Motley Fool Hidden Gems Investing - Customers for Life?

Episode Date: June 24, 2024

ResMed has had the market on sleep apnea cornered for a while, but new weight-loss drugs might be creeping in. We look at what could change based on recent studies and some other businesses that have established lifelong customers. (00:21) Bill Barker and Dylan Lewis discuss: - How weight-loss drugs like Eli Lilly’s Zepbound might be coming for ResMed and the sleep apnea market. - RXO take a bigger piece of the brokered transportation market, scooping up Coyote Logistics from UPS. - Target and Shopify linking up for a win-win partnership. (13:02) Tim Beyers and Ricky Mulvey discuss the value of lifetime-customer relationships, why they’re huge for the likes of Apple, and Costco, and one lesser-known name that may have one too. Companies discussed: LLY, NVO, RMD, SPOT, AAPL, SNOW Host: Dylan Lewis Guests: Tim Beyers, Tim Beyers, Ricky Mulvey Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got Shopify striking a valuable partnership, a look at businesses that create customers for life. We're going to kick off today talking about one of the topics for 2024. Bill, ever since the weight management drugs hit the market, there's been speculation about how they may affect other industries. We're getting one hint at what that might look like today. Shares of medtech company ResMed down 10% after studies of Eli Lilly's Zetbound showed the results may help reduce the severity of sleep apnea. ResMed is in the business of sleep apnea, so this is obviously something they are going to be paying close attention to, Bill. In the grand scheme of things that may impact other industries, where does this one weigh for you?

Where it weighs for ResMed is pretty heavily, potentially. It's early to say, but down 10% off this news, good news, this is always something you should look at primarily, even as a ResMed shareholder, is this is good. If there's another treatment for the thing that ResMed is treating, I can remember ResMed being a great beneficiary of the problems that its main competitor in this space, Philips, had with its sleep apnea machine. Major recall, It's taken years to sort out. Philips is now basically out of the U.S. market on its primary machine. But still, these two, Philips and ResMed, are the duopoly, basically, for sleep apnea machines. And ResMed spent years being the beneficiary of Philips' recall. And really,

it was tough watching that to think that ResMed should take any great cheer in it. You don't want be the beneficiary of somebody's producing machinery that is harming people, which was the problem with Philips. Today, whether you're a shareholder and you're down 10%, that's a small part of the story for what is good news for most people that this GLP-1 weight loss drugs are going to have potentially benefits that go well beyond simple weight loss. I think we need to apply the usual caveats here. This is based on a study. It is early days. There's still a lot of things that need to be figured out. Hard to say that this is going to take effect immediately. One of the big reasons for that, and why it may not move money too quickly, is we have

seen generally, Bill, that when it comes to these drugs, there need to be other applications for insurers like Medicare to be willing to cover them. Otherwise, they continue to be prohibitively expensive for most users, about $1,000 a month with no insurance for these drugs. I think a CPAP machine is about $1,000 to $2,000. We would need to see the medical confirmation here for it to be affordable for many users. Yeah. You're right to point out that this is one data set, and there will be more necessary both for the reimbursement to change and for masses of people to move from something that, in their case, is working for them to something that involves taking on a new drug, a new

medication that has potential side effects. Some of those potential side effects might be good if the sleep apnea is a product of being overweight in some way. So, the early days, the stock is showing, it's been very strong in the wake of all these problems for its main competitor, Philips. This is one of the days when they've got to confront that there is a competitor that is not Philips that is potentially going to take a significant chunk of business away. But it'll take years to see. To your point there, Bill, my dad uses a CPAP machine. One of the things I'm curious about as we start looking at some

of the follow-on effects of these drugs being more available and being used for different things is behaviorally how people go from one medical intervention to another. My dad refers to his CPAP machine as his little buddy. It's next to him when he is sleeping. It gets him ready to sleep. He can't sleep without it. In this case, it would be a big jump for some users that are used to a CPAP machine to switching over to a drug intervention instead. I do kind of wonder how many people are going to be willing to make that jump, especially if it comes with a monthly prescription cost, even if it's subsidized through insurance. Some. Some will. Not all. We're certainly not qualified to give an exact percentage to the

second decimal point on how many those will be, but it won't be your dad. So, less than 100%, we think. I think that's fair. And I think what this also solidifies for me is just continued good news for Eli Lilly and continued good news for Novo Nordisk, because people have been speculating about the potential applications. This is just further evidence that there's going to be more research and probably a lot more money flowing into this space. Yes. There's going to be, additionally, given all the attention and all the adoption that appears to be going on, more research on the side effects and the long-term as that plays out, because it's too early to know what the long-term effects of any of these things

might turn out to be. But the press and the applications and the attention, everything but the cost seems to be very much in favor of many people who will benefit from them. All right. It's Monday, and we've got a deal to break down. UPS announcing it is selling its Coyote Logistics unit to RxO. Bill, the market was clearly excited about at least the RxO side of this one. Shares up over 20% today on the news. Why are investors so pumped about this? Yeah, right. It's not all that often that you see the acquirer move up like this. One of the reasons is that RxO's history prior to having been spun off of XPO, the company which spun off into GXO, XPO, and RxO, was a serial acquirer of companies. RxO has not been in that business

since the spinoff, basically, but now is back in the business. That was a very, very lucrative business for shareholders of XPO. RXO, making this acquisition, becomes the third largest truck brokerage operator in the country. That's good news. That's going to increase efficiencies. They're pointing to about $25 million in efficiencies. It appears to be a good price. This is a company that UPS bought in 2015 for, I think it was $1.6 billion. I think $1.8 billion, maybe. Yeah. $1.6 billion, $1.8 billion. It's selling today for $1 billion. We don't know what they've spun off and what they've spent or earned during that time. But basically, RxO seems to be getting a good price, at least compared to what UPS

spent on it. It's a known operator, Coyote. I think it is immediately accretive to earnings, and it just on an earnings per share basis is justified that way, but also pointing to maybe this is the beginning of RxO becoming a big player in the space in a way that it hasn't been over the last couple of years. RxO did use the magic word bill, $25 million in cost synergies anticipated annually. On the UPS side of this, not always great to sell something at a discount to what you bought it for. That is a business that can stomach an $800 million loss without too much of a trouble. They'll continue to have Coyote providing services through 2030.

Is there anything else to make of this on the UPS side? No. When they talk about focusing on the core business and putting a positive spin on it, they don't mention what they spent and what they're getting today. They're hoping that people aren't focused on that too much. UPS shareholders aren't likely to look at this and think very much of it. It's not going to move the needle on UPS's business. It does move the needle on RxO's business. So, I think that that is net-net creating shareholder rewards today. Hopefully, RxO knows how to wring some cost efficiencies out of it and more profits out of it than UPS seemed to be able to do.

Alright. Rounding us out with the news roundup today, Target is looking to boost its marketplace offering and Target+. It's partnering up with Shopify. News out that companies that work with Shopify will be eligible to join Target Plus and the company's third-party marketplace soon. I look at this one, Bill, and I say, it seems like a win for Target and for Shopify here. This seems like a win-win. Target is trying to nudge sales growth anywhere they can find it. And Shopify, the benefits to sellers just keep getting stronger. I would agree. I think that Target, it makes sense. They've been more of an omnichannel sort of operation, and this pushes them more in that direction. As they point out in the earnings

announcement, this is going to be sort of a curated list of operators that can get onto the Target Plus website. This, I think, expands their potential fashion offerings in a way that differentiates them from the main competition. I think it is potentially more than a little good for Target. The market's treating it as a little good, 2% move for Target, which is a big company, 2% is meaningful. There might be more there, but time will tell. I could understand the understated response a little, because this marketplace concept is a nascent space for Target. They do not break out the results individually, but they do lump them into that other revenue bucket. They throw some other stuff in there as well.

That whole category is less than 2% of revenue for the last quarter. This is not a big needle mover for the business right now. But I think it is something that, if you're a shareholder of Target or if it's a business that you're rooting for, you'd probably like to see them make some inroads on and get some serious traction with that offering. Yeah. They've been moving in that direction. Rather than taking their money and using it to build more big stores and increase footprint and store count, they're doing more things along this line. It's been effective for them. I think that it's not a big expense, so it leaves them with plenty of capital to pursue other things.

It's always nice to see two businesses that we love just partnering up, being friends out there having some fun together. Yeah. Some of these Shopify merchants are going to be not just moving into the Target Plus online space, but into the stores as well, if they're sufficiently successful and it makes sense. It's a way for them to get not only more eyeballs online, but hands on the merchandise in the stores. I agree, it's a good thing for everybody involved, at least as it's spun out today, and see what it amounts to and whether it ever gets broken out in a way that investors can actually put a real value on. Sounds like something we could put a call out for some boots on the ground reporting back once those items hit these

store shelves, Bill. Bill Barker, always appreciate you being here. Thanks for joining me today. Thanks for having me. you just found out that your sales team is at risk of missing quota don't panic just ask rippling ai since it's built on your real-time people and business data rippling ai can pull metrics from rippling and salesforce into a meeting ready dashboard showing quota attainment headcount plan and monthly revenue to quota by region in seconds you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted. When you have critical business questions that need answers, don't just file a ticket and wait weeks for an

outdated report. Describe what you need and have Rippling AI build it instantly from your live people and business data. Whether it's a dashboard with detailed charts or automated workflows with the right triggers, conditions, and approvals. Ready to rule your business? Head to rippling.ai slash fool to get the only AI built to give you full visibility and take complex actions across your entire organization. That's R-I-P-P-L-I-N-G dot A-I slash F-O-O-L. Sign up for exclusive access today. Rippling dot A-I slash fool. Coming up, are there any businesses where you're a lifelong customer? Maybe Apple, Costco, Spotify. Tim Byers caught up with Ricky Mulvey to discuss the value of lifetime customer relationships and a data analytics

company that might be getting them. So Tim, we were actually chatting in the office about this. And you know, when there's a, when there's a Tim rant going on in the office, there's, there's nothing like getting it live. I know, I know you're getting it through the podcast, but live there's just, there's a different energy to it. And one of the things that you're talking about and I wanted to bring it to the show is just basically the importance of lifetime customers for a business and in investing, finding the companies that do that particularly well. We've got some responses from listeners, but I think the easy examples would be like a Costco or a Disney. And before we get to the investing side, are there any companies that you consider

yourself to be a lifetime customer of? I would say Apple. I have an emotional connection to Apple going back to the earliest days when my uncle first got us an Apple II computer for our house. And I was hooked to the Apple brand from a very early age and when I got my first Mac. And that is back in the days when the Mac was very early. I didn't get the 1984 Mac, but I did get, I believe it was a 1987 or 88 Mac. It wasn't the original box. It might have been the LC. I don't remember exactly. But I have an emotional connection to Apple. And so, I consider myself emotionally connected to that brand, which is, for Apple, boy, that is great for them, because their cost to acquire me as a customer is essentially zero moving forward.

They have to do nothing to acquire me as a customer. How about that? I know you're going to get into the question of the economics here, but that's one of the beautiful economics of lifetime customers. Well, Tim White would also agree with you, your co-host on this week in tech. He said the Apple iPhone, because switching is too hard and current alternatives are not better. our colleague mary long would also agree with apple basically saying she can't imagine not buying a mac as her next computer or an iphone as her next iphone etc you mentioned the emotional

connection but with apple they make it uh they make it a little tough to switch out of their ecosystem once you're on apple there's some tremendous switching costs i would say to going to anything else whether it's um having all your photos and messages in one place or just knowing how the key functions work if you're on a Mac and then going back to Windows. Some other examples too that I can bounce off of you to see what you think for lifetime customer relationships. These are from other fools. We had Amazon from Allison Southwick, boxes or groceries arriving weekly. Robert Brokamp saying, quote, do the bucks count? Otherwise, his real answer is Starbucks. But if a new coffee shop opened in his area that had better coffee, better ambience,

and at a better price, he would switch in a heartbeat. From X, we got Kellogg's from Justin Weinman and Domino's from Irritable Investor. The one we were talking about before the show was Spotify, which was mentioned by three or four people saying that they have a lifetime relationship with Spotify. Any reactions to any of those companies on the list? I mean, they're all, one of the things that's really interesting is I'll use Spotify as the example here. I would fundamentally agree with that. So when you become a brand or a service with which a customer becomes so associated with that they formed, lifetime customer means you have formed a habit around doing business with that brand. And so when you formed a habit such

that the buying is just automatic, the company does not have to do anything to acquire your business, then now there is an obligation that exists on the other side of the equation, which is you must not disappoint me. I am a habitual buyer of your product. So my belief in you and my expectations of you are very high. And so if you disappoint me dramatically, I won't just quit. I will quit in a raging fury and tell everybody why I hate what you did. Because it isn't just that you disappointed me, Ricky. It's that you betrayed me. So, let's use Spotify as an example here. I really like Spotify. I use Spotify free. I don't pay for it. But I've been a very loyal customer of it because I love the user interface, particularly for podcasts. But because I have a

very old phone. And everybody who's been listening to Motley Fool Live knows that I have an old potato phone. And on that potato phone, I can only upgrade Spotify to a certain version of the app. And in that app, Ricky, I don't have the most modern feature of Spotify for podcasts, which allows me to click on a button that says, not interested. Not interested in this podcast. What's happening right now is I'll be walking, whether I'm commuting to the office or some other thing, I'll be listening to a podcast, it finishes, and now it's going to auto to another podcast. Invariably, once every, I'm going to say three times, it starts a podcast that I just pull the earbuds out in disgust and say, why can I not say I'm not interested in this

podcast it makes me absolutely crazy and it does make me feel betrayed and it does make me start looking and so i have been looking like is there a better podcast option for me because it's making me insane i so i have not had that issue with spotify and well that's because you probably don't have an old phone i pay for and i pay for spotify you pay for it and you pay for it so there you go. We're doing our... Tim, it's a list of complaints with the products you use for free. I know. And see, isn't that amazing? But I am a valuable customer. This is the thing that's so interesting about that business is I am actually a very valuable customer to Spotify because on the podcast side of their business, the advertisements are vibrant. They make a lot

of money from it, so they make a lot of money from me. Now, I get a lot of enjoyment out of those podcasts, but I am very profitable for Spotify. It makes sense intuitively that a business wants lifetime customers, but there's a deeper economic explanation as to why they matter so much? What's the breakdown? Well, the breakdown is this. Once you acquire a customer, and if you're trying to get lifetime customers, you are deliberately trying to forge some kind of relationship. That can be an emotional connection to the brand. That can be something like an enterprise technology where we call solution sale, where you have a problem and I've come to you with a solution. What I'm selling to you is pain relief. As long as that

pain relief is satisfied and you are not experiencing that pain anymore, you're going to keep paying because I don't ever want to experience that pain again. There's some kind of relationship here. Once the relationship exists, Ricky, then the marginal economic benefit of repeated sales is just higher. So maybe it costs me a little more to acquire you as a customer because the expectation is this is going to be a long-term relationship. And I'm willing to invest in that. I might invest a little bit more because if you're with me as a customer for a lifetime, several years, every succeeding sale is going to be very close to 100% margin. And that is extraordinary. We've gotten a few responses from the customer side. That's the first part of the

Peter Lynch walk. What are some brands that I love and I use all the time that I see other people using? Let's go to the second part with your investment analyst hat on. Are there any businesses that are pursuing these lifetime customer relationships in an interesting way to you? I'll put it this way, since I cover so many tech stocks. Sometimes, we get lost. I'll give you a metric that you probably hear us talk about all the time, and this discussion should put this metric in some very important context. Dollar-based net retention rate or large customer count, and you may see these from companies like Snowflake or Okta, companies like this, Monday where you have big customers that they are trying to win. This is entirely, Ricky,

about lifetime customer value. The thinking is that once a customer decides to commit a certain amount of spend, and across the entire network of customers, not only did we retain 100% of all of the spend on our platform, but it was, say, 120%, it was 20% more than that, now I can tell you that I have the economic benefit of customers who are making big bets on my platform, very sticky. And what that suggests is that even if I'm not profitable today, I am doing the economic work to get super profitable tomorrow. Does that make sense? It makes a lot of sense. This is why you have a lot of these

companies talking about these metrics, because there is some real power to when a customer makes a big commitment to a platform, they tend to stick with it because it's habitual. Like, okay, here it is. We have made this commitment to, let's talk about the company we talked about earlier. This is a truth about Oracle. We made the commitment to the Oracle database. We built a lot of our business on it. It's habitual. We have hired people to maintain it. We are expecting. It's just a habit that we form. We're going to write a lot of big checks to Oracle. We're committed to it. That is incredibly profitable over time. It's how a company like Oracle or Snowflake can generate so much cash from the underlying business, even if, in the case of

Snowflake, on a gap basis, they're not yet profitable. Not yet, but they are growing towards what I would presume at some point is going to be a very large amount of profit. If you've got a company that you think you are a lifetime customer of, let us know what the company is and why you have that relationship with them, you can tweet us at MotleyFoolMoney on X or email us at podcastsatfool.com. That is podcasts with an S at fool.com. Thanks, Tim. Appreciate your time and your insight on it. Thanks, Ricky. As always, people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against, so don't buy sounding thing based solely on what you hear. I'm Dylan Lewis. Thank you for listening. We'll be back

tomorrow.