Motley Fool Hidden Gems Investing - "No company is immune."

Episode Date: January 9, 2023

A major investment bank became the latest (but not the last) to announce layoffs. (0:21) Jason Moser discusses: - Goldman Sachs cutting nearly 7% of its staff - Lululemon shares falling after the company lowered gross margin guidance - Why inventory levels will be a key retail metric to watch this upcoming earnings season (11:00) Kirsten Guerra and Lou Whiteman engage in Bull vs. Bear debate over Teladoc Health. Our new report, "5 Pullback Stocks" is available for free to Stock Advisor members. To access the report just go to www.fool.com/Pullback. Stocks discussed: GS, LULU ANF, AEO, TDOC, AMZN Host: Chris Hill Guest: Jason Moser, Kirsten Guerra, Lou Whiteman Producer: Ricky Mulvey Engineers: Tim Sparks, Rich Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey Ontario! Come on down to BetMGM Casino and check out our newest exclusive, The Price is Right Fortune Pick. Don't miss out! Play exciting casino games based on the iconic game show, only at BetMGM. Access to The Price is Right Fortune Pick is only available at BetMGM Casino. BetMGM and GameSense remind you to play responsibly. 19 plus to wager. Ontario only. Please play responsibly. If you have questions or concerns about your gambling or someone close to you, please contact ConnexOntario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGamingOntario. We've got a bull versus bear on a pandemic darling.

Motley Fool Money starts now. I'm Chris Held. Joining me, Motley Fool Senior Analyst Jason Moser. Happy Monday. Happy Monday. Happy Monday, except for a few thousand people at Goldman Sachs, because the Wall Street Journal reported this morning that Goldman Sachs is planning to cut 3,200 jobs this week. This amounts to nearly 7% of the overall employee base at Goldman Sachs.

Maybe not surprising given that we got wind of this in December when there were reports that Goldman Sachs was going to be cutting their bonus pool for employees and continuing what we saw last week with Salesforce and Amazon. Yeah. We were saying last week, it feels like this is going to be a very common narrative for 2023, at least for the front half of the year. I don't think really anyone is immune out there. I think any company over the last stretch of two or three years has dealt with phenomenal challenges, unique situation, and And chances are, we won't necessarily see these types of conditions, hopefully, anytime in the near future. But ultimately, what happened, and no company is immune,

is just the overhiring really, really took hold throughout all industries, right? This isn't just tech. When we look at Goldman Sachs, I mean, this is 3,200 layoffs that are coming in the context of 49,000 employees total, 6.5% of the workforce. I mean, this is not insignificant. I mean, it's not 10%, it's not 20%, but still, I think this is just going to be an underlying theme for the coming months and quarters, if not really for all of 2023, as we see a lot of businesses really work on trying to right-size their cost structures. When you look at the growth that Goldman has seen through the years, not only in its workforce, but how that's ultimately resulted in its business, it starts to make a little bit more sense. The headcount at Goldman

has grown 34% since the end of 2018. If you look at revenue and operating profit over that same stretch, they're up just 32%. It's a safe assumption that those growth rates are going to be even more challenged here in the coming quarters. Companies are really working hard to try to get the most bang for their buck, so to speak. Later this month, we're going to get the start of earnings season. It is the big banks that, as a group, go first. This seems like one of those quarters, Jason, where even if you're someone like me who does not own shares of any of the big banks, probably want to pay more attention to what they're saying on the conference calls, because I have to believe this topic is going to

come up for every single one of them. I would imagine, and then the other topic that really I'm going to be paying close attention to. And it's something we saw this flip very quickly over the last few months of 2022, where there was this just ongoing narrative that the consumer was in a good place, that the consumer was doing okay, and that was really helping to prop up these banks' results. And very quickly, that flipped. I mean, around October, middle of October on, we started hearing more and more language about the consumer becoming more and more challenged. That is absolutely very easy to believe. We've quoted these statistics ad nauseum here on these shows just in regard to the personal savings rate being so low at 2.3%.

Clearly, more folks out there living paycheck to paycheck than there were last year. I think that's going to be another theme to really keep a focus on here coming earnings season, because the conversation absolutely hinges on really what the Fed wants to do with this interest rate policy over the next several meetings. And we're hoping that we are closer to the end than the beginning of this interest rate hiking. But you just never know, right? I mean, it all really boils down to what inflation is doing. My suspicion, though, is that as we see these companies more and more work on right-sizing their workforces, that I think economic conditions just becoming a little bit more difficult. I think we'd start to see that inflation conversation

turn a little bit more positive, hopefully towards the back half of the year. That ultimately means we're working our way through this difficult time. Lululemon lowered its gross margin guidance for the holiday quarter and shares of Lululemon falling anywhere from 8% to 10% this morning. On the plus side, they did raise revenue guidance for Q4. But what do you make of this? Because part of the backdrop here is we got some guidance from two retailers who, let's just say they're not as strong in terms of being long-term performers rewarding shareholders as Lululemon, and I'm referring to American Eagle and Abercrombie & Fitch. They were both pretty upbeat for the holidays. What did you make of Lululemon's comments?

Yeah, well, very, very different businesses, I would say. I mean, I think you look at Lulu being a more premium offering, and so they're going to focus a little bit more on pricing and not necessarily cutting prices as much as maybe some other value offerings might be able to do. I think you're right there when you look at it from a stock perspective. It's been a fascinating story to follow here over the last probably decade. This was a business that many years ago was extremely challenged. Founder-owner that really was taking the business in a little bit of a questionable direction. They got their house in order though, and it's an investment that's worked out really quite well over the last five and 10 years. Stock is up 279% and 318%

respectively over those periods and outperforming the market. So, investors have won. But it has been a bit more challenging as of late, though. I think you look at the margin picture. I don't think Lululemon is going to necessarily be the only one in this boat. I think that we're going to see companies dealing with challenging margin pictures here all throughout the year. But hopefully, it does start to get a little bit better. But you look at what Lululemon has done over the course of the last five years, gross margin up from 53.1% in 2018 to 56.3% trailing 12-month. And that ultimately has come down to the bottom line in a big way.

Net margin up from 9.8% in 2018 to 15.7% trailing 12-month. So, again, I look at this adjustment to guidance. I think this is kind of just some noise in the context of what is ultimately a very good business. But I do think that for investors here, something to watch is going to be inventory in the coming quarters. You look at just the last earnings call, they ended the quarter with their dollar inventory up 85% from a year ago. And so, when you consider that. It clearly is going to be something that they're going to have to contend with. Anytime you see these apparel companies and you see those inventory numbers really start to go up to that degree, you have to start asking some questions. Management said on the call that

was by design. That was part of the strategy. They felt like their inventory was too lean from a year ago. They've really worked on boosting those inventory channels up this year. I would be a little bit concerned that that may be a little inflated. Maybe that is where this margin guidance ultimately is coming from. If that is the case, that is a ton of inventory to work through the system, particularly when you're just coming out of the holiday season and you're in a bit more of a challenging environment for the consumer as well. So, it could be some tougher days ahead for Lululemon, but I don't know that that necessarily damns the business for the long term, so to speak. Yeah. I was going to say, taking everything you just said, obviously,

it's going to be more interesting to get their quarterly results when they come out, listen to what they say on the call. They didn't really change their earnings per share guidance. So I get the hit on the margins, but if you're focused on earnings per share, it's basically unmoved from where it was. Yeah. I mean, all they really did was tighten that window up just a little bit, right? They adjusted that window down to a range of $4.22 to $4.27. That was from previously $4.20 to $4.30. They're actually giving you a little bit more certainty there, a little bit more certainty in exactly where they see those margins coming in at the end of the year. Again, that just comes from managing costs effectively. A lot of businesses,

they've got a lot of practice in being able to do that very well. Gross margin challenges don't necessarily mean that the business is going to be in trouble, so to speak. But again, I would keep an eye on those inventory levels because I have a feeling that could be something that we're going to talk about this, I think, again, a quarter or two down the road. Jason Moser, always great talking to you. Thanks for being here. Yes, sir. Thank you. I've got to be honest, I don't own shares of Lululemon, but when I see the stock selling off 10% based off of short-term guidance, it does get me more interested in buying shares at a discount. If you also have that mindset when you see stocks pulling back from their highs,

you might be interested in the list of five stocks that our team of analysts has identified. Companies whose stocks have fallen recently, but they've got strong fundamentals and catalysts to set them up for future success. One fell more than 80% despite the fact that third quarter results show growing revenue. The details and analysis of that stock, plus four others, are in a new report called Five Pullback Stocks. It's free to Stock Advisor members. Just go to fool.com slash pullback to access the report. That's fool.com slash pullback. If you've seen a doctor remotely, you probably didn't use Zoom. Kirsten Guerra and Lou Whiteman square off on Teladoc Health, a virtual healthcare company. It's time for Bull vs. Bear.

welcome to bull versus bear we find a company find a couple of fools to discuss it and then flip a coin to see which side they'll take today that company is teledoc the virtual healthcare and telemedicine company serving 40 million members worldwide 2021 if you've listened to a podcast you might have heard of their subsidiary better help on the bull side of this case we have Lou Whiteman. Lou, good to see you. Good to see you. And on The Bear Case, it's Kirsten Guerra. Thank you so much for joining us. Thanks for having me back. All right. Both of you will have three to five minutes to make your case, starting out with the bull side. Lou, that time is yours.

Okay. Thanks, Ricky. So, yes, I'm here to make the bull case for Teladoc, and I understand that. Happy to do it. But I feel like we do have to address the elephant in the room before I do. I am here to make a case for a stock that is down 92% from its high. 92%. And yes, ouch. In hindsight, it is pretty clear we're here to talk about a business and a stock that got way out ahead of reality. Teladoc, for those unfamiliar, is a virtual health company. It provides a secure regulatory compliant pipeline for patients to talk to their doctors, therapists, medical experts, anywhere, anytime, by phone, by video. This is a business that was just tailor made for the pandemic. And indeed, it grew a lot faster than even management in their wildest

dreams would have predicted pre-pandemic. And yes, that growth was not sustainable. The enthusiasm around the stock is now gone. But if you go back to 2019, pre-pandemic, when we had a young emerging business with a promising idea and the potential to tap a huge market, that business is still here today. The bull case from here is this is still a leader in a field and it's well-positioned to fulfill a major need in the healthcare marketplace. So, let's talk about that opportunity. Americans spend $3.8 trillion annually on healthcare. That's more than 17% of our gross domestic product. We are desperately as a nation trying to bring costs under control. Telemedicine needs to be a big part of the answer to that problem.

Now, sure, there are a lot more companies out there than Teladoc. There are competitors. But this is a market that is far too big to be a winner-take-all environment. There are going to be a lot of winners. And Teladoc, with its head start and a regulatory compliant infrastructure, can't emphasize enough how important it is to be on the good side of regulators when you're talking about health information. They have a huge head start on new entrants. One of the reasons investors have soured on Teladoc is it did overpay for a huge acquisition. In October 2020, Teladoc bought Livongo for $18 billion. The deal added a portfolio of smart devices and remote care for patients with managing chronic conditions.

Looked good in paper, but history shows they really overpaid. Teladoc has since taken billions in impairment charges writing down the deal value. But I know at least a big part of that purchase price with stock, and they did it at a time when all telemedicine companies, buyers and sellers, were way overpriced, which doesn't make it okay to overpay, but the stock component does mean the deal didn't blow up Teladoc's balance sheet. And Livongo does provide Teladoc with a great set of assets it can now use to offer a more complete package to customers. It's also worth noting that there was no further impairment charge in the most recent quarter, hopefully the write-downs are over and Teladoc still has this

great set of assets. So, where from here? If you were to buy Teladoc today, you are buying a company that expects to grow revenue and total visits at a double-digit rate, a company that continues to grow its profitability per customer quarter after quarter, and a company that is just beginning to expand internationally. You are getting a company that is much more battle-tested than it was just a few years ago. The pandemic forced us to embrace telemedicine. What was once a potential market is now a very real market. Teladoc today has relationships with nearly half of the Fortune 500 companies. It's a great foundation to build from. The best part? Today, you can buy this business for 1.6 times sales, which is a pretty reasonable valuation for a

growth company. And look, I get it. It's hard to look past the last year or so. The last year or has been ugly for the stock. But it's important that we don't anchor on the past. Right now, today, we have a real business with real customers with great growth potential, now at a back-to-earth valuation with a massive total addressable market out ahead of it. It's still a tough market for growth stocks. I don't know what the next few months will bring, but Teladoc, given its market opportunity, given its proven ability to grow into that opportunity, And given the assets it has assembled, I believe this stock has the potential to be a huge, massive long-term winner for those who are patient.

Lou Whiteman, thank you for the bull case. Hope the folks behind you end up being okay. Kirsten Guerra, you have the bear case for Teladoc. Three to five minutes. That time is yours. Thanks, Ricky. I won't argue that the market ahead of Teladoc is huge, but it wouldn't be the first company to squander a great opportunity. My main issue with Teladoc is that I don't like much of anything about its growth. First of all, where is it? Teladoc estimated 6% to 8% annual growth in its paid membership base for 2022. That's growth, but it's far lower than what I'd expect for a company at this stage, and certainly what previous valuations have implied. But, OK, 6% to 8% growth in member base, that still leaves the opportunity

to grow through increased spending on the platform from existing members. But sessions on the platform have steadily dropped since Q1 of last year, and utilization rates took their first dip in the most recent Q3 reports. This left revenue per member flat. Now, again, considering the opportunity before it, this seems like either weak sales execution or maybe the demand for these types of telehealth services simply isn't what we think. For several quarters now, Teladoc has pointed to its online counseling and therapy offering BetterHelp, which you mentioned, Ricky, as a major contributor to revenue growth. But reliance on growth in BetterHelp specifically scares me, because BetterHelp is their only

product I've heard people talk about out in the wild and not in a good light. I've seen a lot of TikToks from mental health professionals warning people away from this platform specifically. Essentially, their concerns revolve around poor data privacy with mental health information. Maybe one of the last things that we would want to be shared about us. So, without getting into that too much, I think the BetterHelp brand is at risk with its target audience. That makes me extra weary that it accounts for so much of Teladoc's touted growth so far. BetterHelp, by the way, was acquired by Teladoc in 2015.

That brings me to maybe one of my biggest reasons that I'm not a fan of Teladoc's growth story. They are so reliant on acquisitions. Often, not always, but often, the best companies derive most of their growth organically, meaning they sell more and more of the products or services that they develop internally. Inorganic growth comes from acquiring another company and simply absorbing the revenues, customers, and assets that come with it. To be clear, are many cases when acquisitions make a lot of sense. In Teladoc's case, I think they're trying to retain top-dog status by gobbling up competitors as they grow to threaten them. That could be a smart play, and I'd give them more credit if they had the finances to back it up,

but they don't. This company is operating with net debt to the tune of $700 million, meaning their debts significantly outweigh their cash. They do pull in positive cash from operations, but only because of how much it's relying on stock-based compensation. So, already, they're not in the strongest position to continue relying so much on acquisition. But it gets worse when you consider their track record on acquisition valuation. Lou mentioned this. In 2020, they acquired Livongo for $18.5 billion. Two years later, they took a Goodwill write-down on that acquisition for $6.6 billion. And yes, it's true that a lot of that was in stock, but again, now that the stock has

fallen 92% or so, that means they don't have that lever going forward. That was basically a formal recognition by management that, hey, we overpaid for this, and that a full third of their payment for Livongo was worthless, which is not a great look. Overall, growth rates aren't what I'd expect. Recent usability trends have turned down. There's a lot of growth reliance on one product that I think is at the greatest risk of brand deterioration, and it will be harder to execute its acquisition-heavy strategy going forward. Now, maybe you'd expect me to mention far earlier in the bear case the fact that telehealth competitor Amazon Clinic launched only two months ago. But honestly, I think

how Teladoc has been performing all on its own before the Amazon threat speaks for itself. So, for me, it's time to call it on Teladoc. Kirsten Guerra, thank you so much for the bear case. Lou Whiteman, thank you again for the bull case. Hey, you can decide who Who Made the Better Argument at Motley Fool Money on Twitter. We will have a poll there because today's lucky winner will receive. Today's lucky winner will receive one package of medium grade tongue depressors. Keep your spirits up and your tongue down with the 500 count box. Now with 17% fewer splinters.

These tongue depressors can be used to mix medication. worn as a small splint or with a little creativity a tongue depressor can transform into a homemade popsicle stick but wait there's more we'll even send you a second box absolutely share the love with family friends or keep them for yourself just pay shipping and handling this fabulous prize package could be yours if you win bull versus bear 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.