Motley Fool Hidden Gems Investing - Is The Sharing Economy Growing Up?

Episode Date: June 29, 2023

DoorDash has started offering hourly wages for its couriers. (00:21) Bill Barker and Deidre Woollard discuss: - What prompted DoorDash’s recent updates. - Fees, tips, and other ways Airbnb and DoorDash pass on costs to consumers. - How demand for spicy food is just one positive sign for McCormick. (16:15)  Sanmeet Deo and Mary Long break down the main components of Adobe’s business and how AI could prove to be a major growth area. Companies discussed:  ADBE, MKC, DASH, ABNB, UBER Host: Deidre Woollard Guests: Bill Barker, Sanmeet Deo, Mary Long Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Dora Dash goes hourly and McCormick keeps things spicy. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard. I'm here with Motley Fool analyst Bill Barker. Bill, I feel like everyone's getting a second dose of you this week, so that's awesome. How are you today? Well, thanks for asking. Well, let's start talking about DoorDash. They're the leader in the restaurant delivery wars. They announced an hourly wage option for dashers. Those are the couriers that do the pickups. Previously, it was on a per-job basis. I think this came because there was some pressure on gig economy workers from local governments. I think this is good news for the dashers.

Is it good news for the company? I think in the long term, good news for the company. It's going to supplement, in particular, pickup jobs that weren't very profitable on a per-job basis, but were on an hourly basis, or could be at least decent pay on an hourly basis, smaller orders, longer travel. So, in terms of satisfaction of the ultimate customer, I think DoorDash is going to be supplying more of the deliveries through this choice that the Dashers have. I think it's a recalibration of the business model. In these run fast and break things kind of models, where you get things out, don't worry too much about where the profits are right away, get a lot of customers, and then figure

out the profitability over time, both by the company and by the gig economy employees. Over time, you see where the holes in the system are, and this is filling in one of them. Yeah, the holes in the system thing is interesting because this is a similar path that I think all of the sharing economy, gig economy companies have had to wrestle with. Uber has had to deal with it, Airbnb. This is just something that these companies, as they evolve, they're becoming more like traditional work in some ways. Well, there are regulations that show up in certain locations where some of the gig

economy employees or not employees become considered employees or part of the way toward that. So, I think that over time, you're not going to find that jobs like this pay either too much or too little. But in the short term, they will. And I think that the people that can game the system the best, do the best, until people hear, oh, if you work the system this way, you can make a ton of money, and then you get more supply chasing that, and that tweaks the model a little bit, and ultimately, people get fairly paid, is the likeliest outcome. Yeah, it's true. Around Uber, there's a whole system of people giving advice about, which rides to pick up and things like that. Another aspect of all these companies is the

tipping, right? Another update DoorDash made on their app is they're now going to allow post-checkout tipping for 30 days. It seems like a while to me, but there's been a little bit of a backlash in the world about point-of-service tipping. Everybody feels like they're being asked for tips at any transaction, any moment. With DoorDash, with Uber, it seems like they to do everything they can to encourage tipping to keep the workers happy. Are they sort of passing on some of the costs of doing business to the customer? No, there's no sort of about it. You're a customer. You've had costs passed on to you. You've been given opportunities to tip that are many, many, many times the number of transactions

that used to be the case. And you have, perhaps, I'm not accusing you of tipping or not tipping at any point, but you've probably paid more money for the same service in the last couple of years than you did five years ago. Am I right about that? You are right about that, because there's the other aspect of it, especially with Uber or something like that. I'm attached to my rating. That's part of the aspect of this, too. If you don't tip and you plan to use the service again, you're going to be in trouble. I have made probably the mistake of not caring about my Uber rating, so I couldn't tell you what it is. Therefore, maybe I'm not tipping as much as you are in pursuit of a better rating.

I'm hard-pressed to think of an occasion where 27 days after a service I would have been compelled to tip. I can't imagine the circumstances under which that would occur. Leaving things open for 30 days for a tip, I guess, signals something to the employees, look, you've still got a chance. I guess if you go back to the same spot, the same customer again and again and deliver a good service, maybe you can get retroactive tipping. Maybe. Maybe. We'll see. I want to take a quick pivot to another sharing economy service. Yesterday on the show, you chatted with Ricky about Delta and travel. Travel boom is sort of where summer travel, even though it's gotten a little dicey with some of the airlines lately.

But there was a story from a tweet that went viral yesterday about Airbnb. A real estate consultant published some data from this company called All The Rooms, saying Airbnb revenue is down by 50% in markets like Austin and Phoenix. There's competing data from another company, AirDNA, saying the revenue is only down around 3%. Either way, looking at Airbnb, is there a demand problem, or is this a prices have gotten too high problem? I think that it's more likely that the prices, if not too high, have gotten to be no value compared to hotel rooms, especially on a short stay, given what seems to be a very large cleaning service for any Airbnb stay. I think that short-term rentals, hotels

are going to be, if not superior, very competitive. And there are more of them. There are more employees at the hotels today than there were a year ago. There's more people coming in to do seasonal work than there was a year ago. It was still hard to get into the country a year ago. You needed to have a negative test just to get into the country. I can't remember what month that changed, but it was sometime after May when I was traveling back into the country. The data is very different between these two services as to what the extent of the decline is. As you point out, there is a decline year over year. But 3% is very different from some markets. 50%, that's also a headline. Selecting the hardest-hit

market you can find, throwing that into your headline, calling it a collapse. There is no collapse here. But there's more hotel rooms being supplied with more staff that can turn around hotel rooms in a timely manner. Yeah, the collapse thing. Yeah, that was a very overblown headline. But you mentioned the cleaning fees. This is a big issue that everyone has complained about. Airbnb, they have made some moves to increase the transparency on it. The fees part is one problem. The other part is the demands that you get when you use an Airbnb. They ask you to take out the trash or strip the bed. Sometimes it can be more than that. Can Airbnb administer that on the corporate level? It's a little bit

different than transparency with fees, because it's not at the app level, it's really at the host level. Yeah, ultimately, you get what you pay for. If you're paying a very small amount for a room or a house that seems exceptional, then There may be additional fees that supplement that and make the fee less attractive or you're getting less service than you would if you were paying more. Yeah, this is another example like DoorDash, where you've got a new business model, you come out, it evolves, you tweak it, the broken things get fixed over time, and ultimately, the customer, Hopefully, I think for Airbnb, the challenge is the customer to have a consistent experience,

where it is very hard to give a consistent experience due to the nature of independent operators being the ones supplying the rooms and housing. Getting that information out there in a more transparent manner, and Airbnb is not the only one who provides a price upfront that then you confront at the end of the transaction wasn't anywhere close to what you thought you were going to get. That's available in many, many different travel services. But if people are getting upset because of the experience of booking their Airbnb stays, Airbnb will correct that. Yeah, absolutely. Let's talk about something different. Very consistent business, actually.

We're in the heart of grilling season, which it seems like every food season might be good news for McCormick. Strong quarter for them, sales up percent. The part of the business where they see the growth, though, isn't necessarily the hot sauces, the spices that we buy. It's the flavor solutions they sell the businesses. Why is this a growth area for McCormick? Well, the headline number seems like more growth than once you dig things away. Flavor Solutions sales, and that's the category selling to restaurants and to the industrial market, formerly called the industrial segment, up 12%. But, that was all pricing. it was a 14% increase from pricing actions offset by a 1% volume decline. It was pretty

much the same in the consumer segment, much smaller, not able to raise prices as much, only a 9% increase from pricing and a 2% volume decline. Quarter over quarter, year over year by the quarter, people were stocking up less, but they were paying a lot more, especially at the restaurant level, which is also probably something that would come as no surprise to you or listeners. It seems like restaurant pricing has gotten very generous at the restaurant level. Yeah, generous for them, and a little bit painful for us. Yes, we're being the ones who are generous. Apparently, they're being generous with the amounts that they're paying to McCormick. That won't last forever. They're not going

to be able to raise prices at that level. People aren't going to put up with inflation of the 12% to 14% range on their meals or the components of the meals for very long. And of course, inflation has come down recently in the rest of the economy. I don't think that we're going to see numbers like this going forward for McCormick. As you point out, and it's a very stable business, people aren't going to eat 10% more or be 10% more flavorful in their eating from one year to the next. That's true. We've got a CEO change with this one, too. You talked about a CEO change yesterday with AutoZone. Another very stable, sedate kind of change, you've got Brendan Foley, who became president a year ago. He's taking on

the CEO job in September. The current CEO, Lawrence Kurzias, he's going to stay on as the chairman of the board. Foley has been in leadership for a while. This seems like a nice, easy transition, kind of like the one from yesterday. Is this what you want to see? Steady companies, steady transition? Or do you sometimes want to see an outsider come in? Steady is part of it. The reason why you would want this to be a steady transition is, it's not just steady. You can have a company that is a subpar performer, but very steady at doing so. McCormick's not that. McCormick has been an exceptional investment. You don't want to see that equation changed, particularly. It's a happy event for shareholders

to see a continuity of management. Where you do want to see management change is where you are not enjoying exceptional or above-average returns. Then you're going to see more agitation for a change in style or name or more than that. Yeah, we don't need that with McCormick. What's interesting to me about McCormick and about our taste in general is our capacity for spice. We have just fallen in love with hot foods. Brendan Foley, who's that incoming CEO, he said it's not just the hot sauces, but it's also heat as a component of spices, seasonings, snacks, everything.

that's a huge growth area for them. They have Frank's Red Hot, they have some other hot sauce brands. Do you think they're going to continue to go down the hot sauce road, maybe buying other brands? How do they keep pace with the other companies that are embracing this hot-all-the-things trend? Historically, what they've done is to acquire great brands and to keep them going. I think Old Bay, regionally, is probably the best-known brand. Here we are, not too far from Maryland. Old Bay's very central place in the world of eating crabs is one of the things that defines the experience. But I think that Frank's Reds and some of the other hot sauce acquisitions they've made are indicative

of what they do with their excess earnings, which is to make targeted acquisitions. They've been successful, and they're able to put more money behind the marketing of regional success stories. That has worked out. I think that rather than trying to develop new brands, they're better off buying smaller, regionally successful brands and bringing them both domestically and internationally. Yeah, I think that's right. In the hot sauce category, there's plenty to choose from. There is. There's plenty of regional success stories out there, and they have the ability to make them national success stories. Absolutely. Thanks so much for your time today, Bill.

Thanks for having me. Adobe's new generative AI product, Firefly, has people buzzing. That's not all you need to know about the company. Mary Long and Sanmeet Deya walk through Adobe's different businesses and where the company could go next. Today, we're putting the spotlight on one company benefiting from the AI gold rush. Here to talk all things Adobe is Motley Fool senior analyst, Sam Meadeo. Glad to have you. Hey, thanks for having me, Mary. Many listeners may already be familiar with Adobe for its creative software,

but there's more to Adobe than just Photoshop, right? So how does this company actually make money? Yeah, that's a great question. One of the first things we ask when we're looking at a company. Basically, more than 93% of their revenue comes from subscriptions. Their three main segments are digital media, which is about 73% of revenue. Digital experience is about 25% of revenue. And publishing and advertising, which makes up just a little bit around 2%. They're geographically very diverse all across, with America as being 60% of where the revenue comes from. EMEA, 25%. Asia Pacific, 15%. Their gross margin is in the high 80%, and their operating margins have been above 30% in the past four years. They have products that you've probably

used before, PDF, Acrobat. There's also a slew of content creation tools that video editors, photo editors use that I haven't used that realm of software, but they have a wide variety of products across the digital landscape. Very good broad-based company. And are there other offerings beyond that content creation bucket that you mentioned? Those are the main ones, and we're going to get into it a little bit later where they've been adding into their product suite with generative AI, which is meant to kind of enhance some of those products. So I know we're going to get into that a little later. And so with those offerings that you mentioned, without dipping too much into the generative

of AI stuff quite yet. Who are Adobe's chief competitors? You mentioned PDF, Acrobat. Is their DocuSign their top competitor there? Yeah, DocuSign is there. And that's actually a product I forgot to mention is the Signature DocuSign-style product that they have. But they also compete with the big software guys, Microsoft, Salesforce, some of those other companies. But there's also a lot of private companies that they compete with, whether it be Canva, Figma, various other private companies as well. Yeah, you mentioned Figma, and that's another thing that we'll get to in just a bit. But before we dive into that, let's think about the leadership of the company and offer an overview there. So, the CEO, Shansanu Narayan,

has been at Adobe's helm for about 16 years. How integral is Narayan's leadership to the Adobe's story? Ryan has been a phenomenal CEO. He's been at the helm since 2007. Just to give you a snapshot of what he's done, since he began, Adobe's stock has returned 17.1% versus 9.6% for the S&P 500. Over that period of time, the stock has outperformed based on a lot of the initiatives that he's taken on. He's actually been recently named the No. 2 in the top CEO list on Glassdoor. He's been instrumental in them changing their business from a traditional software company where you would buy the package software to a cloud-based subscription model, which changed

their revenue model to a more recurring, steady revenue stream, rather than the traditional package software product. That was a huge transition. It did slow down the revenue a little bit, but it proved to be a much higher margin and a better shift for them in the long run. He's one of the ones that's helped establish a global standard for digital documents with Acrobat and PDF, which is something we all use. He led the launches of Creative Cloud in 2013, Experience Cloud in 2019. He's guided the company in adapting to the changing digital landscape. The company has been recognized as a top place to work for women and minorities.

He's very involved with diversity and inclusion. He's been a great CEO for them. Awesome. You gave us an overview earlier of some of the different metrics and how they've changed at Adobe over the past few years. Can you walk us through how you're thinking about Adobe's current valuation? Currently, based on 2023 estimates, they're trading at about 31X PE. Their free cash flow yields at about 3.5%. One quick metric I like to take a look at that I do a quick calculation on is, if we were to assume a 20X normalized PE, which is a normalized for the market and various stocks over a long-term average. Their current price, which last I

checked was $489. I haven't checked the price as of today. Their current price of $489 implies a five-year earnings per share CAGR of about 12%. That's what the market is pricing in. Consensus expectations is about the same. They're trading in line with what consensus thinks their earnings will grow at over the next few years. They're fairly valued, I would say, and not significantly overvalued, even given the run-up in the stock. Because while the stock's been running up, their earnings and their cash flows have been growing as well at a very high margin steady clip. Fairly valued, I would say. You mentioned the run-up in the stock. Year-to-date, Adobe stock is up over 40%. Has something in particular driven that surge?

I think it's just been good old fundamentals and strong results over the course of the year. You know, they've been continuing to post strong results that beat expectations in a challenging economic environment for tech stocks and specifically SaaS stocks. And that just is a testament to the nature of their products and their software being a core product and utilization for their customers. And also, AI has been something that's been a big tailwind for them in terms of the momentum for the stock. So, let's talk about AI. Like, what makes Adobe an AI play? So, the thing I like about Adobe as an AI play is they're kind of not the first ones when you think of when it comes to AI. You know, you think of Google or OpenAI and ChatGPT.

But they've been slowly and steadily been working to integrate their generative AI tools into their core design products like Photoshop, Illustrator, and Premiere. And they've been working on it for a while, and now they're kind of starting to bring those products out to bear. where the cool thing about their generative AI is, it can entice customers to pay more for the solutions they're already using with Adobe, as well as solutions that Adobe is creating in conjunction with AI to enhance the usability and the interaction. One of their core products that they recently came out with, they launched a beta version in March of Firefly. Firefly is basically, if you've heard of DALI 2 or Mid Journey, an AI photo generation video generation, mostly photo generation for now, app, where it's trained

on hundreds of millions of stock photos that Adobe has, openly licensed content and copyrighted expired public images that you can basically type in a text, create me this image of so-and-so, be as creative as possible as you want, and it will create an AI-generated image for you. What I like about what they're doing with this, too, is they're trying to play it safe and be very mindful of copyright laws to protect artists and their work. They're not in a rush to be the first mover and move fast and break things, as is always the case in technology, while some of the other image generation IAI apps are at risk of potential copyright infringement, so they're already getting some heat.

And while regulation is forthcoming, as it always is, Adobe's trying to play that good side of that and kind of be on the side of the artists and the content creators. Yeah, I saw something literally today that was saying Adobe was so confident in their Firefly program that they would support the legal fees of any artists that were faced with copyright infringement lawsuits or something. Because that system is trained on Adobe's wholly owned stock images and openly sourced ones, there shouldn't be any issues there. So that was kind of an interesting play, but speaks exactly to what you're saying. Yeah. Also, just one thing I want to add about Firefly, it's only three months since Firefly's launch, users have created almost half a billion images with its tools. Right now, it's free and they're going to, at some point, charge for it. The other thing I wanted to mention about Adobe and their AI generation is, this is one thing that we look

for in our portfolios when it comes to AI investing, is how close are they or are they monetizing their AI. Many companies talk about AI, they say they're going to explore AI, but are they really making money from it, or is it just something to boost up their stock and get people excited about them? Adobe, I would argue, is close to that tipping point of actually monetizing AI, and especially with the fact that their current tools are going to be enhanced by AI, and it could help retention and added usability. Adobe's been around since 1982, so it's not like it's the new kid on the block, but as we've just said, it is stepping into this like cutting edge technology and as being a real player there. So is this company, do you think of this as a

stalwart company or is there still a growth story here? That's a good and tricky question. And I think it is a stalwart with the optionality and potential for huge growth opportunity ahead. You know, they have their core businesses that are generating a ton of cashflow and steady operating cash flow. So that is there and it's going to continue to do well. But I think with the generative AI, that provides an additional boost in terms of growth. And the Figma acquisition could add another boost of growth if that were to be approved. So I see it as one of the stalwarts with a growth component to it. Yeah, and for sure. So let's kind of step into this Figma conversation too. Last year, Adobe announced its plans to acquire Figma, which is a collaborative

design software and a huge competitor to Adobe. The price tag on this was $20 billion. There was plenty of skepticism around that sky-high number, but also around potential antitrust issues. The U.S. and U.K. regulators are already considering blocking the deal, and the EU recently launched an antitrust investigation. How central is the success or failure of this acquisition to your Adobe investing thesis? I don't think it's central to the Adobe thesis because, like I said, they have such a core business that is strong and doing very well, very highly diversified, with a ton of recurring revenue and cash flow generation. Their generative AI, I think, is going to be very additive to their core business as well as future lines of business.

But the deal has some positive attributes, which I think could really help them in terms of gaining access to a new user base, complementing their tools with Figma's tools, which are not completely the same, helps them stay competitive in a collaborative design software market, and diversifies their products and revenues even more. While it's a very high price tag, 50 times forward revenue, which I think would possibly be the highest for a software acquisition, it has a lot of positive attributes that could be additive for them in the future. But if deal doesn't get approved and doesn't fall apart, I would not be hesitant to continue to own the stock and be positive on it. Sounds like there's a lot of upside

with Adobe no matter how you slice it. Whether or not this acquisition goes through, they're paving the way, but being patient with AI. Lots of things to watch here and lots of good news all around. Thanks so much, Sandmeet, for diving into Adobe with us today. Good to talk to you. Thank you, Mary. 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 Deidre Willard. Thanks for listening. We'll see you tomorrow.