Motley Fool Hidden Gems Investing - Meta Soars

Episode Date: February 2, 2023

For the first time in a long time, Meta Platforms gave shareholders a reason to smile.  (0:21) Tim Beyers discusses: - 4th-quarter revenue coming in higher than expected for Meta - That $40 billion share buyback plan - Why AMD is demonstrating not all semiconductor chip companies are alike (11:00) How did Planet Fitness get the attention of the Federal Trade Commission? Ricky Mulvey and Sanmeet Deo discuss whether the low-cost gym deserves a spot on your watch list.  Stocks discussed: META, INTC, AMD, PLNT Host: Chris Hill Guest: Tim Beyers, Sanmeet Deo Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

In Toronto, every arrival is a statement, and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac. Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac definition of luxury. Well, it's Groundhog Day again. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst

Tim Byers. Thanks for being here. Thanks for having me. Fully caffeinated, ready to go. Likewise, let's start with the social network. Fourth quarter revenue was solidly higher than expected for Meta Platforms. Throw in the fact that Mark Zuckerberg and his team have been methodically cutting costs and they announced a $40 billion share buyback plan and you get shares of Meta Platforms up more than 20%. Where do you want to start? I think I want to start with Mark can't quit the metaverse. I mean, he just can't quit it. And maybe he doesn't need to.

I mean, he was a bit forceful in his comments about where they're going. He made an argument that Facebook's AI is making better and better decisions about how they place ads and that that will keep going and their investments in AI will just keep progressing. But boy, is the investment in reality labs just gone bonkers, Chris. So I want to give just a quick update here. So year over year, both the revenue for the quarter as well as the operating income for the quarter and the year for Reality Labs were just worse. Like, you know, the revenue was down, but there's about $3.5 billion for the fiscal year, Chris, in additional operating losses for Reality Labs. So that may very well pay off. However, that $40 billion buyback that seems to have the street sort of giddy, there's probably going to be some debt that Meta slash Facebook is going to have to take on to fund that buyback.

And I'm not so sure I love that. They did it last year, and they're probably going to do it again. Yeah. Although, I think part of the counter to that is, we see companies buying back shares, not every company is good at it. There are companies that buy back shares and they don't really reduce the share count. Meta Platforms, for whatever else you think of them, they have done a good job of reducing the share count. But yeah, it is one of those things where it's like, Like, I would, and I'm not a shareholder, but it's like, yeah, I think I'd feel better about taking on debt if interest rates were back where they were, you know, 18 months

ago. I agree with that. And I would also agree if Facebook were actually good at this, like if they were provably good at buybacks, like to be fair, this buyback may be amazing, but they are not provably good at this, Chris. I did the math. So over two years, $72.5 billion on buybacks, $33.6 billion of that in Q3 and Q4 of 2021, and your average buyback price, $389.74.

That is a lot higher than where the stock is right now, even with the bump. So I'm not saying that Facebook is wrong to be thinking about buybacks, especially if you think the stock is cheap right now, it's actually a very good decision. But let's be clear here. Because of that Reality Labs investment that is not going away, Facebook doesn't generate as much cash as it used to, and it is consuming all of it to fund its capital expenditures and those buybacks, and then some, which is why it kind of needs the debt to do this. So, yeah, I don't have super strong objections. But I think if we were to color this as, wow, this company is killing it right now, I don't know. I don't

know that they're killing it, Chris. No, I don't think they are. But I do think part of why we're seeing the stock shooting up today, part of it is just how much it's been knocked down. Part of it is, the bread and butter of this business is advertising. We saw what happened to Snap recently. This isn't getting a lot of attention, but among other things, I think this was a quarter that not only was better than expected and better than average for companies that make their money off of digital advertising, it was also a a signal that the threat to this business from two years ago of Apple changing their privacy settings, they appear to be moving past that, or at least managing their way

around it. They really took hits to their revenue because of Apple's decision to beef up their privacy settings. And you look at the revenue for meta platforms, they look to be back on track. They finally are. Yeah. And he called it like revenue neutral for 2023 and possibly into 2024. So it does look like things are turning a little bit. So I would agree with that. Things are more positive than they were my fear is that because things are more positive than than they were we've suddenly gone from okay things are better than they were so now it's all gas no break let's go like and that i i wonder if it's a little too much a little too soon i would be if i were an investor right now, I think I'd be a little cautious about going deep and investing a lot

in Facebook. In fact, given where the stock has shot up, if you bought this say like a year ago and you're sitting on a massive return, I wouldn't be afraid to say maybe take a little bit and find some other bargains here because this one, I think, is still early in the turnaround process, Chris. Real quick, I want to get your thoughts on a completely different part of the market, and that's semiconductors. This is one of those industries that at first blush seems to be somewhat uniform. Every company is different, obviously, but their results tend to track one another but last week we got intel's latest results this week we get amd's results and they could hardly be more different tim i mean you i think it's time to stop talking about the chip

sector and start and like how the chip sector has been depressed and chip gluts and all this stuff and lumping these companies together because they are moving differently now things have really change so i want to give you a couple of quick numbers here chris so in the these are two relatively similar areas in the area where intel competes let's say supplying big chips to like servers data centers the stuff that powers the cloud they have two they have two segments that sort of provide this this area the operating margins in 2021 for the network and edge segment for Intel, and then the data center segment were 21.5% and 37.2%. Those are down now to 8.3% and 11.9%. So they're either massively cutting prices or they just can't sell their

stuff. It just is not great. AMD in its data center business in 2022 was up 63% and the operating margin expanded from 27% to 31%. These two are going in just different directions materially, and it does look like what we've all sort of heard, that AMD is really getting a lot more of Intel's market share. These numbers seem to bear that out. Wow. And that's not even touching on the more recent announcement from Intel in terms of what they're doing with staff, what they're doing with pay cuts, freezing bonuses, all that sort of thing. And those are tough decisions. But to your point, we're not seeing that at AMD. We're not. And part of that, to be fair to Intel, part of that is because Intel has taken on a

project that AMD has not and really cannot. Intel is going to be in the business of reshoring chip manufacturing here in the United States. They're not only competing with AMD, they're competing with Taiwan Semiconductor. That's a big, big ask, and they need a lot of capital to do it. But the performance of their data center and network business really doesn't help here. It looks like, I mean, I hate to say this because I'm never one to want to discount Intel or count them out because they're just so big. But the numbers are such that, I mean, Chris, roughly those two segments, the server side segments for Intel, that's about $3 billion in operating profit in 2022, AMD over the same period, about $1.6 billion. Now, same period last year, about a

billion dollars for AMD versus on the order of three or four billion dollars. I mean, it's a very, things have changed dramatically. So AMD has done a lot of work to catch up and it looks like they are moving ahead here. So I would say this stock, maybe it's not cheaply valued anymore because people have started to notice AMD. But the momentum, I mean, the big mo is behind this company, Chris. And I think we're going to keep going on this for quite some time. Tim Byers, great talking to you. Thanks for being here. Thanks, Chris. signing up for a gym membership is easy but canceling a gym membership

that's a little bit tougher ricky mulvey talks with analyst san meteo about planet fitness getting the attention of the federal trade commission and whether the low-priced gym deserves a spot on your watch list let's dive into planet fitness because there was a short report that got my attention on it's from edwin dorsey he writes a sub stack called called the bear cave he alleged that planet fitness was essentially an illegal billing operation with gyms on the side looking at a lot of the complaints from members about their billing practices where it's very easy to join but essentially you have to send a letter or go to the gym in person some members have found that maybe their letters have

been lost in the mail or that they've moved away from the gym and now it's basically impossible for them to cancel. And Planet Fitness is, one note I'll say too, is that the CFO, Dorvin Lively, in 2019 essentially said that attrition is so low that we don't even measure it. That's the chief financial officer. And it's not a great look for the company, but it raised some questions of, is that a legitimate claim that it's an explosive claim and is it legitimate? And is Planet Fitness, essentially, are their practices worse than their competitors? You know, as I was reading through this report, you know, I think it's a little bit of a stretch to kind of say they called it an illegal billing operation with a gym in

place. You know, like I mentioned earlier, the cancellation billing issues within the gym industry, the fitness industry, is a huge issue. It's actually a problem, and it's actually something that's very well known. It happens across gyms. Planet Fitness is a franchisor of nearly 2,000-plus locations. They have 17 million members. The short report, I don't know how many exactly. He had some highlights of some of the complaints and legal actions, but in terms of how many total complaints he came across, I'm not sure if you caught that number, but let's say it was 500 to 1,000-something. No, it was in the thousands. It was in the thousands. Yeah, he went to the Federal Trade

commission to get complaints. And they said, we can't even send you the full number of complaints because there's so many about Planet Fitness that you need to get more specific. Yeah. Yeah. So now thousands is a lot, no doubt, but a thousand amongst 17 million members is maybe, I don't want to say insignificant, I don't want to call anyone's claims insignificant per se, but it is a very, very small percentage of their total membership base. And another thing is, As you know, I actually did operate a franchise gym and this is a very, very tough situation as a gym owner. You will have people trying to get out of contracts, get out of memberships constantly. Some people are very legitimate and they have legitimate reasons. They want to get

out. They're not using it as much, but then some just want to get out of it and they'll try almost anything. So the problem here is a push and pull between members and the gym. The gym doesn't want to lose members because that's paying customers for them. And the members don't want to have it be so difficult to cancel. If you can click to sign up, you should be able to click to cancel. And that's actually one thing that the New York, I believe, or the Federal Trade Commissioner had tweeted out about that was something they were going to really focus in on for subscriptions. But this is a tough thing in the industry. I mean, two highlights for me was at Planet Fitness, you can't use a credit card to join. You have to use a debit card or you have to

give them direct access to your bank account. I think that's uncommon among gyms. And the reason is because for a credit card, you can put a block in place. And there have been additional billing complaints. One example was there was a senior in Texas who found that he was being charged $30 a month on top of a $25 monthly subscription with these unexplained charges. Maybe the opposite side of that is Planet Fitness has lots of franchisors and some mistakes happen when, as you said, you have millions and millions of members. Although I imagine that many of those mistakes often go in the direction of Planet Fitness. One other piece that I wanted to bring up from that too is there was the claim that essentially that they were lying about the number

of Planet Fitness locations in an investor letter. And I think that claim holds a little less water than the billing complaints. Basically, Planet Fitness put out a slide deck for an investor day showing that they could open up more locations where they had locations and where they were planning to open up more. And Dorsey found that they were severely overcounting the number of locations in places like Wyoming and undercounted locations in Michigan, which is a very saturated market. Was that a red flag to you, or do you think there might have been a more, let's say, innocent mistake made in a slide deck? When I first read that, it was concerning. And then when we discussed it a little bit, you'd mentioned on the slide deck, it does say for

illustrative purposes only. So while it's not great that that's an issue, I'm pretty sure they probably, Planet Fitness, probably just took a map, threw a whole bunch of dots on there and said, all right, this is what it looks like. They have over 2,000-plus locations. Not ideal. As an investor, I would like to see a company be a little more detail-oriented with their slide decks and the information that they're providing to investors. It is concerning, but not as much of a red flag as it may seem to sound in the short report. I don't want to focus only on the negative, though. Planet Fitness has had a lot of growth. I think before the pandemic, it had 50 straight quarters of same-store sales growth, and many investors are optimistic. It's quickly

growing. It's solidly beaten the market since its IPO. It still looks, in some ways, kind of expensive, where it's trading around eight times sales. What's the bull case for Planet Fitness, and where are you at as an investor who looks at the health and fitness industry on this company? Well, this has been a name that's been on my radar, my watch list for a little bit, for a while now. As a business, it has quite a bit of things that are bullish. Like I said, it has currently about over 2,300 stores. It's more than 60% greater by store count than the next 17 competitors combined. High value, low price competitors, which is a lot of anytime fitness and, like, reasonable brands, you could say. They target a very broad demographic. So,

you know, amongst genders, income levels, ages, you know, they've actually signed up and started to focus a lot on under 35. 40% of their age group is under 35 members. And they particularly focus to new fitness goers, people that are, like, get-off-the-couch types, like, just get in there, and get in the gym and get started. They don't have all the fancy advanced equipment that a seasoned gym goer would want. A seasoned gym goer would probably not sign up for a Planet Fitness because they want more things that a Planet Fitness really wouldn't have. It operates a franchisor model. When you invest in the stock, it's a franchisor. They license franchise stores to franchisees. This allows them to grow their store count quickly, as they've done.

They have high returns on invested capital. The franchisees have attractive unit economics, which is about 40% EBITDA margins, which is great for franchisees. So, stock investors that invest in the stock benefit from this capital-light, high-margin, cash flow-growing business. They have pretty ambitious three-year financial targets, as they outlined at a recent investor day. They want to target 4,000 plus stores and international. They've already started going international. They want low to mid-teens revenue growth, high-teens EBITDA growth, and low to mid-20% EPS growth. So for three-year targets, those are ambitious and strong and something they could possibly do given the way their model is.

And I've always been intrigued by the fact that it's only $10 a month and that they target such a broad audience that, you know, it's almost like part of the turn being low might be because of these cancellation billing issues that we've talked about. But part of the turn is it's only 10 bucks. Just the appeal of not canceling and hoping that you're going to go at some point is huge and prevents many people from canceling as well. So there's a lot of bullish things about this story as well. Sam, anything else on Planet Fitness or cancellations at gyms before we get going you know one one other thing to highlight across the the fact that these cancellation policies are tough across the industry i looked at a few other chains and went to their websites

and kind of took a look at what their cancellation policies are and you know very most of them are very similar la fitness which is a very popular chain hasn't has funny they have an online cancellation form where you can go but you need to fill it out print it and then mail it or deliver to the manager. Lifetime fitness, written notice in person or certified mail, 24 hour fitness cancellation by phone, email, or through app. And then Equinox fitness, which is a higher end chain via registered certified mail, email, or club with managers. So just highlighting kind of the fact that this is very, very common within the industry. Always appreciate your time. Always enjoy talking health and fitness with you. Thank you, Ricky.

That's all for today, but coming up tomorrow, we'll have the latest results from Apple, Amazon, Alphabet, Starbucks, and a lot more. As always, people on the program may have interest 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. Thanks for watching!