Motley Fool Hidden Gems Investing - Consumer Spending, E-Commerce, and the Business of Lodging

Episode Date: February 16, 2022

(0:20) Bill Mann discusses: - Retail sales growing nearly 4% in January - Shopify's strong growth in 2021 being followed by slightly less growth in 2022 - Why shares of Shopify will never look cheap - The company's new partnership with JD.com - Airbnb's record revenue last year - Hotel stocks hitting new all-time highs - The wisdom of Ron Gross (17:30) Olivia Zitkus and Keith Speights discuss a new wave of biosimilar drugs and the challenges (and opportunities for investors) they present. What are you doing February 18th? Join us at the "Investing Essentials 2022 & Beyond" event by clicking here: http://2022.fool.com Stocks discussed: SHOP, JD, ABNB, MAR, HLT, H, ABBV, AMGN, VTRS Host: Chris Hill Guests: Bill Mann, Olivia Zitkus, Keith Speights Producer: Ricky Mulvey Engineer: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. If you're looking for one more light at the end of the pandemic tunnel, this is the show for you. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst Bill Mann. Thanks for being here. Bill Mann. Hey, Chris, how are you today? I'm doing all right. I want to get to Shopify, I want to get to Airbnb, but let's start with the big macro. Retail sales grew nearly 4% in January. I guess for all the hand-wringing over inflation, people appear to still be buying stuff. Yeah. When you take out cars, which is a big thing to take out, it was a 3.3% gain in retail. Yeah, those cash registers are really, really ringing. Now, it's important to

keep in mind that this number is not inflation-adjusted. We're buying maybe less stuff, but we're spending more for it. Home furnishings were up a lot. Motor vehicles and parts were up a lot. The only thing that was really, really down, which makes some sense to me, was food and beverage, like going out to restaurants. I don't know if you've heard, but where I am, Omicron was kind of a big thing in December and January. It was hot here. Not that surprising, but a really, really surprising overall spending number from fellow retailers. You have to assume that the food and beverage number is going to go up as mandates for masks get lifted in major cities as they're starting to. Does the home furnishing numbers surprise you?

It surprised me only because I feel like there was a lot of spending on home furnishings in the first year of the pandemic. The fact that we got this pop in January, I don't know, I guess it speaks to maybe more people moving and more people just saying, yeah, I'm ready for a new sofa. Yeah, I can try and sound smart about a number that I wouldn't have predicted, but at least partially that has to do with the fact that there is pent-up demand in the space. I mean, if we recall, we've had all sorts of supply chain issues, and one area that's been hit really, really hard is both the home builders, things like PVC and trusses and things like that have been unavailable. But then also, the home furnishing segment as well has seen a huge amount

of pushback and delays. And so, yeah, when I saw that number and I thought it through, I was like, yeah, that actually makes sense to me that that would still be well above what it was a year ago, because there's a coiled spring still that comes in the form of the delays and the supply chain issues that have impacted so many parts of our economy. Shopify wrapped up its fiscal year with 57% growth, which is impressive. And then Shopify said growth for this year is going to be slower, and investors did not like that at all. No, they were not pleased about that. I mean, as evidenced by the pretty rapid drop in the stock, it was down 17% when I checked earlier today. Look, it was a good quarter for Shopify.

Shopify has a beautiful slide. Shopify now accounts for more than 10% of all e-commerce in the United States of America. 10%. It's going to be really hard for them to keep growing at 50% plus, given that they are such a large component of the market. Again, this is a company that is now up about 170% over where it was from the depth of the pandemic from a share price perspective. Shopify is one of these companies that we have to remember, the market is really struggling trying to figure out how much this company is worth. How good is what Shopify is doing in terms of bringing money down the road? It's still trading at 30 and 40 times sales, which is an historically enormous number. It was a

great number for Shopify. It has to keep continuing growing. I really don't think that people should have been surprised that their prognostication for 2022 is lower. The thing that I believe to be true about Shopify is that it has a really, really long growth ramp, and that's going to pay off over time. Is this one of those stocks that is absolutely, no matter what the price is, never going to look cheap? Because on a valuation basis, seems like one of those businesses that is just always going to look expensive. Yeah, I think that's the case. When you've got 41% on a massive number, 41% revenue growth, that's a company that I think that you could extrapolate out 41% growth for a really long

period of time, but it will break whatever spreadsheet that you have. So, it's really, really hard to put a value on what these top-flight growth companies are. So, unfortunately, part of the game of holding a company like Shopify is just being used to the fact that occasionally some of the moves in the stock are not going to make sense at all. I'm wondering if, because it's never going to look cheap, if you think about investors as being an addressable market, and I guess you could say this about a lot of different businesses. There are some businesses just because of what they do, there are people who say, well, I don't support gambling, so I'm never going to own a

casino stock or something like that. But I'm wondering if the addressable market for Shopify as a stock is constrained because there are always going to be people who want to see a cheaper stock. And there are always going to be financial advisors telling people, you don't want to buy that. It's such an expensive stock. That's a beautiful Amazon in 2003. I mean, that's exactly what was being talked about. And it's always a little disingenuous, Chris, to pull Amazon out of your back pocket, because Amazon was a special situation, and it'll probably never happen exactly like that again. But that is exactly the conversations that were happening around Amazon about 10,000% ago in terms

of growth. Now, Shopify is a $100 billion plus market cap company, does not have the growth ramp in front of it in terms of share price that Amazon had at the time. But that doesn't mean that a company that will continue to grow, I mean, 41% growth on the base that they had, that's astounding. And they've just opened up a deal with JD.com, so Shopify now has access to 550 million Chinese consumers. There are plenty of markets. I mean, you say that like it's a big number. Yeah, that's true. You know, whenever you talk about China, it sounds like all those numbers, they sound like cheat codes. You put this in and suddenly you've got 63 extra lives or whatever. 550 million people, I am told, is a lot. It's a market that they've barely

tapped until now. There's plenty of growth for Shopify, but I can just simply guarantee as a stock that is now down by 60% over the last three months, this share price is going to continue to visit a lot of different places over time. That's just part of the game you're signing up for when you own a company like Shopify. Last thing and then we'll move on, because I think that there are always going to be people who will lump JD.com and Shopify in the same big bucket of, well, these are e-commerce companies. What does Shopify do that JD doesn't do that makes JD.com say, we want to partner up with you? I think it's the access. It's actually, they don't do that different. But Shopify has a massive

stable of merchants that are already on their platform. Now, for JD.com, they could say, should we try and set up our own platform and try and attract them? Or can we just simply take what we have, which is an unbelievable infrastructure in China, and offer to split the rewards with the Shopify. What they don't have is simply that critical mass, and they're getting there quick. It makes perfect, perfect sense. I expect huge things from that partnership going forward. Airbnb wrapped up the fourth quarter by reporting record revenue for all of 2021, and they said they expect bookings in the first quarter to exceed pre-pandemic levels for the first time. I get that this is overall a down day in the market, so maybe what we're seeing in terms

of Airbnb's rise in the share price today be a little bit muted. But this wasn't a perfect quarter, but holy cow, this is a really good quarter. It was a holy cow quarter. Exactly. What do you suppose the opposite of pouring one out is? Remember back in March of 2020, we were pouring one out for Airbnb. It was the company that was maybe most impacted by the immediate shutdown at the beginning of the pandemic. Now, they've had their best Q4 in history in terms of revenues and income. They've done so really without the benefit of Asia. Asia is still basically locked tight. It's the area that's still most affected by Omicron, but then also by the policies in place that

are much more restrictive than we see here in the U.S. and in Europe. So, super low cancellation rates. They had longer stays. I think you're seeing really for Airbnb, and this is a company that I have wrongly been skeptical of, but the fact that they are now getting much more 50% longer stays than they had a year ago. The way in which these properties are being used is very different than before the pandemic. I think that's a trend that you have to assume is going to to continue. Yeah. When you go even further in terms of their longer stays, stays of four weeks or longer made up almost a quarter of their bookings in this most recent report. It's amazing to me that, look, you made the point

about where they were in March of 2020. There were a lot of companies, pretty much every company had to figure out on the fly, what are we going to do? In the case of Airbnb, part of what they decided to do involved laying off some staff, really pulling back on their marketing. As they look to grow from here, I do wonder if, in particular, the marketing spend is a lever they're going to be, not necessarily reluctant to pull, but if they just put up these results, I guess I would hate to be trying to make the case that they really need to spend a lot more on marketing. It's one of those adjustments that the business made because they had to make it. Now that they've made it and seen what they can achieve without

spending that money, I bet that they're going to be maybe a little rightfully stingy with that in the future. Perhaps. One of the things that I'm not sure that many people have really talked about that much, was that one of the things that has grown really quickly for them, which is their nights and experiences segment. They basically took the fact that they have the knowledge of where people were going, and they knew from the types of establishments that they were staying in, what types of experiences that they could serve them. In so doing, they have crushed TripAdvisor, for example. Without even thinking about it, they've taken the data that they had in place. Where are you

going? What type of property are you staying in? How long are you going to stay there? They're matching that up with experiences. That's not even marketing. That's basic processing of artificial intelligence, of being able to make guesses based on a really unbelievably deep set of features of data that they already have. It's concierge service, as we used to think about it back in the day. But as you said, it's powered by AI, and it's probably one of the more underrated parts of their business. Do you make anything of the fact that Marriott, Hilton, and Hyatt, shares of all three are hitting all-time highs today? I don't own shares of any of those companies,

but I look at that, I look at what Airbnb is doing, it seems like every day we're getting another announcement of an opening up, Disney coming out and saying, I think it's in their Orlando property that masks are going to be optional now. As we say down south, y'all come. It does give me, again, I don't own shares of those three, but I look at that and I feel more optimistic about how the world can be opening up again. Okay. So, Chris, if you had to guess, and you probably guessed the answer based on the premise of the question, which stock has outperformed from March 1st, 2020, Marriott

or Zoom? Marriott. Marriott has outperformed. I remember talking with Ron Gross at some point in March of 2020. Marriott was one of the companies that we talked about. I can't remember if Ron said this on the show or if this was just in our discussion afterwards, But basically, he said, this company, when I look at it from top to bottom, when I think about the strength of the brand, their rewards, all that sort of thing, this seems like an unbelievable screaming value at where it's trading right now. Because I'm an idiot, I did not buy shares. All goes to show that when Ron Gross speaks, you should definitely, definitely pay attention.

Bill Mann, great talking to you. Thanks for being here. Thanks, Chris. Competition comes in different forms. A business like Airbnb has competitors like hotel chains. But for a pharmaceutical business, competition isn't just other pharmaceutical companies, it's also generic drug makers who are ready to move once a drug's patent protection ends. For more on a new wave of biosimilar drugs entering the market, here's Olivia Zitkus. Hi, Fools. I'm on with Keith Spites, a healthcare analyst here at The Motley Fool. Keith,

thanks for coming on with me. Great to be with you again, Olivia. So today I want to talk about an important and kind of under the radar component of the competitive landscape in pharma and biotech, biosimilars. And the easiest way to start exploring the current pertinence of biosims, as they're known, is with the story of an impending patent cliff. So, AbbVie's biologic Humira, a medicine approved to treat symptoms of various inflammatory conditions, is the top drug in the industry by sales. Its 2021 revenue reached $20.7 billion. In 2023, the drug faces an important patent cliff in the United States, where the vast majority of its sales come from. Now, under a patent settlement, pharma company Amgen must

wait until January 31st, 2023, to launch its biosimilar Amgevita in the U.S. It's already been released abroad. Now, Pfizer's definition of a biosimilar product is a biologic product that is approved based on demonstrating that it is highly similar to an already FDA-approved biologic, known as a reference product. Biosimilars have no clinically meaningful differences in terms of safety and effectiveness from the reference product, and they have different regulatory pathways than normal drugs that we talk about. In addition to its agreement with Amgen, AbbVie has at least eight other Humira biosimilar settlements with companies like Boehringer Ingelheim, Vietris, Samsung Bioepis, Mylan, and Novartis. Now, Keith, if I'm an AbbVie

investor, I am panicking. The best-selling drug in the world is about to lose its patent protection and other biosimilars are coming onto the market in less than a year. So, is Humira going to be completely swallowed up by these competitors? And how much does the onslaught of these biosims really matter to AbbVie? Well, first, I can understand the temptation to panic, but I'll say that I'm personally an AbbVie shareholder, and I'm not panicking at all, and I don't think other investors need to either. For one thing, AbbVie's valuation already reflects the coming sales decline for Humira, and sales for Humira will decline for sure. This stock currently trades at around 10 times expected earnings. That's cheaper than most other pharma stocks, and it

looks like an absolute bargain compared to the S&P 500, which trades at a forward earnings multiple of over 20 right now. The other thing, Olivia, is that AbbVie has been preparing for this for years. Even before it spun off from AbbVie Labs back in 2013, AbbVie and AbbVie knew that the day would come when Humira would face biosimilar competition, and the company has been getting ready for this day. It's made strategic acquisitions along the way, notably including the buyout of Allergan in 2020, and that helped make it less dependent on Humira. Also, the company's built up a really strong pipeline. AbbVie's successors to Humira are two drugs, Renvoke and Skyrizzy. These two drugs are expected to together make $15 billion in sales in 2025.

That will go a long way toward offsetting the declining sales for Humira. Also, don't expect Humira's sales to just evaporate overnight. For example, the drug made $6.3 billion in international sales in 2018, and it began to face biosimilars in Europe at the end of that year. But in 2021, Humira's international sales totaled $3.4 billion. That's still a lot of money. Sure, sales fell nearly 50%, but if Humira experiences a similar result in the U.S., it could still make more than $8 billion, say, per year in the U.S. market. That's a lot of money. The bottom line is that AbbVie will definitely feel some pain from biosimilar competition in the U.S. market for Humira, but the company should be in good shape to weather this storm.

All right. So, if you're an investor, that might calm you for a brief moment before thinking to yourself, biosimilars clearly pose some risk to drugs already on the market. Should I also be worried about generics? Let's take a step back, Keith. Can you briefly explain the difference between generics and biosimilars and talk about the problems that generics might create for a reference product. Sure. Biosimilars and generics are alike in that they're intended to offer less expensive versions, I'll put versions in quotes, of brand drugs. Biosimilars are similar to biologic drugs. Those are drugs that are made from living organisms, for example, antibodies. Generics are chemically identical to their

original reference products. And biosimilars and generics can only enter the market when the patents for their reference products expire or the makers of the original products reach an agreement with makers of biosimilars or generics for an alternative launch day. But now to your question about whether investors should worry about generics, the answer is a definite maybe. Generic competition can present a big problem for a company that hasn't adequately prepared for steep loss in revenue. In the past, we've seen companies such as Pfizer go through what are called patent cliffs, where multiple blockbuster drugs lose patent exclusivity over a short period of time. And when drug makers don't have other new products in position to

offset the revenue declines from these losses of exclusivity, their stocks can fall quite a bit. All right. So, it sounds like pipeline preparation is definitely key to surviving the loss of a patent or a patent cliff. Now, Amgen, Boehringer Ingelheim, Vietris, et cetera, are all coming for AbbVie in 2023 with their biosimilars to Humira. It seems to me like producing biosimilars could be a really lucrative business. Are there any companies focusing closely on biosimilars that you think could be worthwhile, foolish investments? Yeah, Olivia, I think that one of the companies you mentioned is worthy of consideration by Foolish investors, and that company is Vietris. Vietris was formed in 2020 by the merger of Pfizer's Upjohn unit with Milan. The company

focuses on marketing biosimilars, generics, and also older brand drugs such as Lipitor, Lyrica, and Viagra. I recently wrote that Vietris is my favorite value stock right now, and I wrote that for several reasons. This stock trades at only four times expected earnings and one times trailing 12-month sales. That is dirt cheap. But Beatrice has performed well so far this year, even as the overall market has declined. The company called 2021 a trough year, but it expects to deliver stronger growth going forward. As you mentioned, the launch of its biosimilar to Humira in 2023 is on the way. That should help quite a bit. Beatrice also expects to soon launch a biosimilar to another blockbuster drug, an eye disease drug called ILEA, pending

regulatory approval, and that should help boost its sales as well. And then finally, income investors should really like Beatrice. The company has a dividend yield of around 3.1%. So, this is a combination of value and dividend that I think a lot of foolish investors would like. I think that's a great pick as well, Keith. Thanks so much for talking Humira, generics, biosims with me, and sorting all of that out for our Fools. This has been a lot of fun. That's all for today, but coming up tomorrow, Jason Moser and Matt Frankel have a deep dive on one of the most disruptive financial companies of this century. 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.