Motley Fool Hidden Gems Investing - Cyclical Stocks Cycle

Episode Date: February 13, 2025

Digital ad platform, The Trade Desk, missed its own expectations for the first time in 33 quarters. Its investors were not pleased. (00:21) Alicia Alfiere joined Ricky Mulvey to discuss: - The expectations, and real business performance of The Trade Desk. - Robinhood blowing away expectations, and what its earnings reveal about retail investing trends. - How restaurants are responding to egg shortages. Then, (15:40) Sanmeet Deo joins Ricky for a look at Celsius’s reposition and what the stock needs for a comeback. Companies discussed: TTD, HOOD, CRBL, CELH, PEP Host: Ricky Mulvey Guests: Alicia Alfiere, Sanmeet Deo Producer: Mary Long Engineer: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. When a stock has high expectations, you don't get much forgiveness. You're listening to Motley Fool Money. I'm Ricky Mulvey. Joined today in person in Denver with Alicia Alfieri. Alicia, it is so good to see you. We've been chatting for an hour, but it's still good to see you. It's so great to be here in person, in real life. To break down some earnings from the Trade Desk and Robinhood. The Trade Desk got absolutely cooked in its latest earnings, Alicia.

Basically, the Trade Desk is a demand-side ad platform. That means they help advertising agencies place buys across the internet and streaming services now, and retail. Revenue grew by about 26% year over year, but that's not the headline. CEO Jeff Green said, quote, I want to acknowledge upfront for the first time in 33 quarters as a public company, we fell short of our own expectations, end quote. Not Wall Street expectations, but company guidance. Alicia, first miss in 33 quarters, but why is the market reacting so strongly to it? Yeah, so there are a few different reasons. So first, let's take into account the fact that the Trade Desk has been an incredible performer since it went public back in

2016. It's grown its top line and generated free cash flow every year. Since its IPO, the stock was, as of yesterday at least, a 40-bagger. But all that performance comes at a cost in terms of valuation and expectations. It's never really been a cheap stock. Because there's so much valuation or so much expectation baked into that valuation, anytime you have a bump in the road, you're going to see the stock take a hit. Let's take expectations out for just a moment. How's the actual business of The Trade Desk doing? First, The Trade Desk has a really sticky solution. Customer retention rate of 95% for the past 11 years, which is pretty

impressive. 2024 was a good year for the company. Ad spend on the platform was record-breaking $12 billion. They saw a fair amount of growth in connected TV, retail media, international opportunities, plus political ad spending during the year was their largest to date. The revenues were up. It was 26% year-over-year and faster than the growth in the overall digital advertising market. And they boosted their free cash flow and EBITDA profitability. So, they had a pretty strong performance despite missing those expectations. Our co-founder David Gardner likes to say that stocks take the staircase up and the elevator down. Well, today was one of those elevator days. Green said it up front that they missed.

This is why. And I want you to translate this executive speak for me. Here's what he said, quote, if this were a sporting event, we'd still have a championship caliber team. But in this particular game, we turned over the ball too many times. That said, we see a larger and faster growing market than we originally expected, which is why we have been making changes and will continue to do so. End quote. When times get tough, it's time to speak in metaphor. You love literature. What's this one mean? Yeah. Well, I did love this one because I am a big football fan. And I feel like in the playoffs, we saw this happen specifically to the Detroit Lions, which is, in case you're not familiar, a team that had just been killing it

for the rest of the season. And then what it feels like happens, and perhaps this is what Trade Desk is trying to say, is that sometimes there are games that the other team doesn't necessarily win. It's more you lost the game because of you. And the company is taking responsibility here. And they pointed to things like structural and reorg changes, which led to their miss here. Again, this is the first time in something like eight years that they've missed their expectations. We can give them a little bit of the benefit of the doubt, especially if we look back historically about how they grew, how they performed. But at the same time, we do have to hold them accountable in the future to meeting their targets. Also, remember, there are other

companies in the space, and be aware of how they're performing as well and how that matches up or doesn't match up with the trade desk. This is my own bias. Sometimes when I hear executives do these sporting metaphors, I get this traumatic flashback to being in a basement conference room in Cincinnati, Ohio, where a gentleman in a Rolex pointed to a photo of Wayne Gretzky and said, you need to skate to where the puck is heading, not where it is. So sometimes the sporting metaphors get me a little bit in that that's more my own bias than what we're objectively talking about on the show. You mentioned other companies and there's a company Applovin, which sells video game ads that absolutely blew expectations out of the water.

So, you're right, this is a very competitive market that the Trade Desk is playing in. Yeah, and we have to see how they're going to perform going forward. I think as long-term investors, I think the important thing to remember is one quarter doesn't make or break a thesis. And so, we have to look at how they do going forward. And for the long-term investors, you want to be thinking about the value drivers for this company. And for the Trade Desk, I see a few.

One is more connected TV spend. Trade Desk, for example, has deals with Max and Disney+. And right now, their chief investment officer said, surprisingly, CTV advertising remains a small fraction of total TV ad spend relative to linear. It's difficult to imagine why, because so many people are streaming. The other one you may want to think about is Google, which Jeff Green has a bone to pick with. He thinks that Google should exit the open internet for morality reasons, but also that might create more opportunity for the trade desk as Google has tightened its grip on selling ads for especially things like YouTube. And you're also going to look at its AI platform,

Kokai, which is a way of trying to narrow down essentially the top of the funnel marketing to who's actually buying goods. And the trade desk is hoping that more advertisers will opt into these intelligent insights in using their platform. When you think of the value drivers for the trade desk, what else should investors be thinking of, or are these three good enough for now and we can move on? I think those three are pretty good. I would also add, the company talked about audio opportunities like in Spotify and their recent earnings report, so that could be interesting. There are also some interesting projects that they're working on as well. They have their Ventura operating system, which is a new streaming TV operating system that aims to

both have a better viewer experience and improve the ROI for advertising. You also talked about their AI platform, which can hopefully help improve efficiency going forward as well. These are all things that we have to look at going forward. Despite the dip, let's not call it a value stock, Trade Desk still trades for about 80X cash flow, 136X earnings. The earnings multiple down from the 200-ish times. So, for the investors listening that see a little blood in the streets, they want to get their hands involved with it, that's a bad metaphor. But what say you to them? You know that I have a little bit of a contrarian streak in me. And I do find it interesting when a really compelling business goes on sale. That said, as you've already pointed out,

this is nowhere near in the realm of a value stock. And there are still quite a lot of expectations baked in here, and that can mean volatility going forward. And for me, it's always important for me to remember to know the ride that I'm getting on. Let's move on to Robinhood, the investing and trading platform. It shot the lights out this quarter. Here are a few highlights. They saw a lot more trading, a 700% rise in revenue from crypto trading activity. A lot of that tied to the election. There was a record net deposits of over $50 billion. That is over a nearly 50%, 5-0 growth rate, multiples of what traditional brokerages are seeing, and at the same time, net income 10x-ed to $916 million from the prior year. What do you make of these results?

What I found most interesting about Robinhood's results this quarter was the makeup of their revenues and how it changed. Last year, net interest revenues, which are revenues based on interest from investment, customer credit card balances, and margin loans. That represented the highest revenue-generating business segment. But this year, it was unseated by transaction-based revenues. These are like tolls the company collects based on customer trades, whether it's regular equities, options, or crypto. Those transaction-based revenues were on fire in the fourth quarter. It totaled $672 million, which represents a 200% year-over-year growth. And again, that's mostly because of crypto revenue growth, which increased 700%.

So, those are some massive numbers, especially when you compare it to the still pretty decent growth that net interest revenues came up with, which was 25% year-over-year, and other revenues which is 31% year-over-year. And all of this helped to support that $1 billion in quarterly revenues, which is a first for the company. And by the way, the whole year came in at $3 billion revenues, which is another record for them. One of the interesting things when you look into the Robinhood results, it also reveals investor interest, what retail investors and traders are doing. They are, first and foremost,

a trading platform. They're saying that right up front. When you dig into these results, this is a service a lot for retail folks. What did you learn about how people are investing in trading right now? Yeah. This is why I brought up the the transaction-based revenue. It looks like there's a fair amount of what the company will call active trading that happens on their platform. We talked about transaction revenues already being up. Also, because Robinhood's Legend platform, which is built for what the company calls those active traders, so people who are trading more often, it was launched in October of 2024, and it is already bringing in revenues at a $50 million annualized rate.

It feels like there's an appetite within the Robinhood platform for perhaps short-term trading, and Robinhood looks to be a beneficiary here. To be clear, with some of these cryptocurrency traders, they've been right right now. Times are good for them. But for me, when I think about a stock that's on fire, we always want to think about what the yellow flags are, where things could go wrong. I think the one for me to think about is that this is probably a cyclical business. Trading activity is not something that is loyal when markets turn south. I think that for any investor looking at Robinhood, the stock, that's something they may want to consider. Yeah, I agree with you. We tend to see

a lot of people are interested in investing or in trading during boom times, which can cut out opportunities, I think, for the all-important compounding that we could see in longer-term investing. But as you said, once the excitement is gone, there can be a risk for Robinhood here. On the flip side of that, bookmark this for maybe a year, maybe two years, maybe six months, maybe five years from now, when investor sentiment turns south and everyone realizes, you know what? I think Robinhood is a very bad business. No, this is the one that a lot of people think of now when it comes to trading. It's not just your Charles Schwab's, it's these upstart apps, which Robinhood may be no longer an upstart.

Yeah, and that's why when you see a business that appears to be cyclical, what can be really advantageous to understand when you're looking at companies like this is to understand where you are in that particular cycle. I want to go to this story now. This has less to do with stocks, but very interesting to me. I went to Whole Foods twice in the past few days. I cannot find eggs. This egg thing, it's not good. What's going on, Alicia? Yeah. So, avian flu is hurting the egg-laying chicken population. And that's because a whole flock has to be slaughtered if there's just one case of the virus. So, the more cases, the less chickens, the less eggs we have, and the rest is supply and demand.

The wholesale price of eggs now is over $8. And Costco can eat this easier than a mom-and-pop diner, but what are the impacts of this as you think about the broader economic landscape? I think that we're going to see bigger chains and some big retailers like Costco, as you said, they can have more wiggle room to help keep prices constant in the short-term. That's because they have a lot more bargaining power. They may even have longer-term egg buying contracts. For smaller businesses, that's not really going to be the case. And if they can't eat that increase in cost, they're going to have to pass it on to the consumer, which is going to make things even tighter for consumers.

So one company that's trying to pass it on to consumers is Waffle House. They're doing a 50 cent surcharge for eggs. This is interesting to me because Cracker Barrel responded. They said a surcharge on eggs. Well, there's nothing hospitable about that. At Cracker Barrel, country hospitality is as important to us as a hearty breakfast. And that means not charging extra for eggs. You know what is funny to me about that is because that is the most online take you could

possibly expect from Cracker Barrel because it assumes that people are looking into things like the New York Post or that they remember from a Waffle House visit that there's a 50 cent surcharge for eggs and now they're going to go to Cracker Barrel, which in my view is not the most online of populations. Alicia, you're the analyst. What's your take? I didn't think we would be talking about Cracker Barrel today, which is one of my parents' favorite restaurants. I would say, again, in the short term, they can perhaps hold those prices steady. And who knows, maybe they have a different strategy than Waffle House. I would imagine that they do.

They're a slightly different kind of restaurant, right? As we wrap up today, according to The New York Times, soaring prices have also led to at least two egg heists. In early February, thieves stole 100,000 organic eggs worth about $40,000 from a distribution trailer. And this week, more than 500 eggs were taken in the early morning hours from a cafe in Seattle. This begs the question, if you needed to steal 500 eggs, how would you do it? I think it depends what kind of thief I am. You know, if I'm splashy, perhaps I would do like a fast and furious truck heist. But you know what? If I thought it was going to be more of a long-term

problem, maybe I would just steal some chickens. What about you? I like stealing chickens. I think that creates more of a long-term solution. And I'd feel bad about stealing from a mom and pop restaurant. And I also think it would be more difficult to steal it from a grocery store. However, you know what? I take that back. We're looking at the loading docks of grocery stores and we're getting in, we're getting out, and we're going at least 90 miles from where we live. That's how I would handle it, Alicia. Appreciate you being here. Thank you for your time and your insight. Glad to be here. New from Nespresso. Blend wellness into your coffee routine with The 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.

Up next, Celsius wants to be more than an energy drink maker. I caught up with Motley Fool analyst Sandmeat Deo to talk about their rebrand and if this beaten-down beverage is an opportunity for long-term investors. Sandmeat, I thought energy drinks were good investments. Celsius, a stock that I own and the more recently beleaguered energy drink maker is now a hydration provider that's right we're getting a reposition the idea is that not everyone wants a ton of caffeine in a can so now celsius is trying to sell hydration sticks that have b vitamins and electrolytes they're trying to change their brand up a little bit sand meat what do you think of it yeah well you know i don't really see this as a brand change

i see it as a brand extension and a compliment to what they what they already have and in their portfolio they do have powdered energy drink the powdered version of their energy drinks this will be the powdered version of hydration drinks which have actually become very popular you'll see there's a ton of different brands like element liquid iv gatorade makes them and it's a pretty large market you know it's a 1.4 billion dollar u.s hydration powder market projected to grow 13% a year to two and a half billion by 2029. So definitely see it as more of a compliment in addition. I actually liked the move. Yeah. I was at my local King supers last week trying to find the Celsius hydration sticks, but I couldn't, they weren't out yet. And it was, I was shocked

by the amount of just brands there were on the wall of different hydration sticks that you can put in your water. One of this, one of the concerns is a, maybe not the word I'll say a concern troll for this is I wonder if this move will create some brand confusion, putting this under the Celsius brand, which has a ton of caffeine in it. It's an energy drink and are people playing a little Russian roulette with which hydration stick you get. This one has a ton of caffeine. That'll keep you up. This one has some hydration, whatever, and B vitamins. I don't know. Could this create some brand confusion though? I mean, it could definitely create some brand confusion. There's no doubt about that. When you have multiple powder drink

options available, especially multiple different other brands. Now I haven't been able to get a hold of the hydration sticks myself. They're for delivery a little later on Amazon, but you know, I looked at some of the packaging and it has literally a big, no caffeine label right on the top, as well as in the picture, you have fruit splashing in water. So I think they're trying to ensure that is differentiated and make, make sure that people know that this is not a caffeine lace product. Let's look more holistically at Celsius, because this isn't the only energy drink that's marketing itself as better for you. There's one called Alani New, which is owned by a private company. It seems to be taking some market share from Celsius, which has a similar target

demographic, women, young people interested in fitness. Celsius has been losing a little share recently, and that's been reflected in the stock price. How big of a deal is Alani New for Celsius's growth story in 2025? Yeah. You can never underestimate the power of competitors in a market like this. Energy drink are huge markets. There's tons of different products out there. There have been tons of different products that have come and gone, and there's some that are still around. Alani New has about 3.5% market share, no small amount, up from about 3% in the first quarter of 2024. It's begun to take market share from the other competitors as well as Celsius and it's a concern for Celsius. So definitely nothing to ignore.

And as a shareholder, I really thought this PepsiCo distribution deal, which is that PepsiCo is going to distribute Celsius to more places. This was going to be a major growth lever, but instead over the past few months, this agreement has just simply seemed to create a lot of inventory problems. As we look at this now, is this still a good partnership for Celsius? As a shareholder, is this something I should be excited about? Well, I myself am a shareholder, so I'm right there with you, Ricky. But yeah, long-term, I still think this is very good. I think in the short-term here, it's been pretty frustrating for shareholders with the inventory issues and the ups and downs of the sales numbers for Celsius.

But thinking broadly and long-term, this partnership gives Celsius distribution power that it couldn't have otherwise had. And having known Celsius from prior to Pepsi, and having sold it myself in a gym that I used to own, it's a lot easier to get. I mean, it was very, very difficult to get. Now you're seeing it pop up everywhere. I've even seen them pop up in international locations. Anecdotal evidence I've seen from customers online. So long-term, this is going to be great.

They got to work out the kinks. Management needs to really figure out how to kind of at least manage this relationship well. And while the stock has been sinking, the price tag for Celsius is now in line with more mature competitors. Monster Energy and Celsius both trade at about 30 times earnings in cash flow. Even Coca-Cola right now is at about 30 times earnings. The cash flow is a little wonky. So Celsius, in the much more mature Coca-Cola, at about the same earnings prospects, basically the market seems to be saying to Celsius, your growth prospects are a little bit better than the average company in the S&P 500, but you are no longer a rocket ship.

Just a few years ago, Celsius's valuation was closer to that hundreds of times PE multiples. Now, it's come back down to earth, but do you think this devaluation, this mature look from the market is warranted? Absolutely. They've had slip-ups with the inventory issues. Their growth has slowed. Even before the really rough quarter in November, where their sales were down about 31%. The quarter before that, their sales were positive 23%, which was much slower than what they had been before in prior quarters. Now, you could never have assumed that their growth rates were going to triple-digit grow in perpetuity. And the slowdown was definitely going to be coming. I think what happened is it just

came really fast, really shockingly. And so, the market was shook. The market still shook, very unsure of how they're going to manage this whole relationship with Pepsi and still unsure. So it's definitely warranted that it's been devalued. I still think it has a lot more growth opportunity than some of those other brands. Their growth rates may not extend to what they were in the past, but I think they can run a better growth rate than a Coke or a Monster. One thing I'm a little concerned about is, as I've been looking at this stock being taken to the woodshed, none of the insiders are buying any shares on the open market. And it's tempting for me to see this story. And I still see a lot of Celsius cans everywhere.

And right now, it's almost like if there's any good news, you can expect this company to get back on track. And there is a long-term trend that Celsius is playing with, which is that better-for-you energy drink. So for those who are curious or those who have been holding for a while and seen this get cut and thinking, you know what? I just want to cut my losses here. What would you say to those investors? If you're holding, which I am as well, I would hang on. I mean, I don't see many concerning things in the business itself, especially like you were saying earlier, you know, you're still seeing these everywhere. You're still seeing people drink the product. You're still seeing influencers endorse it. You're still seeing it at events

like the Tyson fight, like broadcast and advertise, you know, it's still out there. Yeah. I don't like that. There hasn't been any management buys of the stock. That would definitely give me some comfort who knows maybe there'll be some buyback announcement at the in the future that would definitely be great but if you're holding on i would continue to hang all great growth stocks tend to have these massive drawdowns where it shakes out people you wonder if this is a true growth story not all of them are going to continue to soar and do great but you want to hang on if you think it even has the possibility and if you're thinking about buying of the day, you know, earnings are coming in a couple of weeks within the month, at least. So

be very wary of that. If you, if you want to buy before earnings, I never liked to do that. If you're going to be a growth investor, if you're going to play the rule breaker game, remember you're going for a slugging percentage, not an on base percentage. You're hoping for home runs. And you know, a lot of them will be strikeouts for me. It's I've got Celsius from my portfolio, but I've also got rocket lab right now to make up for, for those losses. I think there's been a greater shift towards being people more interested in their health. This is one reason I've liked Celsius. People want to live healthier lives. Here are a few examples. You're seeing Frito-Lay's North America volume falling 4% in the latest quarter. Even

Hershey's selling their salty snacks. The sales are up 36%, but the actual volume has fallen. Banning things like artificial food dye has gotten bipartisan support. You're seeing these natural grocery stores, natural grocers, Sprouts Farmer's Market, both coming off multi-bagger years. The comp sales at Sprouts Farmer's Market in the latest quarter was up more than 8%. Gym stocks, a mixed bag. All of this is to say, you're seeing this trend in your life. People are more interested in being healthy, and I think it's starting to show up in a lot of the earnings results. Sandmeet, I know you look at this closely. I want to play this trend. Where else should I be looking? What are you looking at? It's a great area to look for. And I continuously

look. The hardest part about it is I see lots of great private companies that are not places where we can invest. But if you're looking broadly, I would look at themes and see if you can find specific companies that could benefit. Fitness wearables are definitely becoming trackers. People want to track their health, what's happening with their health, and then adjust appropriately. Gym stocks, fitness stocks can be tough because they can be cyclical. There's a lot of churn in those businesses, but it's still an opportunity. Nutrition supplements, lots of private companies. I think there are some publicly traded companies that are worth taking a look as more longevity excitement is coming around. Mental wellness, different areas like that

when it comes to therapy services online or meditation, mindfulness stuff. again, not much publicly traded stuff that's available out there for us, but worth continuing to just dig, which, which I'm doing as well. And then as we wrap up, it's just us here. Is Celsius actually good for you? It's fine. It's, it's, it's better for you ingredients than I'm going to say is better than monster and Red Bull for sure. Now, caffeine is caffeine. Everyone wants to, just like you would with your coffee, you don't want to overdo it. So don't overdo it. enjoy moderation. Same to you. Appreciate your time and your insight. Thanks for being here. Thanks.

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 are not approved by advertisers. The Motley Fool only picks products that I would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. We'll be right back.