Motley Fool Hidden Gems Investing - GameStop's Split, Peloton's Gamble, and Crafty Investments

Episode Date: July 7, 2022

If you hate analogies you might want to skip this episode. (0:21) Tim Beyers discusses: - Why GameStop's 4-for-1 stock split is like a Chinese finger trap - Peloton's attempt at boosting employee morale and how it will cost existing shareholders - Whether Peloton is calling a "results-based play" - Virgin Galactic's new partnership with Boeing (13:45) From street food carts to publicly-traded companies, Ricky Mulvey and Asit Sharma dig into businesses that take pride in their craftsmanship. Got a question about stocks? Call the Motley Fool Money Hotline at 703-254-1445. Stocks mentioned: GME, PTON, SPCE, BA, SONO, AAPL Host: Chris Hill Guests: Tim Beyers, Asit Sharma Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Motley Fool Money starts now. I'm Chris Hill. Joining me today, our man in Colorado, Motley Fool senior analyst, Tim Beyers. Thanks for being here. Thanks for having me, Chris. Partially caffeinated, ready to go. Oh, well, let's do the show so you can get fully caffeinated. Let's start with GameStop because GameStop announced that it is splitting its stock four for one. This takes effect on July 22nd. And I think if there's one thing you can count on in this stock market, In a year when there's been so much red, and even strong profitable companies

come out with great earnings reports and their stocks sell off, the one thing that has proven true is that if a company announces a stock split, their stock is going to go higher that day. That's what we're seeing. We saw it earlier this year when Shopify did it, we saw it when Amazon did it when Alphabet announced that split is happening next week. Kudos to the GameStop shareholders because the shares are up 6% on the news that it's going to split 4-for-1. I like the way that you use the word news there because you're presuming that it's actual news and not noise. This is, I mean, what's frustrating, but both interesting. I mean, yes, congratulations to GameStop shareholders, but let's be clear, you have just been handed

the finger trap. You know those little Chinese torture devices, like you put your two fingers in and like, oh, I can't get my fingers out here. This is adorable, and oh, Lord, I can't get my fingers out of this. It's the sort of thing that is thrilling for a minute. It's a little bit of artificial sweetener. There's some enthusiasm about this because there are more shares, and it means absolutely nothing, zero. It has no material impact whatsoever. It's really not news, but it is a thing. It's a gimmick. Here's the thing that's interesting to me, Chris. I don't know that there's anything to this, but there's going to be more GameStop shares, which means there's going to be more things to do because there are going to be more GameStop

shares. Will this lead to more activity in GameStop stock? Well, there's going to be more shares, so there's going to be more opportunity to do things with GameStop shares. It creates zero value, but this is why I call it the finger trap. It introduces more opportunity for more shenanigans to happen with GameStop stock. I thought Andy Jassy, CEO of Amazon, did a nice job of explaining why they were doing it, because that's the obvious first question anytime a company announces a stock split. It seemed like a good rationale for Amazon. I'm not really seeing the rationale as much with GameStop. I didn't also see it as much with Shopify when they split their stock. I'm not trying to pick on GameStop, I'm just not seeing

the same rationale that I saw with Amazon. Usually, when there is a great rationale for a stock split. If a company that goes public has a stock that is materially illiquid, meaning that there aren't a lot of shares out there to trade, then it makes it hard to make a market for those shares because there just aren't that many to trade. In that instance, splitting your stock is actually very helpful. It puts liquidity into the market, it makes it more vibrant, more people can get in on it. Then you actually have something that is useful to the shareholder, you're helping make a market for your stock. But other than that, Chris, there's really no purpose to these things. Chris Hill

Let's move on to Peloton. On Tuesday, shares hit an all-time low. This morning, however, shares the Peloton up a bit on the news that the company is trying to boost employee morale by offering one-time cash bonuses and is repricing stock options to the closing price on July 1st. Is this going to work? This is all part of the turnaround plan, and I get that employee morale is low for all of the obvious reasons when you look at what has gone on with that business over the last, let's call it 10 months. Right. Is it going to work? Well, okay. There are two components to, is it going to work? I told you before we went on air that this might deserve, we don't have enough time for a full-on rant, so it might deserve what we affectionately

call in the morning show a rantlet. Here's my little mini rantlet on this. Yes, it will work for boosting employee morale. Employees will be happy about this. But will it work means, will it deliver for shareholders? The answer is, well, maybe, but shareholders are going to pay a big price first, and you have to at least acknowledge that. If you're repricing options, you are literally taking money from shareholders, giving it to employees, and basically coming to shareholders and saying, look, look, look, I get that we're taking money from you. I'm sorry we're taking money from you, but we needed to give it to these people so that they can do a job that hopefully will deliver some compounded returns to you later.

So please bear with us. I mean, this is a bad analogy, Chris, because it doesn't actually translate, but it's a little bit akin to the bank saying to you, Chris, look, I know we promised to deliver interest to you. I know we said we were going to do that, but we don't have enough money right now, so you're going to have to wait a while, and then we'll restart your interest payments later. We may not be able to pay you exactly as much interest as we thought we were going to pay you, but hey, we're going to get there, man, but we've got to make these people happy. Will it work? Peloton employees are clearly going to be happy about this. They have been absolutely crushed here. The business has been horrific. They lay off 2,800

people. Revenue has gotten absolutely blown to pieces. They've had to fix inventory issues. a whole host of things that need to be done. Yes, it's a big lift that Peloton employees are going to have. They're going to have to do an incredibly difficult job to get this company back on track. But let's be clear here, the shareholders are giving money to Peloton in order to do that job for the promise of outsized growth later. This is not free. is not free and we shouldn't pretend that it is. It reminds me of what Peloton did last August when they came out and announced they were cutting the price of some of their devices. We all looked at each other like, wait a second,

this is a business that has built itself on, we're making a premium product, we're going to pay a premium price for it, now they're price-cutting. I believe I said on the show last year, this is a good move as long as it works. The sports analogy is like a crazy flea flicker type play. Instead of punting on fourth down, we're going to do a fake punt. It's the results-based play. It's like, well, if the play works, then great, good call. If it didn't work, then no, it wasn't a great call. And I think that was the case last August. And I think that is the case here. I think you're right. This should help with employee morale. But I think if you're the CEO, you're like, all right, now it's really all hands on deck and we got to deliver over the next

six months or then the news becomes how they're exploring strategic alternatives. Right. The way I look at this, look, I'm the one who should get the blame here because I recommended Peloton. I've been wrong about this one. I have. I should take the hit here. I've been wrong about this one. I gave management way more credit than I should have. And so here's where we are. This is what I'm looking for, Chris. Over the next year to two years, I want to see Peloton, as a result of this, doing enormous lifts and making enormous progress in key areas of the business. Inventory drawdowns, higher than expected revenue growth, incremental improvements in gross margin. All of those things, we should start seeing that.

We don't need to see massive improvements immediately, but we should see needle-moving upgrades in those areas as a result of this. And if we're not, then like you said, it's a results-based play. So then we really don't have anything to go on. If we don't see any movement in those areas, it may be time to sell. Let's close with Virgin Galactic, which announced a partnership with one of Boeing's subsidiaries to build motherships that carry Virgin rocket ships aloft. I just love the phrase, building motherships. Don't you love, by the way, that it's the Virgin company building

motherships? Come on. How do we not? That's amazing. In terms of the business, though, and shares of Virgin Galactic up a bit on this partnership. What should people be watching for to know whether this new partnership is bearing fruit? That's a really interesting question. Boeing is going to make what it looks like a couple of airplanes here. They're going to be making these things called motherships, which is literally an airplane. It's the airplane that takes the Virgin Galactic rocket, which does not launch from the ground. It has to be launched up into the atmosphere, generally around 45,000 feet and from the airplane, then it is dropped, and then it engages its engines and goes up into suborbital space. Having these and having

an efficient fleet of motherships that can do far more of these trips, especially once they start regular space tourism trips starting next year. You do want really industrious motherships that can do a lot of flights. In this case, this deal with the Boeing subsidiary, which is Aurora Flight Sciences, these things are apparently going to be able to do up to 200 flights a year. The math is, if the pricing for a seat is 450 grand, six seats per trip on the Virgin Galactic spaceship, you're talking about a billion dollars if we've got 200 successful capacity flights per year. This does make sense if A, they can deliver the motherships quickly within the next couple of years, and we see a backlog that shows that Virgin Galactic

is actually going to sell out six seats per trip. Really, we want to be watching the backlog here, Chris. It would be better if they're delivering these motherships a little bit earlier. But I think the backlog is the thing here. How many seats can they actually sell at capacity prices? Tim Beyers, always great talking to you. Thanks so much for being here. Thanks, Chris. If you're looking to get crafty with your investments, good news. From street food carts to publicly traded companies, Ricky Mulvey and Asit Sharma dig into businesses that take pride in their craftsmanship.

Today, we're looking at craft and investing. Joining us now is Asit Sharma, senior analyst and a contributing learner for The Motley Fool. Asit, good to see you! Good to see you, Ricky! You got started on a YouTube rabbit hole of these things called Yatai food carts. Tell me a little bit about what they are. Then trust us, we will get to how this relates to investing in publicly traded companies. Well, yeah, you know, it's so easy to fall into those YouTube rabbit holes, but Yatai food carts are essentially open-air food stalls. Now, they're found in different cities in Japan, but they're especially known for being prominent in the city of Fukuoka. There's

about 100 of these scattered around the city, and it's just a well-known feature of the place. These open-air food stalls, some of them are permanent, but a lot of them operate on a permit basis. So, you have to assemble them and take them down every day within a defined period. I got fascinated by the amount of time it takes to assemble some of these food stalls. There are a few that take literally two hours to assemble. For a stall that's going to be open maybe six to eight hours. I also really was fascinated by the meticulous nature of this enterprise. There are some really fancy yatai that are made of beautiful wood and are assembled in a very careful fashion. There are others that just take a long time,

Ricky, to assemble. But there's so much love that goes into this, it made me think, wow, you have to have the spirit of a master craftsman just to do this entrepreneurial job day after day after day. I think the closest analog, and it's not quite, but it is close, is the food stands you would see at a farmer's market, where you see the people they have to lug in, in some cases, the water, the stoves, all of the materials you would need to make a restaurant. In these cases, for these open-air food carts, a lot of them are on the move. they can't stay stable. All of the things that you would take, let's say, for granted if you owned a restaurant, let's say the piping for your sinks, you have to assemble and disassemble that

every single day for some of these entrepreneurs. Right. In Fukuoka, they actually have the water setups, the electricity setups all around the city to make it a little easier, but it's still a huge task to do this. The pricing of these is also interesting to me because it's not super expensive. One of the carts that you showed me on YouTube, the bartender was selling drinks for about 800 yen, which translates to about $6 American dollars. You have to sell a lot in one night. They aren't necessarily charging a premium for the amount of effort they're putting into these food carts. This is something that's always intrigued me about Japan. I had the opportunity to visit some years ago. There's a well-known price point of 1,000 yen for a bowl

of ramen noodles. I always wonder, even at that price point with a volume business, how do you make it every day? Which I think further points us to the love of this thing, right, Ricky? Here in the States, outside of farmer's markets, I think many times we're a lot more mercenary in trying to figure out what our ideal profit margins and volumes should be. When you get down to the level of the individual entrepreneur who's doing something he or she loves anywhere in the globe. I love your farmer's market example. You start, Tori, a little bit less about that. You just want to stay in business and provide this good or service to your loyal customers. I know you've been spending a lot of time thinking about this and watching this on

YouTube. Very important question. What are you cooking up at your Yatai food court? Ricky, I am definitely cooking ramen, because I can obsess over the broths at home when I'm not out selling it on the street. What about you? Oof. I think I am going to have a French fry stand exclusively with malt vinegar. That's for Rick Engdahl. Oh, that sounds so good. Thinking about Kraft, one other strange example for me came to mind. It has to do with this love of the business, not necessarily just profit margin motivated. It's called Aura. And they're doing something extraordinarily special in the saltwater aquarium industry,

which is that they are the largest aquaculture facility for ornamental marine life. So all of the things you find in an aquarium, corals, clownfish, blennies, angelfish, even seahorses. And because of this, there's fewer saltwater fish being caught in the wild, which can often be damaging to coral reefs. I used to take care of an aquarium. It's difficult because you start aquariums because you love ocean life, you love fish, but also the hobby itself can be very damaging. They figured out how to essentially breed these animals that are wild and difficult to breed and also do it in this genius facility where they're using natural sunlight versus UV lights. They found an area where they could get saltwater from a well. They also don't use

any supplementation because it's natural. And they have low electric costs because they were able to figure out how to get a lot of their tanks, specifically for corals, on the same piping system. So, I bring that up because you can tell that there's a lot of love and care in what they do. Because in a lot of cases, when you bring a new coral into the facility, it might take 10 years to grow it to the point where they can frag it off and then sell it to the general market. Okay. Here we have the other extreme. We have our Yatai craftsmen who have just this limited amount of time to set up their carts and take them down and sell their product. On the other hand, we've got Aura, which has so much love in the game. They're willing to wait 10 years

before they can commercialize a reef. I love that it has the environmental aspect. And it saves money for them, too. Okay, we've done enough of the companies that you cannot invest in. Let's look at some of the publicly traded companies with some craft. The obvious example to start with is Apple. Yeah, sure. I'm going to go over a very well-known story here, but I think it's important because I want to draw a takeaway from this. Apple is famously design-centric. This isn't just a legacy of their approach to graphic and product design, but it's also a legacy of Steve Jobs' early life in his biography told by the incomparable Walter Isaacson. There's a story where his adoptive father refused to use

cheap plywood on the back of a dresser or making a fence in the yard, even though people wouldn't see the back of the dresser or necessarily notice that the fencing was cheaper. And this is a quote from Steve Jobs. When you're a carpenter making a beautiful chest of drawers, you're not going to use a piece of plywood on the back, even though it faces the wall, and nobody will ever see it. You'll know it's there. So, you're going to use a beautiful piece of wood on the back. For you to sleep well at night, the aesthetic, the quality, has to be carried all the way through. I think this was a super important lesson for the young Steve Jobs. This type of aesthetic has informed Apple's products all the way through to today. Jobs

was famous for insisting on the way a circuit board looked, even though no one's going to see a circuit board in their computer. I see a parallel here in this attention to detail through Apple's continued success in innovation. I think you can draw a through line from this type of thinking to the products of today. When the management of a company insists on making something beautiful, it unites the designers, the engineers, the product people, sales and marketing. Everyone gets behind that. I think it results in a higher yield on research and development spend as well. I note that Apple was ranked No. 1 in something called the 1790 Analytics Patent Scorecards Report. This is a small company that rates patent portfolios

not just on sheer volume, which you'd expect that Apple has a lot of that, but on impact, growth, originality, and general applicability of the patents. They ranked No. 1 on that survey. I think there's a tie-in with Steve Jobs' early ideas about product design. It's one of my favorite reads, personally, for pleasure. I also think that there's a carry-through of this love of craft into some more modern companies that you wouldn't necessarily expect. Let's talk about Sonos a little bit and their love of craft. Yeah. Sonos is a company which has, again, a very beautiful product. Their speakers are very sleek and minimalist. They pack a big punch in sound. But they're also really the originators

of the idea of multi-channel streaming devices. This goes back to the early 2000s. The original team went through several years of product design and ideation and just raw innovation to come up with a technology, which we take for granted today. That's the passing of sound from one speaker to another. You've got synchronous sound throughout your house. That didn't exist before Sonos. I think that the way the company has designed its technology and its products has carried through. Again, going back to Apple, Steve Jobs isn't around, but Apple is still innovating, making beautiful products. The original founders of Sonos left years ago, but the team that runs it today is full of sound geeks. You can, again, draw this throughline of

a company which is succeeding because it's a product-oriented company first and a capitalistic business second. I say this even though they're publicly traded. Between that and their power of innovation, guess which company ranks third on the 1790 Analytics Patent Scorecard? Is it a Yatai food stall that's also an inventor? They've been a bit late in submitting their patent applications. It's Sonos, yes. This is amazing. They rank third behind Apple and a very innovative, smaller company called Magic Leap, but ahead of giants like LG, Sony, Samsung, and competitor Dolby Labs. Again, you've got this relationship between the love of craft and the total product,

and what happens when you unite other people behind that love of craft. I think it's a persuasive thing to look for when you're looking at companies which have a product that you can see and feel and touch. Maybe a little bit harder in other types of companies. We we could talk software and Shopify, but I know we're running out of time. Yeah. Well, and I think it is the kind of thing you like to look for if you're going to own a company for five plus years, which is the focus on craft and what they do, not just trying to engineer sales and margins for a quarterly result. Yeah. And on that note, Ricky, five-year timeframes, 10-year timeframes, maybe in the next 10 years, the time it takes to get that

Coral Reef into existence, Aura will go public and you can invest in it. I would love to. Asit Sharma, contributing learner for The Motley Fool. Thank you for your time. Thanks so much, Ricky. This was a blast. 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. you