Motley Fool Hidden Gems Investing - Salesforce Increases Its Focus (and Buybacks)

Episode Date: March 2, 2023

(0:20) Tim Beyers discusses: - Shares of Salesforce popping 12% on better-than-expected 4th-quarter results - How Salesforce has more focus but is still a business in transition  - The doubling of the company's share buyback program (11:30) Jason Moser and Matt Frankel discuss the decline of the "Nice to have" economy.  Companies discussed: CRM, PTON, NFLX, DIS, SFIX, FIGS Host: Chris Hill Guests: Tim Beyers, Jason Moser, Matt Frankel Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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starts now. I'm Chris Hill. Joining me today, our man in Colorado, Motley Fool Senior Analyst, Tim Byers. Thanks for being here. Thanks for having me. Fully caffeinated. Lots of earnings-related things to talk about. You know what else is caffeinated? Salesforce shares today up more than 12% because Salesforce beat expectations kind of across the board. I mean, the revenue number sort of stands out to me as, and I'm not a shareholder, but I was particularly struck by the revenue number up 14% compared to a year ago. Obviously, Salesforce has been in the news lately because of layoffs, because of the latest co-CEO to leave. It's been a pretty eventful few months for Salesforce. You're a shareholder. How are you

feeling and what stood out in the report? Well, I'm feeling better for a couple of reasons. First, the stock is up materially, so that's great. But I think there's a bit of maybe sometimes we call these sorts of things relief rallies, Chris. And I think there's some real cognitive relief that, oh, okay, great. The revenue was up materially. And I think there is a bit of acknowledgement from management, particularly Mark Benioff, that, yes, we have to be better at controlling costs. because they have activist investors breathing down their neck. And so you did see that.

So, for example, in this particular quarter, granted, you know, there is a, you know, there's still a lot of cost in the Salesforce business, but I'll just give you a couple of things here. So cost of revenues for the quarter, $2.1 billion in the current quarter, year-ago quarter, $2 billion. So this is not the spend-freely sales force that we are used to seeing. Total operating expenses for the quarter, about $5.9 billion. That was up from $5.5 billion. So yes, material, but not like big jumps the way we're used to seeing it. And I think the thing that really stood out for me, Chris, this is for the quarter on

on a year-over-year basis, 984 million diluted shares outstanding versus 986 million. So down 2 million. Now, there's a lot of accounting that can go into, I'm not saying that Salesforce is, oh boy, now they're getting some religion and they're buying back stock and actually reducing their share count. There could be some timing in effect here. They did buy back some shares. you know we have to wait to see how much they're actually going to get religion around that but i would say chris a little bit of encouraging signs in terms of expense management as well as a better than expected revenue number so why is the stock up it does feel like hey maybe we're seeing a slightly more disciplined sales force that would be a good thing it would be a good

thing. I want to come back to the discipline. But first, since you were talking about the share buybacks, part of the news here is Salesforce doubling their share buyback program that they announced last August from $10 billion to $20 billion. I'm assuming you put that in the positive category. I mean, it should be a positive. Let's say that. Let's say it should be a positive because it depends on what Salesforce does with its historical practices around equity compensation for employees. They've historically been incredibly generous for employees that they've acquired through acquisitions and employees that they've hired organically. They tend to be very, very generous in this area. So a $20 billion buyback

could do a lot to create accretive value to shareholders if it's not wiped out by a whole bunch of equity grants to employees. Now, I think that buyback plan is large enough that it should be accretive to employees, and particularly if the current path that we're seeing continues. So, for example, if just looking at the cash flow statement here from the current quarter, the overall expense that they got the credit on the cash flow statement for stock based compensation expense in the latest quarter was 809 million dollars that's versus 763 million dollars in the year ago quarter so again it's not like a huge increase in a lot of stock based compensation expense that may have to do as much with how the stock prices come down and so the

value of that expense is a lot lower so it just sort of evens out and they've still issued a lot of shares a lot of things remain to be seen but it does seem as though that 20 billion is going to be put to use on behalf of shareholders i just i think it's very easy to take a look at this and i said you know kind of like chris you and i are both sports fans and you know how as sports fans, we take one game and we say, wow, man, what an amazing performance. And we project that out. I think the caution here is let's not take this quarter and project it out and assume everything is amazing for Salesforce. We don't know that yet. We don't. Although, you know, you referenced the belief that we might be dealing with a more disciplined Salesforce,

a more disciplined CEO, Mark Benioff. And one of the bits of information we got that I think is an argument in favor of that is Benioff saying on the conference call that the company disbanded its committee on mergers and acquisitions. Again, I'm not a shareholder, but if I were, I would be happy about that. I sort of look at Salesforce and think, no, you're big enough. Make the stuff that you've acquired, which on balance, I think Salesforce has done a good job with that under Benioff's leadership. But it does seem like a time to, we've seen this from other companies this earnings season, to really focus on basics, really stick to your knitting. I fully agree with that. And I do agree that it is good news, Chris.

This is one of the areas you're really going to want to watch if you are a Salesforce shareholder. So just looking at the balance sheet, if we look at the balance sheet, there's a line on there called goodwill. And it stayed relatively stable year over year, about $48.6 billion presently versus roughly $48 billion last year. And so really no material changes there. But that is a lot of money. And goodwill is the excess that Salesforce has paid. It's like they've made a lot of acquisitions. When they've paid a premium over and above the intrinsic value of the company they acquired, that premium goes on the balance sheet as goodwill. It's like, this is value we believe we're going to accrue as it becomes part of Salesforce. And so it's recorded as an asset on the balance sheet. A lot of that, Chris, is due to the acquisition of Slack.

and so getting their strategy right and actually getting real value i mean serious value out of that slack acquisition which i don't think we've really seen yet they had that has to happen because if it doesn't there's going to be a quarter or a year maybe in the next two years where they have to test this every year and finally they have to throw up their hands and admit like, yeah, you know what? We overpaid for this thing. And then it's a big write-off and the stock gets absolutely crushed. So yeah, they really do need to do this. So they avoid the specter of a big goodwill write-off on Slack. And it is, last point on this, it is something they said they were always going to do. They wanted to make Slack sort of this portal into

the rest of Salesforce. Like, you'd go into Slack, and then you'd issue commands and start conversations and open up a Salesforce app right from within Slack. And you do all of this work together as a group in a Slack channel using a Salesforce product like Quip or something like that. That is still the vision for this. So, they do need to focus on that. Chris, there is absolutely no doubt. Let's close on the stock, which is with the rise today, basically where it was three years ago at the start of the pandemic. Prior to that, you look at the chart of Salesforce and it's a pretty steady up and to the right. It's been a roller coaster since then. Do you look at the underlying business of Salesforce

with everything we've just talked about, do you look at it and say, this is a stronger business than it was three years ago this time, with the stock basically being at the same point? Is it a more challenged business? Is it weaker? Where is the underlying business relative to the stock? What a great question. I think it's in transition. I don't think you can say it's stronger, and I don't think you can say it's weaker. I will say, I think it's more focused. And that is a very, very good sign. A more focused Salesforce can do a lot of good for shareholders. It can improve its interface. It can improve the integration in its apps. And this company has a lot of capital. So if all of

that capital that it generates is now focused internally on improving the business, on improving Slack, on making integrations tighter, on improving the user experience, look out. They can be very, very dangerous in their core markets. So that is a good thing. A focused Salesforce is potentially a dangerous Salesforce, but I don't think yet you can say it's either stronger or weaker. I just think you can say it's in transition, Chris. Tim Byers, always great talking to you.

Thanks for being here. Thanks, Chris. Just as more companies like Salesforce are sticking to the basics, so are consumers. Jason Moser and Matt Frankel share some thoughts on the decline of the nice-to-have economy. Hey, Matt, it's great to catch up with you again. There was an article by Christopher Mims here several weeks back in the Wall Street Journal that talked about the decline of the nice-to-have economy. I thought it was a good and timely piece given where things stand today. The pandemic long on the rearview mirror, things are starting to

normalize. At the same time, with all of that, we're seeing challenges in the broader economy as it pertains to the consumer. At the end of December, we saw a full 64% of Americans were living paycheck to paycheck. Inflation, of course, is still an issue. And man, just frankly, consumers running out of money. Let's open up with this topic. First and foremost, how would you describe the nice-to-have economy? Well, you kind of hit the nail on the head with the running out of money thing. So the nice-to-have economy, it's always a thing, right? Everyone always wants to buy things they want, not just things they need, and that's especially true in periods of economic prosperity. But the past couple of years, 2020 and 2021 in particular,

have been unusual in the sense that consumers had a ton of disposable income, more so than in a typical economic peak, due to a combination of factors. There were all the stimulus measures that were taken. There was postponed payments. We're still not paying our student loans. I don't know about you, but that gives me an extra few hundred dollars a month of spending money. Thankfully, Matt, I don't have any student loan bills coming up. But given your financial advisor status, we may need to chat after taping because I have one child going to college in the fall and another one going a year later. We're still trying to put all of those pieces together. I mean, you figure the average student loan payments in the $300 to

$400 ballpark, that gives the average person with student loans like $4,000 of extra money. It's a lot. And then combine that with the lack of ability to go out and spend money on experiences and things like that in 2020 and 2021. People had a lot of money to spend on stuff they didn't need is kind of the best way to describe it. Yep. Yep. You know what it made me think of immediately. Your kids are a little bit younger than mine, so this may be even more fresh in your mind. But as they're going through school at that young age and they're learning about wants versus needs, that's something that we deal with all throughout our lives. We're dealing with that want versus need and having to balance that. It's nice to be able to get those things that you want,

but you need to make sure to take care of those needs first. It really does feel like this nice to have economy. That's a lot of those wants, isn't it? It is. And I mean, I'm just as guilty as anybody. Like, I mean, I couldn't spend money if I wanted to during 20 and 2021. So what do we do? We can put a pool in our backyard. I mean, I'm just as guilty as anybody, but it is really important to differentiate wants versus needs. And the fact that needs have gotten so much more expensive in 2022 and so far in 2023, the fact that our needs have gotten so much more expensive, it's not just that people run out of money, but when needs get more expensive, it gets tougher to spend money on the wants. Yep. Yep. It really feels like we saw an exceptional number of

companies pop up over the last several years here that play into this trend. What are some of the companies or the markets that really stand out to you as far as these nice-to-haves? I mean, like I said, I already told you about my pool. That sounds like a need. I mean, you know. Just another one in my house right now, Peloton. Peloton was a big one. They're definitely something that you don't need. There are exercise bikes that are about a tenth of the price of a Peloton. It's a great product. It was really nice to have. Especially after our gym shut down during COVID, we could really justify the cost. We got a Peloton in our house and we actually

saved money on our monthly exercise expenses because we had our Peloton. Exercise equipment is one. There's personal styling boxes. You remember Stitch Fix is a big example. My wife, she couldn't go shopping for her scrubs. She's an ICU nurse. She couldn't really go shopping in person, so companies like Figs became a big staple. I mentioned it on the show one time. I was doing a show and three FIGS packages arrived while I was on the show. I would say even companies that specialize in discretionary retail, like say Best Buy, to a lesser degree, because they do sell things that people kind of need, like a washer and a dryer and things like that. But they do sell a lot of things that people were buying in large quantities, one, because they were working from home, and two, just because they had a lot of extra money. Yeah. Yeah, well, I mean, I'm glad you brought up Best Buy, because it also,

you look at like a Best Buy, and then you compare that sort of a big retail operation to something like a Target or a Walmart. And while Target and Walmart are certainly full of a lot of those wants, you know, they're also businesses that are really capitalizing on the grocery market, and we could argue that groceries certainly are a need. Now, it's interesting, you know, this article is talking, speaking of groceries, I mean, it feels like one of the bigger victims here as of late pertains to groceries, right? It's all of these meal kit companies. We've seen so many of these pop up. And I understand the convenience, right? Everybody needs to eat. That's the beauty of food from that perspective and investing in a well-run restaurant operation,

for example. But it does seem like we saw a lot of the meal kit type businesses really harping on that convenience factor. They're starting to suffer a little bit more now though, aren't they? Yeah, and it's not just the meal kits, it's the food delivery services as well, like DoorDash and Uber Eats. People didn't realize as much during the pandemic shutdowns how inflated prices get when restaurants list their stuff on DoorDash. They really do. To offset their own fees. That's something that is really starting to suffer, too. The meal kits, in my opinion, were just a bad business model from the start. We've used them before.

The customer acquisition cost is through the roof. Peloton, for all its faults, its churn is like 1% a month. Meal kits, it's like 20 times that. They have to offer things half price off your next three orders just to get people to stay. That's not sustainable. Those companies are losing money left and right, which was fine when money was free and investors were willing to speculate on companies like that, just growth at all costs, if you will. Now that money is not free anymore, now that interest rates do exist, you're starting to see investors not tolerate money-losing businesses, and there's not a way really for them to gain the customers that they need without losing money. Yeah. And just a side note there,

you said the word sustainable, and that just made me think with these meal kit companies, as convenient as it may be for some, and I'll be clear, I mean, I do most of the cooking here at home, and I never would consider subscribing to one of those meal kits, partly because I just know how to cook and I like being able to do it as I like to do it. But the waste that comes along with those meal kit companies, that's something that you have to keep in mind. We saw as the e-commerce has exploded over the last decade, one of the big concerns has always been packaging and the waste that comes along with that. How can we do this so it's a bit more sustainable and less impactful on the planet there? For all of the work I'm

sure that the meal kit companies have done in that regard. I mean, when you're talking about sending food, that requires a lot of different moving parts, keeping things cool, keeping things dry. There is just a tremendous amount of waste that really comes with that. Oh, for sure. I mean, one thing the meal kits do have going for them, because we've used them a couple of times since they cut down on food waste, they send you the exact amount of groceries you need, which is really hard to do, especially for like two adults. It's tough to buy just enough produce for two adults without having a lot of waste. But you're right, the waste is a big issue. People are really starting to realize that now. People were willing to tolerate it a little bit more during the

pandemic. Well, during the earlier days of the pandemic, it's still going on, but when there wasn't much of a choice. So, the waste is definitely something that's on consumers' minds and kind of getting them back into the grocery store. So, what strikes me about this trend is this doesn't really seem like a one-off. It seems like something that pops up when, like you were saying before, consumers have more money to spend. And then when that money starts running out, we see these things start to pull back a little bit. So it strikes me this is something that's a bit more cyclical in nature. Yeah, discretionary spending is very cyclical. We saw a surge in discretionary spending in like the 2005-2007 timeframe before the financial

crisis happened, for example. But the 2020 and 2021 period had that unusual combination of factors, the stimulus, the postponed payments, the inability to go out and spend money that really just made it an unusually high level of discretionary spending. Now, combine that with the willingness of investors to pump all their money into these profitless businesses, essentially subsidizing people's discretionary spending. And it was just kind of like a perfect storm for this, the nice-to-have economy. Yeah. I tell you, one of these things that you see as you use these nice-to-haves as time goes on is they become a little bit more of a must. You find out ways to justify this being a must-have, right? Whether it's the

convenience factor or whether it's something else entirely, you do start to find ways to justify these being need to have. And, you know, I think it's also important for investors to remember, too, just on that cyclical nature of consumer discretionary. I mean, these are the times probably where you want to start looking at the opportunities in consumer discretionary when we're seeing more pain, when we're seeing these valuations depressed, right? Because it's not something that will last forever. It's certainly not to say that all of these will come back, like meal plan companies, for example, I'm not sure that's necessarily the market that I'm looking to invest in, but perhaps, you know, fitness, perhaps specialty retail, something

like that. I mean, these are probably the times to look at some of these nice-to-haves. And it makes me wonder, for you, what is a nice-to-have that has become a must for you over the past few years? Well, I would say my pool, but it's not like I could give that back even if I wanted to. You're stuck with that one, yeah. Something that I could get rid of, I would say my streaming services. I added a – at the start of the pandemic, I had Netflix. That was it. And now I have Netflix.

I have HBO Max. I have Disney+. My kids would never let me get rid of Disney+. In the early days of the pandemic, it was nice to have. Now I kind of consider that an essential. And for my wife, it would be the Peloton because it's that subscription model that kind of like sucks you in. now that you've already spent thousands of dollars on your equipment it seems silly to cancel your monthly subscription and just let it sit there yeah so i guess that would be an essential too

yeah and i mean the health benefits too of exercise and i mean absolutely i like going to the gym but then again i work from home all day so i like getting out yeah she works in a hospital all day so she likes coming home and working out yeah very understandable well let's wrap this up real quick just with an idea here you know in in sort of looking at these companies that start out as maybe nice-to-haves and then sort of flip to that essential. Some good examples there. What are some characteristics or what does it take for a company to get from nice-to-have to essential? Is it something that relies on external forces, macroeconomic conditions, whatever it may be? Or are there things that company itself can control to take that,

to make that leap from being a nice-to-have to, oh, now, listen, we are an essential part of your life and you need us. Well, I would say, one, a network effect. It wasn't that long ago when a smartphone was considered a nice-to-have luxury. Think of Apple. Everyone thinks of Apple as not an optional product. A recession hits, they don't sell any fewer iPhones, not significantly. The network effect of their products definitely helps. And the same thing goes with streaming. Streaming is a superior product and at a superior price point to the alternative, which is kind of the obstacle that companies like Peloton need to overcome. Because yes, Peloton is absolutely a superior product of the $300

exercise bikes, but it's not at a similar price point. And so people have a really tough time viewing something as a must-have that costs 10 times as much as the alternative. And that's why the streaming services, I think, are so successful, because their cost is comparable to the alternative, and it's, in many ways, a better product. Well, we'll end it there. Matt, thanks so much for making the time for us today. Of course, always good to be here. 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.