Motley Fool Hidden Gems Investing - Is Toast toast?

Episode Date: November 2, 2023

PayPal’s new CEO debuted with some heat.  (00:21) Ricky Mulvey and Jason Moser discuss: - Alex Chriss’s first earnings call as CEO of PayPal. - Renewed focus for the payments company. - Airbnb’s quarter and questions for its international growth. - Investors going through an “airline stocks phase.” Plus, (14:10) Mary Long and Tim Beyers take a look at restaurant tech company, Toast. Stock Advisor discount link: www.fool.com/mfmdiscount Companies discussed: PYPL, ABNB, TOST, ORCL Hosts: Ricky Mulvey, Mary Long Guests: Jason Moser, Tim Beyers Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Trade ice skating at Nathan Phillips Square for ice cubes in your umbrella drink. Let Porter Airlines fly you from Toronto Pearson non-stop to 10 top sun destinations in Mexico, the Caribbean, and Costa Rica. Enjoy award-winning Porter service Toronto has loved for 20 years, and start your vacation as soon as you're on the plane. Book your sunny getaway today at FlyPorter.com, and actually enjoy economy. PayPal has a new dad, and his name is Alex. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jason Moser. Jason, good to see you. Hey, Ricky. Good to see you. How's everything? It's going pretty well. How about for yourself?

You know, I could complain, but nobody ever wants to hear it anyway. No, I want you to complain. We've got five minutes of JMO complaints. All is well. All is well in the neighborhood. We had a successful Halloween, and now we're kicking off Thanksgiving month. I'm excited to get that bird on the Traeger this year. Well, speaking of kicking things off, PayPal has a new CEO, Alex Chris. 30 days on the job. I'm not going to ask you to judge his performance. He can't really do anything in 30 days. But yesterday was his first earnings call, gave investors a first impression. What was your take on Alex's first impression to the PayPal shareholders? I'm optimistic. I really feel like

we've got someone in the CEO office there that is aware of the potential that this business has, but also is aware of some of the unforced errors that they've committed along the way that have the market really looking at this thing more glass half-empty right now. His feelings regarding the business, we talked about this in production, the word focus was used a lot. We could argue that the company has probably lacked focus here over the last several years has tried to reinvent itself and become that super-rat that we heard Shulman always talking about. Really, at the end of the day, that didn't seem like it was the wisest move. They're whittling down the cost structure, focusing more on what they do well, which is

payments. I think that his awareness of some of the concerns in the investing community is encouraging. I think one of the things we got on that call yesterday was a clear admission that they are not giving us the key performance indicators that tell us how this business is doing. It's been difficult to judge this business because the information is just not so granular. We didn't get that level of granularity that I think a lot of us are looking for. It sounds like that's getting ready to change, which is a good thing. Yeah. I will note that Shulman was thanked, quote, for his diligence and professionalism on handing the reins over absolutely nothing on the past leadership from the new CEO, Alex Chris. He did talk about the

key performance indicators. You tell me, how big of a problem was this for PayPal? This is the quote. I believe in the last several years, it has been difficult to model our company consistently because the company itself hasn't provided consistent metrics to allow you to do so. That is going to change, end quote. You're an analyst. You follow PayPal. What are the metrics you need to see out of the new form of the leadership? Well, I think, ultimately, PayPal today is much different than it was years ago. This isn't just some app where you just send money to your friends. It's a big and somewhat complicated business. You get PayPal and Venmo and Braintree, there's branded, there's unbranded. This growing focus obviously on small to medium

businesses or SMBs, you'll hear them talk about. I think it's been a problem for a while, the lack of these key performance indicators really giving us a way to judge their success and their progress. This isn't just, hey, we're looking at gross dollar volume being pushed through the network anymore. Each facet of the business plays its own role. I think getting those KPIs, getting those metrics where we can gauge the success of each part of this business is going to be extremely helpful. I know I'm not the only one. I think it's been a very common complaint in the investing community is just not being able to really judge their progress or lack of. Now, it feels like we're going to be able to look under the hood at each of these

drivers of this business and understand more the levers that they can pull with PayPal or with Venmo or what is happening with Braintree and branded versus unbranded. We're going to see big focus on this PayPal complete payment solution. That was a big theme of the call as well. So I think that next quarter is going to be very enlightening from that perspective. I'm looking forward to it. Yeah, we got 18 mentions of the word focus, and that was just in the opening remarks for alex chris he is he is going to repeat that into your skull he also had a couple innovations that he wanted to highlight are and i'm gonna i'm gonna give you the menu and then you tell me if any of these are really worth investors attention number one we got a cashback

credit card number two a unified paypal rewards program 25 million users in the past 12 months they've also highlighted easier sign-in experiences reduced friction and then number four jmo the first regulated stablecoin by a global payments company which connects PayPal and Venmo accounts. Let's go. Crypto is back. Yeah. Well, I'm not the biggest crypto guy, so I'll decline to really comment much on that. To me, it seems like they're taking just a measured approach in whatever crypto aspirations they have. That's a good thing, I think, not going all-in. I think with PayPal, reducing friction is always key. It's frustrating if you are going through checkout, for example, and then you get to

that last step and how you want to pay isn't necessarily supported. I think reducing friction, they've opened up now to where they are part of the Apple wallets and Google wallets. Again, PayPal Complete Payment Solution, I think, is going to be something that really ultimately reducing friction that creates longer, stickier relationships with consumers. Hey, I mean, listen, everybody loves rewards, right? I think a unified PayPal rewards program, that makes a lot of sense too. For heavy users of the service, that's something that keeps you coming back for more. All right. We also got Airbnb earnings, but anything else you want to hit from PayPal before we move on?

No, no. I think this was a great introductory quarter, I think, for new leadership. And I think next quarter is really what we're looking forward to, because we're going to get a better idea of exactly how they're going to take this business forward. I think it's worth noting, too, the sale of that Happy Returns business to UPS. That, I think, is a good example of focus. Get rid of these things that just don't have much to do with your core business. And thankfully, they sold that to UPS, and they actually made a little money on that deal. So, good outcome there. All right. Investors tended to be a little, or they're a little tepid about Airbnb's latest quarter. It's got revenue of $3.4 billion. That is up 18% year over year. Adjusted net income

of $1.6 billion. That is the highest ever. It's active listing supply. The number of houses, condos, rooms grew at about a 20% clip. That's an extra million places to stay. And then they also announced $500 million in stock repurchases over the quarter. What do you think is worth highlighting? Well, you know, I understand the, you know, there's a lot of uncertainty on the world right now, right? And I mean, this is truly a global business. So I think when you look at the cross-border, for example, the nights booked, cross-border

nights booked increased 17% a quarter. They actually called out Asia Pacific having fully recovered to pre-pandemic levels. I think from a global perspective, you look at the opportunity that they're pursuing in travel. The tourism industry is greater than $2 trillion opportunity. Obviously, that's not Airbnb's total market opportunity, but it just goes to speak to how large of an opportunity this is. I think you see this business ebb and flow a little bit as it's figuring out its place in the world. We've talked a lot about the headline risk with New York City in this, what was it, the local law that they passed through essentially banning short-term rentals.

It was a headline, but it wasn't something that was terribly fundamental to their business. I think they said it represented maybe 1% of overall revenue. It does feel like they're finding their way in this world, kind of like we saw with Uber back in the day when it was really getting established. I think for me, looking at this from the global perspective, I understand the hesitation or the concerns at least in regard to the forward-looking guidance there because international travel right now is a little bit of a riskier proposition than it has been in the past. But all things considered, it's a very important business. I do believe if they shut their doors tomorrow. The world would feel it. To me, nothing really other to point out than maybe getting a

little bit more insight into what they want to do with their experiences. Next week, I think they have their big winter release, and so we'll get some more information there as to updates they've made and the strategy that they're taking with that experience inside of the business because that can be a very complimentary one. Yeah, Chesky talking about cities opening the doors to Airbnb a little bit more. I think San Diego was one of them. Of course, that's not going to grab the headlines quite like one shutting off Airbnb. But yeah, the experiences thing is a little bit of a concern, Jason. That's the plan for New York City. And before the show, we're doing research. And there are experiences in New York City that look lovely. You can have

a tea tour. They have comedy shows. There's someone that'll yell at you while you walk across the Brooklyn Bridge with them. But a lot of the business and experiences, or a good chunk of it, does seem to be people taking photos of you in front of oncoming traffic. I guess, What is your message to those experienced buyers that would like those photo shoots in Times Square in front of oncoming traffic? I just make sure your insurance policies are up to date. Take out a little bit more if you need it, because that sounds like an accident waiting to happen. Last thing, I think that Airbnb hasn't really approached yet, but makes a lot of sense for the business, is a loyalty program. Chesky told Bloomberg that they're thinking about it,

but it really wouldn't have anything to do with points or free stays, saying, quote, it would probably be more novel than a standard points program, not like a subsidy program, which is what most programs are, but something where when you use it, the service actually gets better. I don't know what that means. Yeah, it's difficult to say. You're getting rewards by virtue of the card that you're using to pay for your Airbnb stays. Maybe there's the Airbnb Power users, maybe this gives you free upgrades or maybe you get to waive the cleaning fee or something. I don't know. It sounds like they have to give that one a little bit more thought. But loyalty programs, they pay off. You're giving people a reason to keep using

and to keep coming back. So as long as they execute it thoughtfully, it seems like it has some potential. All right. Let's finish off with a little bit of mailbag. We got an X or a post or a tweet or a message on the platform formerly known as Twitter from at Taylor underscore Franklin. We'll ask you this, Jason, does every lifelong investor regrettably go through a quote, I should buy an airline stocks phase? Uh, yeah, I think so. I mean, I think the longer that you, uh, the longer that you invest the, I mean, sure, you know, the more success you witness, but, but the more mistakes you make, right. I mean, and that's, it's, it's a never ending learning experience. Airline stocks are funny. I'm assuming this is not just focused on airline

stocks, but that's probably an easy one because I think historically, that's been a pretty tough investment. I think Warren Buffett's got some pretty good quotes out there on investing in airlines. Even he flip-flopped and decided he needed to get into airline stocks at some point. Yeah, I think we all go through that. The key is to just make sure that you're aware of it and that you learn from it. Like, you know, Ricky, we just got through with this big SPAC phase, right? I mean, we all probably suffered a little bit from that SPAC phase. I know I did, App Harvest, you know, where are you now? That was a dumb investment on my part. But you know, hey, listen, I learned from it. And so, yeah, I think the key is embracing the fact that you're going

to go through those phases and learning from them and being able to identify that and saying, okay, well, it feels like I'm in this phase. And the last time I went through a phase, what did I learn? Should I just avoid going through this phase? Is it just a phase? I think that's really the key is just always keep an open mind as an investor and just embrace the learning opportunities because that's what they are. Jason Moser, thank you for your time and your insight. You got it. Thank you. 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.ai slash fool. visit fool.com slash MFM discount. I will also include a link in the show notes. All right. When a stock drops 75%, is it time to order up or are things toast? Up next, Barry Long talks with Tim Byers about a beaten up restaurant tech stock. So to kick us off, I think I should admit my biases upfront because when I go to sit down at a restaurant, I have a nice meal. And then at the end, the check arrives in the form of

a little white box that I'm supposed to tap my credit card onto, I turn into a curmudgeon-y, Luddite-like version of myself. The point is, I don't want to like toast. What am I missing? Is toast anything besides a point-of-sale system? It is. It solves what I often call a migraine level problem. What I mean by a migraine level problem is, if you have a headache, aspirin is It's nice, but sometimes you can go to sleep and ride it out. But if you have a migraine, you will pay whatever is required in order to get relief for that migraine. And so I like to be investing in companies that solve migraine-level problems because

they tend to have things like pricing power. They tend to have a little bit of a competitive advantage. And in the case of Toast, the migraine-level problem here is that if you're a restaurant operator, you do need to be investing in everything from the point-of-sale system to managing ordering, reservations, integrating with delivery systems, managing your payroll, managing just a bazillion things. There's a lot of digital systems that you need to be invested in and which need to be integrated. And so you can do really one of two things. You can hire somebody who will get the tech for you and then integrate it all for you, or you can go with Toast,

which has what I would call a full-scale restaurant operating environment. They give you all of the things that you need for the tech infrastructure for a restaurant, which is very attractive if you're a restaurant operator, particularly if you're a restaurant group that has, say, five to up to 20 locations. You get all the point-of-sale systems. You get all the hardware. Then you get all the software. You get all of the integrations. The way Toast charges is they will charge you something for that hardware, and they do charge a subscription fee. But the key feature here that is a win-win for the restaurant, and really a win-win-win for the restaurant, the waitstaff, and Toast itself, is what's called the fintech side of the business,

where they are taking a small slice, about 50 to 55 basis points, off of the fees that are generated through just the business that runs through the restaurant. As the restaurant does more business, Toast makes more money. As the restaurant makes more money, Toast makes more money. As the restaurant makes more money and turns tables faster, those waitstaff are happier too because they're getting more tips. They might be getting bigger tips. A lot of people win by putting Toast in place. That's something I very much like about this business. I think the massiveness of that migraine is reflected in the fact that the restaurant business is pretty notoriously tough. The National Restaurant Association reports that just 20%

of restaurants actually make it past the five-year mark. Then for those that do succeed, margins are famously slim. Do you think that that high-failure, low-margin combo, does that affect Toast's prospects at all? It does, but it also provides an ever-refreshing pool. This is something that is true about every company. You know the names because they're Motley Fool picks that deals with small businesses of any sort. Let's talk about HubSpot. Let's talk about Shopify. These are businesses that cater to a sector of industry where the churn rate is high because the failure rate amongst small businesses is high. That would be a really big problem if there weren't always new concepts, new small businesses being created. And in the case of

the restaurant business, there's always a new restaurant concept, Barry. I mean, there have been so many of these, and that will always be true. We will always find ways to go out and have a good dining experience, whether we're talking about quick serve, or in the case of really the core of Toast customers is a sit-down experience, just maybe have a bottle of wine, a good meal. We're talking primarily about that type of restaurant and restaurant group where it's an owner that is not a massive chain. There are maybe two or three different proprietors who came together, had a concept, and wanted to build something, and they've gotten to 10 locations. And those are the people who have really no interest in the entrenched player here, which

is Micros, which was acquired by Oracle, been around for years, and they have not been all that modern, and they've been much more of a point solution, and so Toast has been taking share from them. And for those that have been around for a while, Micros has been a big target, and Toast has been getting a lot of business replacing those micros point-of-sale systems. And I think that's probably going to continue. This is still an early-stage company. Revenue's been growing at a good clip, but Toast has yet to turn any net income. Third-quarter earnings for the year come out next week. But long-term, what kind of returns do you expect

to see from Toast in the next five, 10 years? And what do you think it needs to do to actually get there? Well, there's a number of things that it needs to do to get there. There's a couple of main drivers for Toast. The first is number of locations. In the latest quarter, I'm just checking my numbers here. If I look at it, in the last quarter that ended June 30th, they were up to 93,000 locations. Now, Toast has said that their addressable market in the U.S. is a bit over 800,000 U.S. restaurant locations. Across the world, they think that addressable market, and they are going international, that can be over 20 million. So, locations are a big part of this. They want to multiply the number of locations they can get into. And they're doing a very good job

of doing that. So, just for comparison's sake here, Mary, from June 30th, 2023 to June 30th, 2022, that's from 68,000 in the year prior quarter up to 93,000. So, adding 25,000 locations in a year. That is an impressive number. So, what we're hoping when we see in the current quarter is more growth in locations. But really, what we want to see in addition to that is steady growth upwards in terms of revenue per location, profit per location, and total business that these restaurants are doing. And I think if they continue on the trajectory they're continuing on, Mary, they can get to a place where they're generating about a 15% to 16% free cash flow margin, get to about 250,000 to 300,000 locations. If they get there at the rate they're growing

the revenue they earn per location, this is a company that can generate 20% plus average annual returns over several years, maybe even up to a decade. That's a lot. A lot of things need to go right. They're going to be subject to things like macroeconomic conditions, consumer spending. This will not be linear, but the seeds are there for this to be a very successful growth company over the next several years. In spite of that growth in number of locations that you mentioned, the stock is down nearly 75% from the high that it hit of $65 per share, which happened right after its IPO. Do you see that as a product of these macro-level conditions and things that you just mentioned, or is there another reason why the market is

valuing this company so differently? The valuation needed to reset. I mean, let's just be honest. They came out the gate in their IPO, and they were valued way too richly, way too early. And the valuation had to come back to normal. And so now, it has come back down to a much more rational level. I would call this stock pretty fairly priced and potentially cheaply priced if the growth holds up. But I wouldn't call it cheap on a pure basis because it's not yet profitable. But I think it is priced for very good growth over the long term. But initially, Mary, it was vastly overvalued coming out the gate. And so, the market has reset the pricing here. Now, more recently, what's driven down the price are a couple of things. First, the flub

with putting on digital orders, they decided to try to put on a $0.99 digital ordering fee onto every toast order that was a digital order. And that went over like a lead balloon. That did not work well. And they had to admit the error and backtrack from that, which I think was the right thing to do. And then the other, I think, is a pretty big misunderstanding about a CEO transition. Chris Camperotto, who had been the CEO and had worked with the founding team for a really long period of time, including at their prior company, it was time for him to move on to become executive chairman. The CEO is not somebody who's coming in from the outside. This is a founder. This is Adam Narang, who has served

in a number of different operational roles for Toast. He helped lead sales early on in the company's life. This is somebody who's been training for a step up to the CEO role almost since day one. He still owns a fair amount of stock in the company. I think this is probably the least controversial, most interesting, and most useful CEO transition I've seen in a while. and so the fact that the stock is getting whacked on that only makes me more interested in buying more. As always, people on the program may own stocks mentioned. The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Thank you.