in many cases, they get the job done. That's all that's needed. Supermicro instead builds these hyper-personalized systems that are also far more power efficient.

And so, like I said, all of these companies have done well for themselves in this field over the years. Unfortunately, as you said in the chart right now, it looks kind of like a flat line for everyone else, but they've done well. Ultimately, though, if what a customer needs is really power-intensive compute with highly flexible storage and networking, then Supermicro actually becomes far cheaper in the eyes of a competitor on a total cost of ownership basis. And so, the more energy-intensive compute that's required, the more attractive they're

going to become. So what has been driving all the recent build out of servers and data centers recently? It's AI, right? Which is, yeah, I know it is. It's an incredibly compute intensive technology and it's only growing more so. Mark Zuckerberg at Meta said recently that Lama 4, their LLM, their AI that they plan to release in 2025 will require 10 times the compute just of Llama 3 from this year. So this is incredible tailwinds, these AI tailwinds. I don't know exactly the sourcing of the chart. I can't say whether the staggering scale is exactly right, but the general sentiment is absolutely true. Their products are becoming way more attractive based on the current needs of the landscape. And if you listen to management, that will only

continue to be all the more true in the future. This is a company that did nearly $15 billion dollars in revenue for this past fiscal year. The CEO had announced previously that he expected the company to do 20 billion dollars in sales by the end of this year or early next. That once felt like a super lofty goal. Now you look at those numbers and it feels actually attainable. So the new target, according to management, is 50 billion dollars in revenue. Again, that seems like a big jump, but is that actually within reach on a reasonable timeline? It could be. It could be reasonable. Here's why. Let me take you back one year ago, August 2023, when I first started looking at this company. At that time, the trailing 12 months revenue for Supermicro was

about $7 billion. That was when CEO Charles Liang suggested that $20 billion could be achieved for them in, quote, just a couple of years. That seemed wild, but after assessing his track record, I thought it was actually believable based on his past performance in making these kinds of predictions. Fast forward to today, that prediction is very much on track. Revenue more than doubled in a year. Not only does that $20 billion no longer seem impossible, his guidance in this quarter suggests it could almost happen next quarter. That would be a timeline of 15 months versus his initial prediction of just a couple of years, which already seemed wild. For me, the takeaway from all of this has been that when Charles Liang makes a forward prediction,

investors should probably listen. He has really high visibility into demand in this area. This is a company with a major backlog. He has very close working relationships with the CEOs of companies like NVIDIA and AMD. So yeah, I think investors should listen. Guidance going forward just for the next fiscal year puts the company in the range of ending with $26 to $30 billion in revenue. So doubling again after it just doubled, again, it's a wild prediction, but he hasn't steered us wrong so far. So we've talked a lot about revenue thus far. And again, that growth has been really impressive, but it seems that while revenue has exploded for Super Micro, it hasn't gotten as efficient at turning that revenue into a profit. So what's going on

there? Why is there a disconnect? Yeah, the gross margin has slowly degraded in recent quarters. You described a chart, so I want to do the second best thing for listeners that every listener loves, and that's just recite a couple numbers at you. Their gross margin for the last five quarters has gone from 17% to 16.7%, 15.4%, 15.5%, and 11.2%. You can see there is a steady decline, but a real drop-off in the most recent quarter. This is really what spooked investors. We talked about AI tailwinds are really what's driving Supermicro here. But that's the same tailwind that's driving NVIDIA. This is maybe what's confusing to some investors is that with NVIDIA, the more they sell, the more operating leverage they're seeing. That gross margin keeps

rising. Why can't it be the same for Supermicro? For one, Supermicro will simply never have the same level of operating leverage that NVIDIA does. NVIDIA has more fixed costs, whereas Supermicro has more costs that scale with production, like the labor of actually assembling all of these hyper-customized systems. So investors should really never expect Supermicro's gross margins to explode in the same way that NVIDIA's can. But more specifically on this quarter, they did point to a change in customer and product mix, which really should be read that they're going after more hyperscalers. At that scale, they're offering greater discounts. Then they also point to initial production costs on new direct liquid cooling technology. This is something

that they expect to be a big growth driver in the future. Investment could make a lot of sense here. The CEO did say that he expects short-term margin pressure will ease and expects it to return to normal by the end of fiscal year 25. That is a year away, so definitely something to watch, but I think a lot of this could make sense for the company. Okay. So speaking of making sense, this is a stock that, as we've mentioned, has seen some wild swings over the past year. It's down about 16, 17% this morning. Last I checked on these results a year ago, it was trading at about $230. Today it's over $500, but last night it was around $600. Earlier this year, it was nearly $1,200. Can you make all that make sense for me, please?

That's a volatile stock, Mary. What do you want from me? No, it is. It's volatile. Volatility really means both up and down movements dramatically in either way. We tend to talk about it when it's down, but it does mean both directions. By March of this year, Supermicro was up 300% year-to-date. That's volatile, just as much as a drop of 16%, 17% today, this morning, something around that. I know it can be really hard to watch all of this back and forth in the stock, but the truth is, if you had invested at the beginning of the year in Supermicro and you just looked away for eight months and you looked back for the first time today, an 82% or so return is still incredible, right? So I can't make the market make sense. No. But I think if we just

keep focus on the business fundamentals, they are still a better company than they were yesterday. And Supermicro is still doing really well for itself and for investors. Supermicro is not the only stock that's susceptible to wild swings in the market that sometimes we struggle to make sense of. Another stock seeing some dramatic reactions this morning was Airbnb, also down about 16, 17% this morning. While the company reported record nights and experiences booked in the second quarter, they warned looking ahead of slower demand in the U.S. for the rest of the year. So right off the bat, Kirsten, is this an Airbnb story or is this a macro consumer story? I love this question because just yesterday I was trying to run Airbnb through

my company quality framework. And one of the questions is, is the company's success driven more by internal factors than external factors? And I was breezing through and I got to that one. I just did the thing where I stared at the screen. Like, is it? Is it? And it's tough. It certainly is susceptible to macro. But at the same time, Airbnb is a company with a really close customer feedback loop. They listen closely to their customers and their data. They constantly iterate to make those experiences better. For example, this quarter management shared that more than 80% of bookings on Airbnb are group trips. And so they added a bunch of group-focused features like shared wishlists, trip invitations, group messaging with hosts, things like that.

And so I don't think any slowness in demand is due to lack of focus from Airbnb or anything like that, anything they've done wrong. So it is a macro signal in some cases, but I also wouldn't take it as some big signal. We know nothing really about the extent beyond the line in their shareholder letter that, quote, we are seeing shorter booking lead times globally and some signs of slowing demand from U.S. guests. That's it. Shorter booking lead times really just means they have less visibility than usual. It's not a sure sign that anything dramatic is coming or it could be. We'll see. Yeah. And it's a short line that set off quite the dip. But if someone wanted to, perhaps they could make this an Airbnb story by pointing out. Are you about to make it an

Airbnb story? I'm going to try. I'm going to, I'm going to play that role for you. Okay. So revenue increased or something similar, right? To what we just discussed with super micro revenue increased year over year, not those a hundred percent gains at super micro saw, but 11%, nothing to laugh at, but net income was down 15% compared to the year prior. So where'd that money go? It's a mix of places. They lost about a percentage point on gross margin, that's direct product or platform cost. Then they lost two percentage points on operating costs. One coming from SG&A, their general and administrative costs, about half a percent to research and development. It is spread all over the place. A lot of that or some of that,

a good contributor of that is stock-based compensation increase. It rose faster this quarter or over the past year than headcount did. Some good news on that front though, at the end of 2024, that will be the last that we'll see of this more unpredictable increase in stock-based comp, because 2024 will be the last of the double-triggered RSUs that they used to issue pre-IPO. They'll all run out, they will have either invested or expired. Really, what that means going forward is just that stock-based comp should rise more in line with headcount, and it will make it a much more predictable number for investors. Hopefully, we will see a little bit less of this surprise drop in these margins, even when revenue is growing pretty solidly.

We spent most of our time this morning talking about two stocks that suffered from market reactions. But there are other companies that today saw the opposite reaction, that saw quite positive reactions on their earnings. Earlier this week, we saw a lot of fear driving things in the market. There's been a lot of up and downs just over the past few days. As we wrap up for the day, do you have any parting thoughts on how you're thinking about, in either direction, all of the drama that seems to be overwhelming markets right now? I try not to think too much in both directions. I like to just focus on the wins. I own both Airbnb and Axon that you named, and I'll probably just spend more time celebrating the Axon win today

than I will worrying on the Airbnb loss. That may sound silly. They're both there, right? But it just, it keeps me going. It keeps me invested. Keeping investing is the goal. Kirsten, thanks so much for the time. As always, lovely to chat with you. Thanks for coming on to Motley Fool Money. Thanks for having me. new from Nespresso blend wellness into your coffee routine with a coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead

don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Roku gets 120 million eyeballs on its home screen each day. And yet, even with that, the company hasn't been able to turn a profit. Up next, full contributor Rick Linares joins Ricky Moldy for a look at the streaming stock that's down nearly 90% from its all-time highs. If you think of top dogs in streaming, your mind probably goes to Netflix. But there's another company with some top dog categories, but you wouldn't know it if you look at its stock chart. Roku is a streaming platform and makes streaming devices.

It's the number one TV operating system by unit sales and hours streamed. But as the company has added households and grown revenue, its operating loss has not turned into a profit. Rick Munerez, this is one of the more controversial companies in the full universe, and I appreciate you being here to talk about it. Thank you. I'm here for the controversy. Let's get it. First, let's talk about the gem of this company, though. And that is the Roku home screen. Every day, 120 million people look at it. And for context, the average viewership of the Super Bowl was about 123 million people, according to Nielsen. So let's talk about the

home screen. What does Roku do with that? And what does it mean for its business? Yeah. So, if you think a Super Bowl three, three and a half hours long is too long, depending on the halftime show, I guess. Roku users, they spend an average of more than four hours cradling that Roku remote. So, clearly, they're on there the whole time. Most of that time isn't spent on Roku as far as Roku's experience. Basically, you click on the Netflix button, you're taken to Netflix, and you're in Netflix's world. Click the YouTube button on the app or on the remote, you're in YouTube's world. A lot of that time is spent off Roku itself, but it's there so it's sort of like let's say like maybe it's like the traffic cop of streaming or

maybe probably better is like the walmart reader if this walmart reader would follow you around for four hours as you shopped taking copious notes of everything you're doing so it gets smarter and better that when you leave and you come back turn your face to turn back and go to the main page which is basically the walmart reader which is basically the roku operating system is starting to say oh you might like this or that just like netflix does while you're streaming Netflix, except in this case, Roku is getting financially incentivized to push certain properties your way. So, yeah, it does a lot of neat things with its ability to have such a dominant chunk of a very popular pastime, which is us streaming on TV.

Roku also has sort of an Apple tax position. For example, with Netflix, what is the relationship between Roku and Netflix? Yes. So, Roku and Netflix, they go way back to the early days when Netflix wanted to start streaming, they brought in CEO Anthony Wood to help them create this box that Netflix eventually abandoned. And that led to the creation of Roku itself. But on the prospectus, when they went public at $14 a share back in 2017, it basically said, yeah, we're a free platform. We're making money from many sources. But Netflix revenue is not material, in quotes, to what they're doing. So, Netflix didn't really have to advertise. So, they weren't really giving a lot of Roku money

that way. They don't necessarily share ad revenue because they had no ads at that point on Netflix. So, really, Netflix, even though it is the largest premium streaming platform, YouTube is actually larger in the world of things as far as time spent on a platform in front of your TV. It's not a material contributor. Their money is mostly made through a lot of the others. When the Hulu or when a Peacock or when a Paramount+, when they want to get noticed, they're the ones that have to cut checks because they need to. you have to get on that home screen. And then the other company that has an interesting relationship is The Trade Desk. As more streaming companies introduce ads onto the platform,

how's that work for The Trade Desk and Roku? Yeah, it was great to see. But again, it's a great headline. The story itself, I don't think it's necessarily something that's seismic, but it is a win-win situation. Basically, back in April, The Trade Desk, obviously, the leader in programmatic advertising and a major player, if not the ultimate player in connected TV, got together with Roku. Roku has, as I mentioned earlier, that little Walmart greeter taking a little information. They have all this data. So, they basically teamed up together so that the trade desk advertisers that are on the platform can get on Roku and lean on Roku's behavioral data to basically optimize their ad campaigns on Roku. So, the two companies are

working together. Each company is getting a little smarter in the process. But again, it's a win-win, but I don't think it's something that's going to be materially, it's not going to be a financial contributor in a major way in the near term. In the long term, obviously, it basically validates Roku as a platform. They're paying for data and you get a nice headline out of it. One story, we'll see if this is a major contributor, is the Roku channel, which is the No. 3 app on Roku. When we talk about streaming, we talk a lot about paid stuff with Netflix, Disney+, that kind of thing. But the Roku channel is the No. 3 streaming app on there. It might help that the Roku channel has a relationship with Roku.

But they also are seeing streaming hours dramatically increase on that channel, up 75% year over year. What's Roku trying to do with free TV with their business? Yeah. I was one of probably many when they actually launched the Roku channel, wondering why are you doing this you have this whole agnosticism appeal that unlike uh you know let's say a google or an amazon or an apple tv plus that apple tv rather that they want you to basically go to their platform roku is here hey we're open to basically thousands of apps uh come on in we're not biased we we know what we want uh but then they started acquiring content they started picking up small content in in bits and pieces uh and in the process the roku channel

became a thing and everything from like now like from from from the olympics to live sports to live programming to live tv to actual a growing catalog of stuff they have available it's become a big player and it's actually helping in the fact that now they're less reliant on the other uh streaming services to be a contributor in their in their revenue sharing for for ads because they basically collect it all uh but more importantly it also makes roku almost the same as like a netflix or Hulu that you have to subscribe to because you want to see that specific content. Roku is the same way now. You may as well just get a Roku operating system. Or if you get an Apple TV, Apple, I have a couple of Amazon Fire TVs at home. And the first thing I do is I just, you know,

take the HDMI and boom, in goes a Roku stick. And I think you're seeing that happen that more people are realizing, hey, Roku is the way to go in that sense. It does, it's very valuable in that sense. But the Roku channel is just one piece for something of a platform that just works intuitively and seamlessly. Let's talk about the unit economics, because this is where you get the bearish knocks on Roku's business. Basically, the company makes money as you spend time on the platform. It loses money when you buy a Roku device. But now it's the No. 1 TV operating system. How is this company not making an operating profit? Yeah. Again, this is one of these things where, yeah, an actual profit... No, no. It was profitable

for a little while back in 2021 for about a year or so. And then it just started investing in content and all these things that companies do to try to scale up and platform. But you do have the case where the company, while it's not generating a profit, the losses have narrowed substantially. And more importantly, just a matter of just cash flow, it's been free cash flow positive. And I mean, nine-figure trailing 12-month free cash flow for each of the last four quarters. Adjusted EBITDA, cash from operations, all these have been positive over the last year, every single quarter. So this is a company that is getting there. It's generating money, even though on the bottom line, once you do all the accounting, it doesn't work

out that way. But it is a company that's doing better on that front. And obviously, the growth has been phenomenal. This is a company that started back in 2017 when it went public. It was 19 million subscribers. Average revenue per user for the trailing four quarters was $13. Now it's basically triple that in the fact, quadruple the users now, more than 83 million users and more than $40 a share over the last 12 months in average revenue per user. So it is expanding on that. But yeah, it does have to take a hit on the hardware, as you mentioned. But then again, so does Amazon. You know that when you're buying that 1999 Fire Stick, it's costing them a lot more to make that and ship it to you. Same thing with Google. They're also heavy subsidizers

of their hardware. That's the game you have to play. This has been a platform company. The Hardware is just their means to an end. There does seem to be a little bit of a comparison with Spotify, I think, here, where there's a lot of bearish knocks that, oh, the unit economics don't work. It's not going to be able to become profitable. Maybe it's got some levers to pull that it can change it in the future. What levers would you like to see Roku pull to do that? I'm a fan of Spotify, a major user of Spotify. But to me, I like Roku better in the sense in that Spotify isn't investing in hardware. When they have, it hasn't worked out too well.

But they do have all this music licensing royalties that they have to pay and all these things. Whereas Roku is just sitting back and collecting the checks for the most part. It's a different way the relationship is working. But I would like to see them do the fact that just increased average revenue per user. Obviously, advertising has not been as great. The recovery post-pandemic has not been as buoyant as I think most of the bulls, Roku bulls, would like to see. And also, again, I hated the Roku channel first, but now I like it. And as long as they're making smart financial moves to acquire content, I'm all for it. And I think it just needs to keep

growing that way, expanding itself. And I think as more services, just you mentioned Spotify, they increased their prices a couple months ago, this summer, actually. And you've had other services like Max and stuff that are increasing prices. As services increase prices, they need to get noticed more, and that's going to be better for Roku. CEO Anthony Wood, founder of the company, has 50% voting power, more than 50% voting power, excuse me. So if you're a retail investor, you are very much riding with Anthony Wood. What do investors who don't know a lot about Anthony Wood, what should they know about him as a leader? Yes. So if you have, let's say, a Hall of Fame for streaming TV plays, he'd be a first ballot shoo-in. And again, before Roku, he created a

company called Replay TV, which is not going to be known by most listeners, but they're the company that invented the DVR, the digital video recorder. TiVo, which came out at the same time, took all the thunder and became the DVR company. But there certainly were a few lawsuits here and there for Replay TV to claim it. But again, Anthony Wood is widely viewed as the creator of the DVR. Roku is Japanese for the number six. This is something that I think a lot of people know. I know we say it a lot. But the thing is, he's been at this company for so long. And again, as I mentioned earlier, Roku started out of just a Netflix relationship where he was there to create a box, oh, Netflix doesn't want to go that route. And he's like, well, wait, I can do this on my

own. And poof, it was released from Netflix and created Roku, and since then, done great. So I do not think that Wood is actually Googling how to translate the number seven in Japanese. I think he's here to stay, but clearly a visionary. And despite the fact that the company's not profitable right now and the stock is definitely well below its 2021 high, he's definitely the right person for the job and clearly doing a lot of things to make it happen. Yeah. So I own some Roku personally. I know one of your largest positions, you post your largest holdings on X. And Roku's not there because of its performance. So, Rick, why do you have so much conviction in this company? Yeah. So, again, this is a stack that, while it's done terribly over the last,

I mean, it doubled, more than doubled last year. And it's still trading higher than it was at the beginning of last year. But it's gone down quite a bit from now, down almost 85%, 90% from its peak in 2021. So clearly a lot of pain. But the stock, again, it has, from going public at 14, it's more than tripled in seven years, which is great if you got in then or maybe somewhere else. But obviously, most people are feeling a lot of pain. But to me, this is a company that even though the subscriber base has grown fourfold, their average revenue per user has more than tripled. So actually increasing faster, stack both of those two things, and you have a company that's growing basically 12-fold, the revenue that it was back then. And the stock is really

only trading three times as high. That, to me, seems like an imbalance, and I think there's value there. I think Roku's trading cheap fundamentally on a trailing revenue basis historically, and based on the fact that it's improving its bottom line with every passing quarter, it's getting better at that. And again, to me, the engagement is really all that matters. The moment that I see that Netflix, I'm sorry, that Roku subscribers are starting to decline or usage is starting to decline, my bullish thesis may change. But right now, over the past year, in a time when people are saying, oh, people can go out and have fun, no one wants to be home streaming, the number of accounts have grown by 14%, to 83.6 million over the past year.

The numbers of hours streamed is basically 10 billion a month, up 20% over the past year. So, with usage passing the growth, it means that, again, people are spending more than four hours on average a day on the platform. I don't want to bet against Roku, even if it seems like the bulls do not have much of an argument these days with the stock being hit so hard. Four hours a day, that's basically a smartphone. Rick Manieris, appreciate you being here. Thanks for your time and your insight. Thank 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 Mary Long. Thanks

for listening. We'll see you tomorrow.