Motley Fool Hidden Gems Investing - Bear Market Officially Arrives

Episode Date: June 13, 2022

The S&P 500 officially entered bear market territory. (0:25) Jason Moser discusses: - The pain investors (including us) are feeling - Why he recommends putting cash to work slowly - DocuSign's latest quarter meeting management's expectations - The relative attractiveness of DocuSign's stock - Coca-Cola's new partnership for Jack-Daniel's-and-Coke cocktails in a can (16:06) Shares of Meta Platforms have fallen 50% this year. Is it a value play or is the stock in the bargain bin for valid reasons? Jose Najarro and Nick Rossolillo take a bull vs. bear approach to the social network. Stocks discussed: DOCU, KO, BF.A, META, NVDA Host: Chris Hill Guests: Jason Moser, Jose Najarro, Nick Rossolillo Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGamingOntario. The bear has arrived, but so have reasons for hope. We got that, plus a debate over meta-platforms. Motley Fool Money starts now. I'm Chris Hill, and I'm joined by Motley Fool senior analyst Jason Moser. Chris Hill. Happy Monday! Chris Hill. Hey, hey! Happy Monday, indeed! It's not really a happy Monday in the stock market. We're trying to instill some positive vibes, Chris, right? Positive vibes only,

as Big Cat might say. Yeah, that would be great, but we also need to sort of recognize what's happening in the market. And what's happening, the headline is appropriate. The headline is, hey, the bear market for the S&P 500 is officially here. We've got a couple of hours before the close of the market today, so maybe it pulls out of the nosedive. But let's just, for the sake of this conversation, let's assume that it doesn't, and we're actually officially down more than 20%. Where do you want to start? Because I hear the comment of positive vibes only, and yet you and I were talking earlier today in the office, because we're both in the office today, which is great to see.

Yeah, it feels good. But we were talking earlier today about the amount of negativity, just the sentiment, all of the commentary, the analysts' notes coming out. We'll get to at least one stock that's taken a turn for the worse recently and the negative views on that one particular stock. But just in general, there is so much pessimism, Jason, and it's hard in times like this to feel good as an investor, and it's hard to feel like, okay, now I'm going to be proactive. Even though we know, historically, this might be a pretty good time to start looking for ways to deploy cash into the market, even if you're just doing it through index ETFs. Yeah, it is clearly a painful time.

I want to make sure people understand that. I started out by saying positive vibes only. course, you want to do everything you can to try to view things from a glass half-full perspective. It's really difficult though, and it's difficult for us too, for you, for me, for those of us that really we do this for a living. I'm right there with you. My portfolio is taking a big hit, just like everyone else's. Now, it is a portfolio that I've had for a long time. I've had the good fortune to be able to be introduced to Foolish Investing many, many years ago. I've built a a diversified portfolio focused on businesses, taking that business-first mentality and being an owner of those businesses. Over time, and I've said this before, the longer you hold

these well-diversified portfolios, the easier these stretches are. This isn't the first bear market that you or I have witnessed, and it won't be the last. For some out there listening right now, it is. It's very understandable that you're feeling some sense of doom, some sense of, oh my God, how is this ever going to recover? The fact of the matter is that history tells us it's recovered every time. I don't know when, we're not really in the business of market timing, but these markets do recover. It just takes time. You keep that in mind. Bear markets absolutely can be painful, but there's some interesting Ned Davis research out there that hopefully puts this into context. If you look at the last 92 years of market history,

bear markets have comprised only about 20.6% of those actual years. If you put that into percentages, stocks have been on the rise for 78% of the time. Overwhelmingly, folks who take the longer view who continue to invest, who stay invested, benefit from that. You're benefiting from the fact, the statistics tell us, the numbers tell us that overall, for the majority of the time, stocks are helping us, not hurting us. Now, that doesn't really do much for you right now in this moment. I know it's painful, but I think you made a good point there. This is a point in time where you have to start looking at some of these opportunities out and thinking, hey, you know what? Maybe this isn't a bad time to consider putting a little cash to

work slowly. I want to reiterate that because that's what I've been doing myself. Just small increments. You don't have transaction costs to worry about, so you don't have to worry about putting a certain amount of money to work in any given point in time. I think that really helps. You can take this slowly. I would encourage folks to consider just invest slowly, but this is the time where you need to start really considering putting a little bit of that money to work periodically, whether it's just through dollar-cost averaging, whether it's through your retirement plan where you have money that's contributed every paycheck. Continue doing that because the numbers tell us over the long haul, this works out, these markets do recover.

It does take time, but these are the times when opportunities do present themselves. Just one last thing on the pessimism, because I think this is one of those things that's important for us as investors to remember is that part of the reason there's so much pessimism is because the people that we pay attention to the most, and that is the executives and their teams leading the companies that we are watching, that we are part owners of the business, the Jamie Diamonds of the world are, I don't want to say he's being pessimistic, by his own admission, he's being very conservative. Part of the reason there's so much pessimism is because companies are coming out with their own guidance and they're saying, hey, look,

we're shoring up our balance sheet. We're ratcheting back our expectations. We don't want to get in a position where we're being overly optimistic because this is not a situation where anyone who does that is going to be rewarded. Yeah. I agree with taking the conservative approach. It is always worth remembering, as bad as it feels, it can always get worse. If you look at the current status right now, we're looking at year-to-date, you've got the NASDAQ down about 30%. You've got the S&P, like we noted, entering bear market territory down 20%. That's not to say it can't get worse. Again, going back to that Ned Davis research, stocks lose 36% on average during a bear market. Now, you contrast that with the fact they

gain on average 114% during a bull market. Clearly, you want to be a part of that bull market. But in order to do that, in order to be a part of that bull market, the cost of doing business, so to speak, is to endure times like these. Honestly, when you look at that gain, that average gain of 114%, you can absolutely outperform that by being opportunistic during times like these during a bear market. Something worth keeping in mind, but I do absolutely agree, taking the conservative approach, shore up your balance sheet. Cash is a great thing to have right now, and you want to put it to work slowly. There is no reason to go all-in because there is a lot going on in the world right now. There's a

lot of stuff that's really out of our control. You hear talk of inflation in the White House and the Fed, and how can they not control that? There is a lot of stuff going on in world. There are a lot of things that are just, frankly, far out of our control. There are just certain things that are just far out of our control that we don't really have any say-so in the matter. You just have to be able to endure times like these in order to reap the benefits. For folks who are feeling like they're losing a little bit of sleep at night or they just don't feel comfortable in a market like this, this is a great time to consider adding some of those diverse types of index funds or ETFs because that really does help smooth out the bumps along the

the way. I wanted to get your thoughts on DocuSign. We talked about it on Friday's show. There was a big drop in the stock on Friday after their latest earnings report. Emily Flippen, and I'll paraphrase what Emily said. I think I asked her, the stock's down 25%, is the business 25% worse? She basically said, this This report isn't all that bad, although she did talk about the billings as being a point of worry. This is on a day when the S&P 500 is entering bear market territory, so it's not like DocuSign's drop today is against the backdrop of a day where everything else is in the green. But the stock's down another 10% today. As I alluded to earlier, this is

one of those businesses that, holy cow, the pessimism seems to be really high on this business. I'm wondering what you think of it. Well, yeah, the pessimism is high. It was high not all that long ago, too. The stock had recovered a decent bit going into this earnings report. The earnings come out and the stock plummets again back to levels not seen since, I think, several months ago. You keep that on the perspective there. I am a DocuSign shareholder. I've recommended the stock here. I continue to be optimistic about it. I am not selling any of my shares. I think when you look at this quarter, management met their targets first and foremost. That's

the standard I always look to first and foremost when I go through these earnings reports, is management doing what they say they're going to do. In this case, yes, management is doing what they said they're going to do. I think the market's reaction, and rightly so, in regard to the billings number, there was a little bit of a revised billings guide. not great, but it's certainly understandable given the state of the economy. Something I also called out in the call, management noted the employee attrition. That's not a DocuSign specific problem. You've got a lot of companies out there today, particularly in this tech space. We know that a lot of these companies, they use equity, they use

stock-based compensation to bring talent in to try to build up that workforce as they continue to grow. A lot of these companies have witnessed tremendous pullbacks over the last year plus. They're giving back all those stay-at-home stock gains. DocuSign was one of those companies that really benefited from that tailwind. We knew when DocuSign was closing in on something like $300 a share, whatever it was, it just clearly was way ahead of its skis. It just didn't make a lot of sense. Now, with that said, the business continues to perform very well, but when you look at that billings guidance, you've got higher attrition within the workforce. Part of that is attributed to the great resignation that continues to play out as people

go looking for other things. But also, employees continue to pursue other options. When you bring folks in on that promise of equity and then that equity tanks, you start to see people saying, hey, you know what, maybe I'm going to go somewhere where my compensation is a little bit more guaranteed. What that ultimately does, their pipeline slows down. That's ultimately what Billings comes down to. It's a pipeline thing. It's not to say that DocuSign the business is suffering. When you look at the actual business itself, they grew revenue 25% from a year ago. It's a full-on subscription business that was up 26% from a year ago. If you look at international revenue up 43%, that makes up now 25% of the total business versus 21% just a year ago. They're

maintaining that net dollar retention rate that was 114% for the quarter, well within that range that they targeted, 112% to 119%. They continue to bring big customers in. I think the customers with greater than $300,000 in annualized contract value, that grew 32% from a year ago. They now have 886 of those customers. Then top it off with just this expanding partnership with Microsoft. I think that's a partnership I don't think you want to underestimate, given Microsoft's position in the enterprise world, well beyond just consumers. But Microsoft's position in the enterprise world is tremendous. We talk about billings with businesses like these. Billings can often be lumpy. They can be timing-related. They can be short-term noise that creates some

opportunities. I would not look at this Billings Guide as a sign that the business is in trouble. I think management is taking the sensible, more conservative approach, but they have a very good track record really of growing this business and meeting their goals. They remain confident, as they say, that they're on the path to becoming a $5 billion revenue company, which would make it better than two times as big as it is today. I continue to hold my shares regardless of this pullback. It certainly seems like for folks who are interested and don't own shares of this company yet. This is a very good business, and perhaps this is one of those opportunities that's presenting itself. Chris Hill

One more thing before I let you go. I view this as a positive, just on the surface, but also underneath the surface. Coca-Cola is teaming up with Brown Foreman, which is the spirits company behind Jack Daniels. They're going to be making a Jack and Coke cocktail in a can. It'll launch later this year in Mexico, and the plan is to roll it out to other markets, presumably either late this year or into 2023. This is the fourth alcoholic drink in Coke's portfolio. I'm tempted to ask, why wasn't this the first in their portfolio? But all kidding aside, Jason, I think this is a really interesting development, both for the Coca-Cola and Pepsis of the world, but also for the spirits companies. I think this might be the next big wave in the way that

hard seltzer was maybe two, three years ago. It feels like it could be. Spirits represents a very resilient market. We see the constant jockeying between beer and wine and spirits. There is always a little bit of an ebb and flow there, but spirits, generally speaking, are very resilient. I do like the idea of partnering up with big brands like Coca-Cola to be able not only to produce a branded drink that most everybody would be able to recognize, but really also you're just opening up this massive market opportunity, being able to get this ready-made beverage into consumers' hands. This is a very popular drink. I think that it's no accident that you look at a company like Coca-Cola and Brown Forman and see that they

they've outperformed the market year-to-date. These are resilient businesses. This is a good time for businesses like these. What we've seen, particularly with Coca-Cola, they are examining more ways to present the value proposition to consumers, to get that product into people's hands, whether it's smaller cans, bigger cans, different size packages. more step beyond that is partnerships like this, which combine two very powerful brands, makes it very easy for folks who like this drink to get it in their hands without necessarily having to make that big investment. I say big, of course, that's relative, but if you want a Jack and Coke, you got to go to the liquor store, you got to go to the grocery,

you got to do all this stuff to make it happen. This certainly simplifies it, and so I could see where that would be attractive for fans of the beverage. Jason Moser, thanks for being here. Next up, we've got a bull versus bear on Meta Platforms. Shares of the business formerly known as Facebook are down 50% this year. Has the stock been beaten up too much or is Meta Platforms in the bargain bin for perfectly valid reasons. With more, here's Ricky Mulvey. Welcome to Bear vs. Bull. The company today we have is Meta. Joining us right now, Nick Rossellillo and Jose Naharro. Good to see you both. Good to see you, Ricky. Thanks for having

me on today. Yeah, I'm pretty excited. Thank you for giving us the opportunity to kind of have this showdown. All right, let's start with the bull case. Jose, take it away. First, I want to say the first bullish case that I see for Facebook right now is just the financial strength that they have. Financially, this is a company that has great numbers, even with the strong investment push that it's doing right now. Just a quick look at numbers, for example, cash flow. Most recent cash flow from operations was about $14 billion versus a $12.2 billion a year ago. We see some strong growth there. Obviously, that cash flow doesn't really account for some of those capex that is doing this most recent quarter. But still,

free cash flow in the most recent quarter was around $8.5 billion versus $7.8 billion a year ago. So, we can see strong, healthy cash flow coming in from the business. If we take a closer look at that balance sheet, they have roughly about $14.9 billion in cash and cash equivalents and $29 billion in marketable securities. And to top it all off, they have no long-term debt at the moment. So we saw the healthy cash flow, that strong balance sheet. And right now in their most recent quarter, they did see a revenue growth of about 7%, even with numerous headwinds this company was experienced. Some of those headwinds were like the iOS changes, the e-commerce slowdown supply chain, and kind of the macro economics affecting the overall market right now. So

personally, I believe that 7% growth was still pretty impressive. If we kind of take a closer look at the second reason, I think this is that eyes continue to be on its platform. And for this being an advertisement, mainly business, that is super important. They did show that in their most recent quarter, family daily active people was 2.87 billion, and that was up 6%. Family monthly active people was 3.6 billion, and that was also up 6%. One thing I do feel we hear a lot is Facebook is pretty much one of those dead social platforms. No one uses Facebook anymore. But they did see Facebook monthly active users still saw a growth in United States and Canada. Even if it was a small number, it just continues to show the strength of their main platform, which is Facebook.

Just to give a quick number, right? 263 million monthly active users in United States and Canada this most recent quarter. That was up about 1 million compared to a quarter ago and up about 4 million compared to a year ago. So we're still seeing that growth in users and in such a developed, one of their most developed market at the moment not only in united states they also saw growth overall on facebook monthly active users both year over year and quarter over quarter the other thing on their platform they are improving their platforms to fend off competition we have seen a lot of talks of them doing things like facebook reels instagram reels they are kind of moving more into the short-term video into the long-term videos as well and kind of incorporating stories

One thing I am seeing very frequent on the news right now is they are creating new tools to kind of make those creators using the reels, the short videos, and all those stories better. So, most recently, they did announce that they're kind of adding things like audio stickers where creators can interact with their users or with their fans a little bit more. This is, at the end of the day, going to drive more content to their platform. The final reason is probably my favorite reason, and this is their investments in emerging technologies. This is a company that in the next few years is going to be investing in artificial intelligence, in data center, augmented reality, and virtual reality. So first, I just want to show how does artificial intelligence help. First and more importantly, it helps combat that changes of iOS. This is a company now, because of those iOS changes, is getting less data from its users

and is able, and due to that, it's providing probably lower metrics on its advertisement. With artificial intelligence, it can kind of improve that trend. It can improve the advertisement metrics and at the end, improve the solutions for its customers. The second thing is artificial intelligence can help improve suggestions on what users watch or see. This overall improves the kind of experience for a user, improving retention rate. The more time you're in on their platform, the more ads they're able to hit you in with,

and the more money they make. Next, data centers. How is data centers going to help? Again, this improves experience by investing in data and networking infrastructure. Who wants to go onto Facebook or Instagram or other platforms and watch a slow video? With them kind of investing in networking and data centers, it's going to make sure that, hey, when you're watching a video on their platform, it's not going to slow down. Again, when you have this kind of improved experience, you're going to also improve the

retention rate. With those retention rates, you're also going to see the growth in kind of the advertisements that are being hit. The final one I mentioned was augmented reality and virtual reality. And first, I do want to say this is a new form of advertisement. I do believe this is going to be the future of advertisement. And one thing Facebook gets a lot of, I want to say, hate for is they try to copy some of their competitors, copy TikTok. This is one of the first times that they are kind of doing their own thing with augmented reality and virtual reality. And I do believe this is going to be the new form of advertisements for some of the big players. The second one is they are designing their own hardware.

They're designing the Oculus virtual reality headsets. And this is kind of a great move, in my opinion, because it's going to prevent other players from withholding data. Like we saw, one of the biggest weaknesses for Facebook was that iPhone and how they kind of just reduced the data going to the company. if Facebook owns its hardware and it becomes adopted by the consumers, then now Facebook will also be the owner of that data and will be able to strongly advertise and, at the end of the day, increase its overall revenues. I'm going to cut you off there because we're at 5 minutes and 30 seconds. Jose Naharro with the bull case. There's going to be a lot of ads in the metaverse, aren't there? Yep, definitely. And I think Facebook

is going to be a strong player there. A little scary. Now, with the bear case, Nick Rossellillo. I hear you, Jose. Those are good reasons to be a bull on Meta or Facebook, whatever we want to call it these days. Coming from a long-term Facebook slash Meta shareholder, I've got some serious doubts about this company at this point. Let me break it down for you. User growth in their most important markets, like you mentioned, Jose, the U.S. and Canada, also Europe. They're holding on to most of those users, but growth is pretty much tapped out at this point, even in slight decline in Europe during the first quarter of 2022. And then growth internationally is slowing down as well. And then also in the first quarter of 2022,

average revenue per user actually decreased, which led to only 7% revenue growth in the quarter. That compares to 20% revenue growth in the fourth quarter of 2021. So talk about going from a high flyer to basically a post-pandemic pushover in a pretty quick period of time. It gets worse, though. For the second quarter of this year, Meta thinks revenue is going to be $28 billion to $30 billion. That compares to $29 billion last year.

So we're looking at a possible decrease in revenue year over year. Add to that the fact that expenses are going up, $87 to $92 billion in full-year expenses this year. That compares to $71 billion last year, about a 23% increase, all in a year where revenue may not even go up beyond 5%. Basically, what that means, lower profitability. Operating margins are still pretty good at over 30%, but operating margin has been all over the place the last few years, upwards of 40%, even 50% at times, and now it's in retreat. The big question is, why? What's up with Meta? Maybe it's macroeconomics, recession, basically. Maybe it's a TikTok issue. Maybe it's Apple's device activity tracking changes and transparency.

Or maybe it's just simply the spending on the metaverse, like you mentioned, Jose. But there's a potential issue as well. Meta categorizes this as reality labs. That's the segment that they report their AR and VR business under. It's on approach to about $3 billion this year in revenue. But about $10 billion in annual spending is expected to help foster this segment. We're talking about a business that's going to be, according to Mark Zuckerberg, a decade or so before we can weigh the merits of this business. It's going to be a while before we can call this a worthwhile investment. We don't even know what the metaverse is going to look like. I'm fine with that kind of experimental spending. But given Meta's lack of diversification,

I wonder if there's maybe some lower-hanging fruit somewhere else that the company could go after with that $10 billion a year in spending. Speaking of diversification, out of all the FANG stocks, minus Netflix, let's replace that with NVIDIA, replace the N in FANG with NVIDIA. Out of those companies, Meta's the least diversified as far as revenue streams. I think it might be time to decommission Meta from this exclusive group of tech giants until they can rekindle some sort of growth and prove it's a little bit more of a disruptor versus getting disrupted by some of the other tech giants. one final point jose you mentioned the balance sheet 44 billion in cash and equivalents no debt

that's fantastic but it compares to 64 billion in cash and equivalents last summer where did the cash go share repurchases about 20 billion in share repurchases in the last year great that's fantastic. However, the stock cratered in February. So, not exactly money well spent. So, basically, to sum it up, Meta is cheap. I'll put that in air quotes, but it's cheap for a pretty good reason. At the moment, this is more looking like a traditional media company with pretty flattish growth, rising expenses. It's profitable, but you can't really categorize it with the other tech giants. I'm just not so sure about this being a resilient growth story like it has been the last decade since Facebook meta's IPO. Nick Rossellillo, thank you for the bear

side. Jose Naharro, thank you for the bull side. You can decide who made the better argument at Motley Fool Money on Twitter. We'll have a poll up there. 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 Chris Hill, thanks for listening. We'll see you tomorrow.