Motley Fool Hidden Gems Investing - Consumer Stocks Spotlight: Etsy, Roblox, and Reddit

Starting point is 00:00:00 What do we commerce earnings say about the economy? You're listening to Motley Fool Money. All right. Good morning, fools. I'm your host, Tim Byers. With me, two of my Rule Breakers teammates, Alicia Alfieri and Tom King. Alicia, Tom, how are you feeling? Are you suitably caffeinated? Very good, thank you. Good to be here. Mostly caffeinated. Mostly caffeinated, okay. Well, you have a young baby, so you need more caffeine than most. We're going to hit an e-commerce earnings spotlight today. Last week, Fed Chairman Jerome Powell decided to hold back on lowering interest rates, citing mildly concerning inflation data. And yet, U.S. economic activity appears to be good with GDP up a reported 3%. So, shouldn't that be a boon

Starting point is 00:01:01 for companies driven by consumer spending? We're going to tackle two, and to me, it looks like a mixed bag. I'm going to start us off with Etsy, Tom. I'm going to come to you in a second here. But I show Etsy reporting a 4% increase in revenue year over year. EPS, though, earnings per share, fell 39%, and gross merchandise sales dropped 5%. That doesn't sound that great. It seems to be that Etsy's ability to raise prices on sellers via higher take rates is really the only thing that's fueling growth here. So, am I reading that wrong? Is that true? And if I am reading it right, is that sustainable? So, where are you on Etsy? Yeah. So, there were two drivers of Etsy's revenue in the second quarter of 2025, that was pretty much a flat revenue from the

Starting point is 00:01:53 commission it takes on each sale on the platform, but about a 15% increase in advertising revenue. And gross merchandise sales, the value of things sold on the platform was around about flat. So basically what the data is saying to me is sellers on Etsy spent a lot more money on advertising but it didn't which drove revenue for etsy but it didn't drive an increase in sales on the platform that feels like like if it's sellers have to benefit here like this has to be a mutually beneficial network so then is it fair to say if i've heard you correctly at the moment it's not as mutually beneficial as it as it should be in an ideal situation no that's that's a very accurate statement um gms is flat it's pretty much been it declined pretty it had a boom it boomed in 2020

Starting point is 00:02:47 and 2021 as did many businesses and it's been pretty much flat declining and flat since about 2022 onwards over that time frame etsy has been steadily increasing its commission rate its take rate what it charges for each sale at the same time that sales have been going down for sellers so it is not a sustainable situation and i'm not sure how it how it ends but right now it can't carry on the way it's going all right well watch this with caution fools because it's it's a uh it's not a doom loop but it may be cresting into you know a roller coaster ride that we don't like all that much but let's talk about one that is not you know maybe uh maybe a a little bit more interesting, maybe a more fun roller coaster ride, Alicia. I don't know.

Starting point is 00:03:40 But Roblox earnings, once again, seeing that the business design means that realized revenue and profits doesn't reflect the actual strength of the platform. I mean, that's certainly what it looks like. And there were some strong numbers underlying the initial, what looked like weakness on the top line. Just quickly on this, revenue growth and adjusted earnings per share came up short of expectations. But these numbers were really jarring to me, Alicia. Bookings jumped by more than 50%. So, this is business that's done in Roblox. Monthly paying users, up 42%. Hours of engagement improved 58%. So, is Roblox's popularity peaking, streaking? Where is it here? Well, I think Roblox's popularity is continuing to grow. So, as you said,

Starting point is 00:04:30 revenues and profits don't tell the whole story. We need things like engagement metrics, the numbers you touched on, number of users, hours spent on the platform, and bookings data. That really speaks to the value of the network and the health of the platform. So, the latest quarter showed Roblox growing its relevance across the world. So, bookings, hours spent, daily average users, all of these metrics were up across all world regions. But We do have to be careful here. So there were five very popular viral experiences that Roblox has that has over 10 million daily active users. And four of those are pretty new. They've launched just within the last 12 months. But Roblox is more than those games. So excluding those top

Starting point is 00:05:20 experiences, hours of engagement still grew 47% year over year and over half of the growth in spending in Roblox experiences came from the games or experiences that weren't in that top 10. So, again, that growth should continue, but we have to be careful not to expect the growth from those viral hits to continue since interest tends to wane over time with things that are viral. Well, I mean, don't tell the acquirers that because one of those top games, what is it, you know, a kid that made a Roblox game in like three months and then sold it for something like $3 million. I don't remember if it was private equity or just a VC firm, whatever it was. But it was quite a deal here. So, it does look like the top of the funnel is generating

Starting point is 00:06:13 pretty massive interest. Yeah. And I'm glad that you brought that up. Viral games can really help to attract new users and, also important, new developers to the platform. And if those users are sticky, if those developers create games that resonate, it'll help to continue to grow Roblox's relevance and its network value over time. We would like to think so. All right. Up next, is Reddit a rule breaker in the making? We're going to debate it. You're listening to motley fool money 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

Starting point is 00:07:07 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 our coffee plus on Nespresso.com. Now that we're back here, let's talk about consumers who don an alter ego and take on social news and discussion platform, Reddit, which recently reported earnings. So we're going to talk about whether or not this is a rule breaker in the making, and we're each going to give a take on this. But before we do, let me tee this up with some data. Revenue grew 78% year over year in the most recent quarter. The company reported its biggest ever earnings beat as a public company, Reddit Answers, which is something that they provide as a way to

Starting point is 00:07:58 draw from the expertise of the community to answer significant questions. That was up 6X in weekly users and daily active users reached 110.4 million. That was up 21%. So, I'll start us here. There is some amount of evidence that Reddit is scaling and getting more out of the network as it grows. I found this fascinating. Reddit is a cash generator on a simple FCF basis, free cash flow, that means. And it's produced $3.7 million in free cash flow, even after you subtract out all the stock-based compensation. Now, there isn't enough cash there on an organic basis to cover their acquisitions, and Reddit does make acquisitions. But still, this is impressive. I mean, they are scaling. They look like they are scaling inevitably

Starting point is 00:08:55 towards consistent free cash generation. But Alicia, tell me, I mean, am I wrong? Is this a rule breaker in the making? I don't think that you're wrong, but I do have a question. But you think I might be misguided? No, I would never say that, Tim. I do have a question I've been noodling on, and perhaps we could all noodle on it together. So I am a big fan of Reddit, especially as a new parent, there is a wealth of human experience that you could find there. And there are different channels, mom it, dad it, all kinds of subreddits. And I do think that in order to grow over the next five years, Reddit needs to hold on to this key competitive advantage of its trove of human

Starting point is 00:09:39 experience data. Now, in their earnings call, Reddit talked about how AI can answer many questions, but some questions require a human answer and a range of human answers. But it also talked about human experience data being incredibly useful to another of the users of its platform, which are LLMs. So I wonder, will selling access to its human experience data essentially give its competitive advantage away to LLMs? And if not, can AI and LLMs become a weak point in Reddit's network if their net contribution is negative for Reddit, right? Since they're benefiting from the human experience data, seeking to kind of replace Reddit in some ways by getting that data and using it in their own learning. And if they ever post anything to Reddit, it would likely diminish the

Starting point is 00:10:42 value of the human experience data that is so important for Reddit. I mean, maybe. But as somebody who's worked on some code that is trying to hit the Reddit API, can I just tell you how expensive it is to get the Reddit data through the API? So I would say Reddit is not undervaluing that data. And if LLMs want to play and people who are using those LLMs want to play, they're going to pay and it's not going to be cheap. So, I mean, it's an interesting question though, but Tom, where do you land on this? I would be very, very wary of Reddit. Okay. Say more. It makes almost all of its money from advertising. So that means that when people go onto Reddit.com, they see a banner ad on the side or a highlighted link, a sponsored link or

Starting point is 00:11:33 something. That's where Reddit makes all its money. There is a very big question right now about how much people are going to be visiting individual websites when they can get their answers from an LLM. So that is a big unknown for me right now. If Reddit is not getting as much traffic to its website as it did historically, that is going to hurt Reddit badly. And add to this fact that it is trading at 20 times revenue. And these are the kind of multiples we haven't seen since 2020, 2021. And that did not end well. So I would be very cautious of Reddit. Yeah. I mean, I'm glad you brought up the valuation. The valuation is arguably extreme and the hurdles that it has to get past. I mean, in order for Reddit to really blossom

Starting point is 00:12:30 and deliver returns for investors. If you're a Rule Breaker investor and you're really looking at this one, you have to be looking out 10 years and seeing an extraordinary expansion of that free cash flow margin. And you have to hold steady, not only in that advertising business, but you're probably going to have to come up with new ways to generate revenue. So that API that's feeding the LLMs, that's going to have to be profitable and persistently so. And you may even need a third revenue stream that we can't even see yet. So yeah, this is speculative. I think we can agree. So is it a rule breaker? I think the consensus here is like, yeah, maybe. Maybe. We'll take a look at it. But I don't think it's as cut and dried as it might be. I'm not sure it

Starting point is 00:13:22 has all six traits. All right, Fools, up next, a little bit of business history, a new segment. Please stay tuned. You're listening to Motley Fool Money. All right, in the spirit of education on these podcasts and something we used to do on a show you may have seen on Fool Live called This Week in Tech, we are bringing you now This Week in Business History. So for each of you, I know you've seen the notes, so you don't have to act surprised here, but I wonder if you are surprised by when this was. Today is August 4th. If we go back to August 4th, 1930, that is the opening of the first King Cullen supermarket in Queens, New York. Quick side note, I remember as a kid before we left New York, I remember going with my mom on shopping trips to

Starting point is 00:14:14 the King Cullen supermarket. I know this name. I remember it from the early 1970s. Here's my question for each of you, and I'll kick it off to you first, Tom. Are you surprised that supermarkets have been around now going on 100 years? If you'd asked me, I would have thought it began later. Yes, I am surprised it began as early as 1950. Alicia, what do you think? I'm not terribly surprised. But I do wonder how they were different, how their footprint was different than they are today. I'm sure they were much smaller and carried a much less variety of goods. Well, so it's interesting you mentioned this. So the Smithsonian Institution says it's America's first supermarket, and it was revolutionary at the

Starting point is 00:15:07 time. It introduced the concept of a self-service grocery store. Up to this point, you would go to a grocer and the grocer would take your list of what you want and then go get everything out of the back room, out of the stock room and bring it to you. Yeah, Alicia, go ahead. I feel like that should come back. I love the convenience of that. Isn't that almost like Instacart? It is. That's Right. This is the thing. The Rule Breaker's lesson here is that it is very often that an existing industry that used to have rules that were broken end up getting rules broken again, and sometimes we go back to a variation of the old rules. This is exactly right. Instacart is sort of like this. Interestingly, also, this idea of small format, lots of things pre-designed,

Starting point is 00:16:05 very designed really to break really the price barrier. And this is what's interesting. Very low prices was what King Cullen was known for. This sounds like another recent rule breaker, Tom, which I would say is BBB Foods. Not necessarily a big warehouse, reasonable form factor, really small, designed for really low prices, and you get in and you get your stuff fast and you get out. This is interesting to me. Here's my question for you, Tom, and then I'll kick it back to you, Alicia. This does seem ripe for yet another paradigm shift. Have I made you more interested, less interested, or you are as interested as you always were about looking at rule breakers in this industry? I mean, it certainly is a very big industry,

Starting point is 00:17:01 close to a trillion dollars in sales in 2024. It is an industry that hasn't changed very much for quite a long time um you know as you said the first supermarket introduced in 1930 now that is how we mostly get our groceries from walmart is for example one of the biggest grocers in the united states i suppose somebody could figure out a way to do it better but um it is it is a difficult industry to enter because i mean the margins are very thin they're very big well prepared competitors costco walmart i'm thinking of in particular um it's a hard thing to shop for groceries sometimes the thing you want is not there or the advocate you like your bananas a certain ripeness other people think there should be a different ripeness all those sort of factors

Starting point is 00:17:50 make it pretty hard to to get this right and disrupt but i'm certainly interested to hear ideas from people that try to try to do it differently i think amazon fresh was quite an interesting idea in the whole grocery space. And that, I don't think, has been particularly successful. No, it wasn't that good an idea. And why do you say that, Tim? Because I think they tried to automate far too much of it and stripped all of the humanity out of it. And I think that just didn't work. But let's end on this. As of 2024, it's a $1 trillion market. And we're going to get a better read on how this is doing when Walmart reports earnings on August 15th. So stay tuned for that. Kroger will report in September. So will there be disruption here? We're going to

Starting point is 00:18:41 have to look at the numbers in the coming month. Let's end with a prediction because we have Walmart earnings coming up on August 15th, and we have Kroger earnings coming next month in September. So, here's my question. Quick one. Yes or no? Which one, or actually, which is the bigger outperformer, Walmart or Kroger, over the next 10 years? Give me a rough estimate of what you think, and I'll start us off here. I won't just leave you on the hook. I'll go with you first after I give my prediction here. I'm going to say Walmart, and I'm going to say at least 10% annualized over the next 10 years, I think Kroger is going to struggle to get over 7%. Leisha, what do you think? I mean, Tim, you came in and stole my answer right out of my head.

Starting point is 00:19:31 Oh, no. You didn't copy my answer. There's no rules here. I would copy your answer, but I would also say that as Tom was talking, I was thinking about this idea of disruptors in this space. And I thought, there are some cases in which a player that has been in the market for a while can disrupt the market and disrupt itself. And I think if any company has the likelihood of doing it, it would be Walmart. So, I agree. Walmart disrupting itself. Okay. I like it. Tom? I always try to take a different answer to what my co-hosts have given. But honestly, that's exactly what I was going to say, Tim. Walmart and around about 10%.

Starting point is 00:20:12 Consensus. Yeah. So, that's my answer. I like it. Consensus. We got it. We're going to leave it there. Fools, as always, people on the program may have interests 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. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Fools, thank you for tuning in to Motley Fool Money. For my guests, Alicia Alfieri, Tom King,

Starting point is 00:20:51 for our engineer, Dan Boyd, I'm Tim Byers. Thanks for tuning in. Fool on, everyone.

Motley Fool Hidden Gems Investing - Consumer Stocks Spotlight: Etsy, Roblox, and Reddit

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