Motley Fool Hidden Gems Investing - Rule Breaker Earnings Roundup

Starting point is 00:00:00 Emily Flippen. Earnings season has been historically rough, but today seems to be the exception. We're breaking down fourth quarter earnings for three controversial rule breakers today on Motley Fool Money. Today is Tuesday, February 10th. Welcome to Motley Fool Money. I'm your host, Emily Flippen, and today I'm joined by Fool analysts, Jason Hall and Toby Bordelon as we break down earnings from three of the most popular rule-breaking stocks out there. Now, guys, I know we know which companies are reporting ahead of time. So, of course, we had an idea of what we wanted to cover today. But what we didn't know was that somehow these three companies would be breaking the mold of an otherwise really rough earnings season.

Starting point is 00:00:46 So, I don't know about you, but for me, it's really nice to have some positive news today as we're going to dive into Datadog and whether or not its fourth quarter earnings really show that this usage-based observability platform is more insulated than other software companies, as well as Ferrari, which saw its worst day on record last quarter after guidance came in weaker than expected. Was management sandbagging? We'll get there first. But of course, we have to start with my favorite of the bunch, which is Spotify. Now, Spotify basically needs no introduction. It's the audio listening platform that everybody loves to hate. There's probably people listening to us on Spotify right now, Emily.

Starting point is 00:01:21 Exactly, exactly. And I will say, if you had alternatives, maybe you would go to alternatives. But Spotify continues to deliver a superior product that people continue to flock to. And to your point, Jason, there aren't a lot of alternatives out there that offer that superior product. That's part of the reason why they added a record number of monthly users this quarter. I think they hit 290 million paid subscribers. It's been a really rough year for Spotify prior to reporting earnings this season. But this quarter was incredible. I mean, what stood out to me was an operating margin north of 15%. There's always this overhang about Spotify of, okay, good. They have the users, they have the engagement, but can they monetize it?

Starting point is 00:02:01 This quarter showed the highest operating margin ever for Spotify. That's what stood out to me. But Jason, to your point, what stood out to you? A couple of things, really. Firstly, MAUs, monthly active users, it does continue to grow both at double-digit rates, but also faster than premium subscribers. So kind of that land and expand, bring people into the fold, and then they get tired of the ads, or maybe their spouse is using it too, and it just makes sense to go ahead and upgrade and get a family account or something like that. That premium subscribers number is growing slower than MAUs, but the gap is starting to narrow. MAU growth was 11%. Premium growth was 10%. We've continued to see that gap narrow. And I think it just indicates

Starting point is 00:02:48 how much more mature the business has become while still growing at a double-digit rate. That's fantastic. But it's also becoming more and more reliant on premium prescriptions. So it has to continue to add value for those subs. If we had gone back five or six years ago and the company had a reported ad-supported revenue was down 4% in the quarter, the financial results would have looked very, very different. But because the mix has grown so much to now that the premium members are so much more, they're less tied to the cyclicality of the ad business and more just those steady revenues that come in from those paying subscribers. So as long as they can continue to create value, then seeing that number to continue to be more and more important

Starting point is 00:03:32 should serve them well across different economic environments. I was a little surprised to see ad revenue relatively weak this quarter. Now, this quarter is generally bad for ad revenue, but my hopes are high that the rest of 2026 might be good for them. this is a midterm election year. So ad spend generally tends to have a bit of a rebound, or I think expectations are for it to have one. Whether or not that ad spend goes to Spotify, I think remains a question mark. But to your point, Jason, their ability to upsell people, especially into things like audio book hours has been incredible. Just this past quarter, they announced that they're going to be getting into, I guess, physical books as well, allowing

Starting point is 00:04:09 people to kind of pick up where they left off. So if you're in the process of half listening, half reading a book. They're kind of bridging that gap. I love to see that level of innovation from this management team. And I understand that this is a controversial company though, because this is, again, a company that everybody loves to hate. Toby, I have to ask myself though, when Jason says, look, we have 200 million premium paid subscribers. They're growing at a double digit rate. They have over 750 million, 750 million monthly active users. I mean, wrap your head around that number. I have to ask myself, is there an upper limit to their performance? Because where does the company go from here? I I've been waiting for the slowdown

Starting point is 00:04:48 to happen. It just hasn't happened yet. Yeah. Look at some point. Sure. Uh, we're, we're probably going to hit an upper limit. There is an upper limit to everything. That's just the reality, right? Uh, that happens to every company. Eventually you see that upper limit to your core product or your core service, but the good businesses find ways to keep growing by expanding their business into other products and services, or increasing the value of what they offer so that they can justify those price increases, going back to Jason's point, increasing that premium value that you're offering. Look, revenue growth is already slowing down. This is the slowest revenue growth since 2018, I think, that we've seen. But profitability is

Starting point is 00:05:26 growing as they focus on efficiency. And they're setting the stage for future growth beyond what we're seeing by rolling out music videos, for instance, expanding the audiobooks to new markets, focusing on live events, personalization driven by AI, which may increase that perceived value that you're receiving from your subscription, that sort of thing. I think they're doing exactly what you want them to do in terms of pushing beyond the core to bring in more services and features to that platform to keep that growth going. If not in the core business, because eventually you can't, the overall business as they continue to grow what they're doing. What year does Spotify buy Netflix? That's my question.

Starting point is 00:06:03 I'm daring to dream there, Jason. I will say the big mistake that I think investors make with companies like Spotify is, myself included, by the way, is assuming that things do have to slow. We tend to discount innovation and optionality in business models. We tend to extrapolate the world as we know it today. I know when I put together a financial model, I put in expectations around how everything operates today. If it continues in this direction, where is the company? But there's sometimes optionality and variability built into platforms that is simply unpredictable today. And I think that's really where the rule-breaking traits and investing come into the equation. Because what you're doing in that case is

Starting point is 00:06:41 really investing in a management team, investing in a vision, in innovation, the things that you quite literally can't put into a spreadsheet. And while maybe Spotify has a lot of challenges ahead of it, I don't want to say that this is the quintessential Netflix in the making, to your point, Jason. I do think that it is a good example of the type of company that is hard to piece together as just the sum of its parts. Up next, we'll be diving into Datadog, which is one of the most confounding players, in my opinion, in observability and what its fourth quarter earnings say about software stocks as a whole. This is Motley Fool Money. Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable

Starting point is 00:07:23 mattress in the world, the Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today, because we have your number. Welcome back to Motley Fool Money. Software stocks have been under massive pressure as concerns around AI disruption and poor earnings have led to Wall Street skepticism about their place in enterprise usage long-term. Now, observability platform Datadog has not been able to avoid the scrutiny. And prior to reporting earnings, their shares were down 15% in 2026 alone. But it seems like these wider concerns aren't showing up in their financials quite yet,

Starting point is 00:08:10 in large part due to their strong enterprise customer growth. They just posted eye-popping sales growth of nearly 30% year-over-year in their fourth quarter. And management implied that AI-powered innovation would help them churn more customers with complex challenges and thus, in my opinion, extrapolating here, likely be able to charge them more over time too. Toby, what is it about Datadog that has allowed this business to be the exception to the rule here this earnings season? Because we've seen plenty of other software companies post these beaten race quarters, but not be rewarded by the market the way that Datadog has today. What we have right now is a sudden fear that AI is going to destroy every SaaS company out there.

Starting point is 00:08:48 That's what we got last week. I don't agree with that assertion, but that's the vibe, or it was the vibe of last week. And what companies have to do, I think, is make the case that that's not going to be true for them. Give investors a convincing argument as to how they're going to use AI to help grow their business so that the narrative can change, at least with respect to that specific company. Datadog did that this quarter, showing how AI is a demand catalyst for them versus being a headwind. Management directly tied the momentum we're seeing in the raw numbers we got from the quarter to their customers using their AI features. They highlighted the new features based on the AI they've rolled out.

Starting point is 00:09:27 And I think that's kind of fed into the reporting narrative that we see with this earnings report. So, the story on Datadog right now is AI is driving demand for their services. Now, that narrative maybe shouldn't matter, right? A big part of this is how management has framed the results in this presentation. Should that matter versus the actual numbers? Probably not, but it does. At the same time, a week after that big market drop, I think a lot of investors are realizing, hey, the numbers we're seeing from a bunch of these companies, as you noted, Emily, they're beat and raise in many cases. The companies are doing well. If the AI apocalypse is coming, it's not going to be this quarter. Datadog is also benefiting from not just that

Starting point is 00:10:09 framing that management has done a good job at, but just timing. They reported a week after the big fear and gave them enough time for that narrative to change. So, I think they're coming late enough here that those initial fears are starting to moderate a little bit. So, you put the storytelling and framing together with just the timing, and it's been really good for them. Now, should overall market buy matter when you report earnings? No, but it often does. And I think that's what we're seeing with Datadog here. Yeah. Whenever I find that investors are trying to scratch their head understanding, why is my stock selling off after a great quarter? or why is my stock not down more after what I thought was a really bad quarter? Oftentimes,

Starting point is 00:10:47 the context in which they're reporting derives those short-term responses. As much as I do believe in a long-term efficient market, in the near term, we can have those inefficiencies really show up and we start to see course correction over following weeks or months, days, even as people digest the news. Jason, I think that's what we've seen here with some of these software stocks, but there's still been these bigger picture concerns around the impact of AI on software. And even if we see some companies like Datadog or others kind of course-correcting here, there's still concern around enterprise software businesses. AI lowers the barriers to entry in a lot of cases. And a lot of people still suspect it will cause pricing pressure. Datadog's fourth

Starting point is 00:11:26 quarter doesn't buy into that narrative, but pressure, I guess, takes time to build in a lot of cases. It's not made by a single quarter. So when you look across the enterprise software spectrum, I mean, it's a silly question to ask, but I'm curious how you think about it. Are you selling all software stocks right now? Do you think the AI bloodbath is overdone or is there a there there? I think it's a little bit nuanced, but I do think broadly it's overdone. I think the weak, weaker companies are going to get out-competed by stronger companies that have better products, wonderful leadership, deep culture, built on innovation, and always running hard to get to the goal before your competitors do. But I don't think that AI is some panacea

Starting point is 00:12:11 that turns, you know, steel companies into software builders. Companies want to utilize AI tools, but they want to utilize those AI tools to help them do whatever their business is better. Not rebuild every software wheel just because AI lets them do it. I have a really over-the-top analogy that I want to give. We've seen the agricultural industry become massively productive with automation. And we're seeing AI as a thing that is starting to drive even more value and unlocking productivity and getting more productivity out of every arable acre, right? But we don't see McDonald's moving into farming just because technology is making farming more automated. They're letting the farmers leverage those things to deliver better agricultural

Starting point is 00:13:04 products. Now, I think most enterprises are still going to go to enterprise software experts in the same way. Now, with that said, yes, AI is probably, there are going to be edge cases where businesses are using AI to build things that they're not necessarily using software companies to build. I also think that we could see some seat-based SaaS companies feel pain, particularly as we see AI play out and affect white-collar jobs. Now, we just talked about a company that's a usage-based model. So they're built to win if their product is a winning product. But I think these things are a far cry from every Fortune 1000 company firing Salesforce because they can build their own CRM with Claude. That's a really good point. And I think my bigger

Starting point is 00:13:56 concern, I agree with you, Jason. I think there's going to be a place for the CRM software of the world, so to speak, for the agricultural businesses and the McDonald's. But I do think that there's true that's possible. We see some pricing pressure here, which is the main concern that ultimately how much these enterprise software companies are able to generate on a per seat or a subscription based model because they are and have historically been valued as 90% plus gross margin businesses. And in the world of AI, while there might be a place for CRM software, maybe this is a structurally lower margin product than it has historically been valued at, given the barriers to entry being lowered by AI.

Starting point is 00:14:39 I think that is maybe the concern that the market is extrapolating here. Yeah, I think that's right. There's a difference between being totally disrupted and just increasing competition. Competition is good for businesses. It's good for their customers. And eventually it's good for shareholders too. It certainly is. Up next, we'll be wrapping up the show with a look at Ferrari, which is a stock that seems

Starting point is 00:14:59 to be racing to the EV finish line a little faster than expected. Stick with us. When you're a mid-sized business, you need every competitive advantage you can get. Like an AI solution that works for you, not against you. S.A.P. Grow is built with A.I. embedded at its core, working across every system, and it's ready to go from day one so you can hit the ground running. Bring it with S.A.P. Grow, A.I. cloud ERP for any size business. Welcome back to Motley Fool Money. As we wrap up today's earnings roundup, I want to reflect on Ferrari.

Starting point is 00:15:33 Now, typically, Ferrari is a very stable stock, but it did see its worst day on record last quarter when the business set guidance well below what the market had expected. Some speculated that management was sandbagging in an otherwise unpredictable environment and fourth quarter earnings were out today and indicate, yep, that was as some expected entirely the case. Shares are up around 10% both due to a strong quarter as well as management's reassurance that their order book still extends far out into 2027. I mean, Jason, Ferrari is just an incredibly resilient brand. They managed to control their prices through scarcity. Do you think that business model still works though, I guess over the course of the next decade, the same way it has over the course of the previous decade. So if we operate through that really important lens of Ferrari

Starting point is 00:16:18 as a luxury brand or not a car company, then yes, I do think it can continue to deliver more of the long-term success we've seen. Since its 2016 IPO, revenue's up about 150%. That's about 10% of your average, which is pretty good because of the way the business is built and that income is up almost six-fold. The stock's gone up almost six-fold along with it. Now, how can it sustain that while still being true to Enzo Ferrari's famous line, supplying the market with exactly one less Ferrari than it demands? And it's simple. It's growth in that market. If we go back to 2000, there were less than 500 billionaires in the world. Today, there are more than 3,000. There's close to 70,000 people worth more than $200 million. That's about a sevenfold increase

Starting point is 00:17:08 over the past quarter century. What does that mean for Ferrari? Because we know the growth of the world's global wealthy is continuing. Ferrari's in this extraordinary position that it can continue to raise prices and therefore its margins and build a few more cars and still remain a rare, extremely desirable brand, and that people will pay whatever Ferrari asks to add that latest model to their collection. If you can't beat them, join them. If you can't buy a Ferrari, buy Ferrari shares. It's a problem with the K-shaped economy. That doesn't seem to be going away anytime soon, so might as well benefit from it in some form or fashion. Either way, glad to see shares of Ferrari up a bit today. Toby, I will say, one of the more controversial

Starting point is 00:17:53 things about Ferrari is what they're going to do around electric vehicles. Their investor day last year, they tweaked their long-term EV guidance down from around 40% of its lineup to, quote, only 20%, which I still think is a lot. But do you think the market's overreacting to the near-term pressure on EVs? Or is that actually a threat to Ferrari's long-term brand power if they don't manage to make that transition successfully? Yeah, there's definitely a threat here, right? They've got to get this right. But I don't think it's an EV-specific threat. it's the same threat you'd see no matter what new product they were rolling out. They've got to preserve that brand. They've got to make it a Ferrari that's worthy of the brand for them.

Starting point is 00:18:30 I think they're setting the stage, though, to get for this new EV in a way that is suggesting to customers and investors they will get this right. Yesterday, there was a big story I saw on a popular tech blog, The Verge, about famed designer Johnny Eve and his team designing the interior of the new Ferrari EV. People recognize that name, the former head of design at Apple. The pictures looked really good. So, I think Ferrari's coming out and saying, yeah, maybe this is going to be less of our portfolio than we initially thought. But trust us here, it's going to be super cool. You're going to want this car. The other side of this, though, is they don't actually need to transition to EVs. They need to be in the market because

Starting point is 00:19:10 people want it. But I don't think their core customer really cares if EVs are a smaller part of the business or not. As long as the whole product line continues to carry on that Ferrari legacy, that's really what it's about. A lot of customers still want their traditional cars. Ferrari is different than a normal car company. You don't go buy a car off the lot. You order it and you wait, and then you wait some more, and eventually you get it. Ferrari's not going to make a ton of EVs that they hope to sell. They're going to make what their customers order like they've always done. This is not an inventory risk like you might see with a Ford or a GM or something. You order the car, they're going to build it, and they're going to deliver it to you.

Starting point is 00:19:51 They need an EV because some of their customers want it. It needs to scream Ferrari. That's critical. But the model for them is just very, very different than a typical automaker. Whether it's 20% or 40%, I don't think that's relevant. What matters is they're keeping the brand strong, and they deliver the high-margin vehicles their customers are ordering. You don't order it. They tell you that you can order it. That's what it's going to be. It's not going to be orders open on our website. It's going to be, here, customer, you're eligible to order one of the first EVs off the line. It's actually not a line for them. Again, these are custom-designed, custom-made, very, very different model.

Starting point is 00:20:31 You know someone who knows someone who works at Ferrari who's able to get you in if you could afford the price tag. That's how they keep their brand power. Either way, the common thread across Pulling back from 48% to 20%, maybe that even raises the value. Yes, exactly. They're creating more exclusivity. I don't know if that may be how it works. This is the Ferrari playbook. It's worked out well for them in the past.

Starting point is 00:20:50 No reason to think it's different today. And this is a management team that understands and knows its customer well. And I would actually say that's true for Datadog and Spotify as well. These are management teams that really fundamentally understand their business and they meet their customer, whether that be the people who use their platform or the people who advertise on it. They meet their customer where they're at. And I think that's part of the reason why each of the fourth quarters that we saw posted today

Starting point is 00:21:12 from these rule breaker companies were as great as they were in an otherwise really challenging environment. Either way, it's been incredible to actually have some good news to talk about on the Motley Fool Money podcast today. Otherwise, I will say, I guess we're all back to our scheduled depression, doom, and gloom as we seek the other challenges in the market. But it's a great reminder that there are some silver linings and great opportunities still out there in an otherwise challenging environment. Jason and Toby, thank you both so much for joining and sharing your insight with us today. As always, people on the program may have interest in the stocks they talked about, and The Motley Fool may have formal recommendations for or against, so don't buy

Starting point is 00:21:45 or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Jason Hall, Toby Bordelon, and the entire Motley Fool Money team, I'm Emily Flippen. We'll see you tomorrow. Thank you.

Motley Fool Hidden Gems Investing - Rule Breaker Earnings Roundup

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