Motley Fool Hidden Gems Investing - Shopify’s Whiplash Day

Starting point is 00:00:00 Tyler Crowe. Spotify's earnings and conference call had two very different reactions. This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe. Today, I'm joined by longtime Fool contributors, Matt Frankel and Jon Quast. We've got a pretty good show today. We're going to talk about Moderna's recent challenges with the FDA approval on some of its flu vaccines. We'll do our normal Thursday thing where we do stocks on our radar. But we wanted to open today's show with Shopify's up and down day yesterday with its fourth quarter earnings report. I think Shopify investors probably have their necks treated for whiplash yesterday. Before the market opened and the company reported fourth quarter earnings, it was poised for a great day.

Starting point is 00:00:56 The stock was up 13% in pre-market trading. Then as management basically started to discuss results and get questions in the conference call, the stock started plummeting. Actually, by the end of the day, it was down 6% from the prior day close. I have hosting duties here, so I will admit I'm not the most ardent follower of Shopify, so I'm going to lean on you guys a little bit more here. But at the first glance of the results that I looked at, I was like, they're pretty good, right? Matt, what did they say? Well, first of all, Tyler, in the past couple of weeks, we've seen a few earnings reports where it's up in pre-market trading or after hours the night before, then management opens their mouth and it changes. This is

Starting point is 00:01:36 definitely not the only case we've seen this quarter. But yeah, the numbers looked extremely strong, at least on the surface to me. 31% year-over-year revenue growth, which is exactly the same as a year ago, so it's not even decelerating as the business scales. Solid growth in free cash flow, operating profit, pretty much every other metric. Merchandise volume through the platform grew by 29% for the full year of 2025. There's now three times as much merchandise flowing through Shopify's platform than just five years ago. International growth was a really strong point.

Starting point is 00:02:11 The ShopPay checkout platform volume through that grew 62% year over year. It's looking really good. The company authorized a new $2 billion buyback. Even the first quarter guidance was well ahead of what analysts were looking for, which has not been the case with a lot of other software companies. It wasn't a perfect report. The big headline is they missed earnings. They missed EPS estimates by a few cents. Free cash flow margin contracted a bit. As I just mentioned, net income declined year over year. But there really wasn't much to dislike in the report other than that EPS miss, which the market will usually forgive for a company that is growing at

Starting point is 00:02:47 faster than expected pace. So, it looked really solid on the surface. The one thing I did notice on that EPS miss was it looked like it retired some, I can't remember if it was preferred shares or convertible debt, which on a gap basis doesn't look good. But overall, when you're doing those sort of things, it's a good idea. And again, I'm not 100% plugged into the expectation games for Shopify, but I thought the numbers look fine. So, John, what was said on the conference call that made the market go, hey, wait a minute, what's this? Yeah, I'm going to share a little trick with investors. If you ever see a stock drop after the conference call and you wonder what was said,

Starting point is 00:03:26 tune into the first question asked from analysts, and that'll probably be what the culprit is. In this case, the first three questions from analysts to Shopify was tackling the same issue. And that's a thing that was on everyone's mind. And it's a thing, a trend that they're calling agentic commerce. So Tyler, investing is all about the future, right? So the numbers were fine looking back, but investors have questions about what agentic commerce means for Shopify going forward. You look, it appears that there is a big change coming, an important restructuring, if you will, coming to e-commerce. So just to take a step back, how is AI used in commerce right now? Well, generally speaking, consumers are using AI to research what to buy.

Starting point is 00:04:16 But it's quickly moving towards a world where an AI agent is going to be told what to do, what to look for in a product, and buy it with your financial information on your behalf. It's going to be able to handle the transaction from start to finish. Shopify is building open source infrastructure called Universal Commerce Protocol. It's building this with Google. So this is open source, so this isn't necessarily a competitive advantage for Shopify. It is something that Shopify will use, though. And listen, I don't really know what this all means, to be perfectly honest. But let's consider a couple changes that agentic commerce could bring. First, why do you buy what you buy and click what you click?

Starting point is 00:05:01 Human decision-making is one thing, but how a machine is going to make decisions is another thing. And so that's something that could really change e-commerce and digital advertising for that matter. But you also look at, take a business like Pinterest. Pinterest can understand trends and user intent because the searches are happening on its own platform. With agentic commerce, this could be disintermediated from the platforms as people

Starting point is 00:05:27 interact with portals like Clod or ChatGPT. So what we're saying here is the Shopify numbers look great, but this is kind of related to that whole SaaSpocalypse. AI is changing everything. E-commerce is about to change. And the question is, does it hurt or help Shopify? To follow up, I want to toss this to both of you. Number one, are you Shopify investors? If so, was any of this thesis that between the numbers and between what they said in the conference call, is this thesis altering stuff or just market jitters? Or maybe if you're not a Shopify investor, does this make you more or less likely to buy? Full disclosure, I have owned Shopify stock in the past. I don't currently own a position. I would say that this is more market

Starting point is 00:06:14 jitters than the breaking of the investment thesis. There could be some execution risk here, For sure. Agentic Commerce is a new animal, and I don't know exactly how it's going to shake out. It does have some valuation risk as well, in my opinion. Shopify stock is always kind of pricey. When you stack the execution risk with the valuation risk, it's not a stock that's high up on my watch list right now. I do own it. I opened a position in 2022, I believe, right after the stock plunge. Last time, they were calling for the death of SaaS companies. It was right at the end of the pandemic when e-commerce was drying up and things like that. It's been a very solid investment for me so far. One thing I would say is that while

Starting point is 00:06:57 the threats of agentic AI shopping are certainly to be taken seriously, but on the other hand, Shopify has been challenged before with new technologies and has historically done a great job of adapting. So I have no reason to believe that won't happen now. They're so ingrained in their customers' business. They do a whole lot of different things for each of their customers. It's not just as a shopping platform. So, I think it's an opportunity here, in my opinion. As the host who doesn't spend as much time with Shopify, I'm going to default to you guys on this one. After the break, we're going to take a look at Moderna's bridge over troubled water here. Earlier this week, we learned that the FDA refused to consider Moderna's recent flu

Starting point is 00:07:42 vaccination for approval. Based on some of the reporting from the Wall Street Journal, the decision wasn't without controversy. And this is the second time in a year that the current administration has kind of come down against Moderna. Back in May, the Department of Health and Human Services canceled a $590 million contract to develop an mRNA vaccine against avian flu after issuing the contract five months prior. Now, I bring this up, both the flu vaccination refusal to consider and the avian flu grant cancellation because these vaccines were what management considered their bridge treatments that it would use to fund its earlier stage vaccinations for things like cancer and rare diseases where it really wants to go with its

Starting point is 00:08:28 mRNA technology and without it it will have to rely on the revenue it gets from its current commercial products which are its covid vaccines and it has i think one flu vaccine right now The thing is, it's burning through a rather large amount of cash to do all of that development, and the COVID vaccinations aren't quite filling the gaps. Now, I don't know about you two, but I'm having a hard time making a sense of all this. If these recent decisions from the FDA drastically alter Moderna's strategy over the next several years. I mean, I'm not going to sit here and try to make sense of the FDA's decision here. I don't think any of us are, you know, it's kind of a head scratcher to the three of us and to Moderna

Starting point is 00:09:09 in general. I follow the company pretty closely. It's definitely a setback, but it's not what I would consider a game changer. And I'll tell you why. So, on one hand, the flu vaccine is by far the furthest along of the 50-plus candidates Moderna has in its pipeline. But on the other hand, it is still one of more than 50. And it's important to put this into perspective. So, Essentially, the FDA took issue with the methods of Moderna's late-stage clinical trials with this flu vaccine. I'm not saying that they don't want an mRNA flu vaccine, just they have issues with the methods. It's kind of curious that they approved the method earlier and then went back on it. It's really worth noting that the U.S. is just one market. This is the U.S. not starting a

Starting point is 00:09:53 clinical review process. They've already had these applications approved in the EU, in Canada, in Australia, there's others expected soon. So, it's not like this is a death knell for the project, even if the FDA doesn't consider it ultimately. In the clinical trials, the mRNA flu vaccine did show greater efficacy by a significant amount compared with the traditional flu vaccines that we get now. Moderna has other candidates in late stage, which are like phase three trials, including several of its cancer treatments. The company recently said that it's hoping to secure 10 different product approvals by the end of next year, 2027. So this is just one piece of the puzzle. So not saying that this isn't a big deal, but it is important to keep this

Starting point is 00:10:37 in perspective. Yeah. I mean, in one sense, this is kind of why I don't invest typically in biotech companies. The reward could be astronomical, but the outcomes tend to be binary, right? Either you get your drug to market or you don't. And I think there's definitely room in a balanced portfolio for stocks like these, so long as you have other things that are a little bit more certain. And maybe you're in the medical field and have a better understanding of what's going on, therefore you can make more educated decisions. I will say, though, listening to Matt talk, I mean, one of the things that I do like, and I think that investors could be encouraged by Moderna, is the fact that it's not just a one-drug pipeline, that the pipeline is so robust.

Starting point is 00:11:19 And so there is risk that comes with this sector, but the fact that it has a large potential pool of drugs that could come to market, I think that that is something that investors can stay encouraged with. Yeah. I mean, shots on goal is really a thing here. I read a study, I think from over 2011 through 2021, it was like 7% of all drugs that started a phase one clinical trial actually got to commercial viability. So the more on the pipelines, the more you actually have a chance of something getting through. Now, I don't think I'm being too political here when I say that the current administration has very different views on vaccines writ large, and specifically mRNA vaccines compared to previous administrations,

Starting point is 00:12:01 which does make me kind of wonder, because we were talking about this large portfolio of upcoming mRNA vaccines. If we're seeing resistance from the FDA on these influenza-type vaccines, like why should the attitude on these for you know towards oncology and rare disease treatments at using mrna vaccines be any different and again we go back to this fact that the company is burning through a rather large cash pile to fund all the research and development for this stuff happening right now and testing novel treatments like if we're being real here and this is kind of the attitude that they're getting should the company seriously consider like slowing its testing and development to a slower pace in hopes that maybe a change in FDA leadership

Starting point is 00:12:45 is more receptive to mRNA vaccines and kind of preserve that cash that's coming in the door? I think it's a valid question. Do we kind of cut back and start preserving cash at least until there is more clarity as to what is expected and what the rules are? This whole subject is a little bit complicated, unfortunately, because it tends, in my view, it tends to be whichever side you, you fall on the, on this debate tends to have a high chance that it aligns with your political affiliation as well. I think it's a shame because I think we all want to live in a world where we have better medicines that can treat terrible diseases. And at the same time, I think that we all agree that the testing should be robust. It should be the, the drugs that we approve should

Starting point is 00:13:33 be incredibly safe. I think we all want the same things. And sometimes I think that political polarization kind of clouds our objective decision-making processes. I think that the biggest issue I see here is that of regulatory clarity. Even if you agree with the FDA's decision to not review the application, it seems that from Moderna's perspective, it felt like it, in good faith, went with current FDA guidelines and then didn't have its application even reviewed. I see, at the very least, a communication issue here. You have a company that's investing money, trying to go through these processes to get a drug to market, and now saying, hey, we're not even going to review the application because

Starting point is 00:14:13 you didn't. It seems like the issue is what it compared its drug to, and it thinks that it should have been compared to something else. If that's all it is, I feel like that could have been communicated more upfront and clearer. I think we see communication issues and lack of clarity in many regards, in crypto, regarding tariffs, all these things. Companies are having a hard time knowing how to plan because of the lack of regulatory clarity. Yeah. And Tyler, I don't think you're being too political at all by asking that. I think the administration's attitude toward vaccines has become generally

Starting point is 00:14:48 more cautious. That's not a political statement. It's a pretty indisputable fact. I mean, even compared to the original Trump administration, whose Operation Warp Speed is the reason that Moderna's COVID vaccine was so successful in the first place. The landscape has shifted. The way I interpret the FDA's ruling, which John just summarized really well, is as a worst-case scenario, Moderna would have to retool its late-stage trial of the flu vaccine to show its efficacy, which would set it back probably a year or so. My belief, and I could be wrong is that the FDA would look differently on treatments that are intended for rare diseases than it would on a product that conceivably could be used by a high percentage of the

Starting point is 00:15:30 population if it's successful. General skepticism about the need and efficacy of flu vaccines is nothing new. It's worth pointing out. If I had to name one vaccine that people were most skeptical about in general, it would probably be the flu vaccine. I'm monitoring this situation. I don't really know what to make of it, but it's a setback. It's not a death blow, is my big point here. Two, I would say, not the cheeriest topics that we've discussed over here with Shopify and Moderna. We're going to move on to a little bit more positive news, and after the break, we'll do stocks on our radar. Now, I don't know who else saw this, just a little aside before we do stocks on our radar, but during the recent drop in Bitcoin price, this is a really great

Starting point is 00:16:18 story. A Korean crypto exchange accidentally gave away 620,000 Bitcoin instead of 620,000 Korean won worth of Bitcoin. So instead of giving away what's roughly approximately like $425, they accidentally gave away $40 billion. Unfortunately, I wasn't one of those lucky recipients of the Korean crypto exchange giveaway. So I guess me, you guys will have to keep on picking stocks. Matt, you get to go first this week. What's on your radar? It's really tough to pick and choose, given all of the earnings and the AI-fueled price drops. It's definitely a good time to selectively start looking for opportunities. Some of my usual suspects are starting to look interesting, including Shopify, which I mentioned earlier,

Starting point is 00:17:04 Upstart, PayPal. Those are some that are looking interesting. But I'm not going to stick with one of my usuals. For my radar stock this week, I'm going to go with a company called Trex, T-R-E-X. If you have a composite deck, they probably built it. The stock has been absolutely hammered in recent years. Tons of demand was pulled forward during the pandemic when everybody was renovating their houses. Oversupply headwinds hit the stocks after that as warehouses stocked up on all their products. And the way most people pay for new decks by borrowing against the value of their house has been stagnant because of high interest rates. But I think that this could be a really sneaky way to play falling interest rates, especially if mortgage rates fall into the mid

Starting point is 00:17:44 5% range, which I think they will by the end of this year, just my prediction. Americans right now have more home equity than ever before, about $35 trillion. And as it becomes a little more economical for them to tap into it, I think Trex could be a big winner from here. For my radar stock today, I'm going with Crocs, ticker symbol C-R-O-X. My teenagers and their friends don't call these shoes, by the way. They were playing a game recently and everyone who was wearing shoes had to change chairs and a couple of the kids didn't get up. And I said, why didn't you get up? And they said, we're not wearing shoes. We're wearing Crocs. Okay. Listen, there are cheap stocks where the business is dying. I would say stay away from those. There are also

Starting point is 00:18:26 cheap stocks where the business is fine. And that's what I see Crocs in that category. Crocs is up about 20% today after reporting its financial results for 2025. Its sales are basically flat. So I would love to see growth here, but at least we're not seeing big losses. Sales are basically flat. It generated over $700 million in operating cash flow, and that allowed it to repay about $100 million in debt for the year. And it reduced its share count by about 10% by buying back shares. In 2026, it expects basically flat sales again, roughly the same profitability. So again, I would love to see growth, but it's holding steady here and it only has a market cap of about $5 billion. So it's going to earn a lot of profit in comparison

Starting point is 00:19:12 to its market cap. At this price, it can reduce its share count substantially. It can keep paying down debt. I think it's going to be hard for shareholders to lose money, in my opinion. So Crocs is on my radar. All right. So I went with Saffron, or Saffron, depending on how you want to pronounce it. The ticker is S-A-F-R-Y. It's actually an over-the-counter in the U.S., but it's actually a French company, so S-A-F on the Paris exchange. It is a French aerospace and defense company and a big one, too. It's mostly engines. It's their big driver, but it's also the number one worldwide manufacturer in aircraft components like landing gear, wheels and brakes, electrical equipment, in-planes, cabin interiors. It's big

Starting point is 00:19:55 in European defense as well. And it's also the 50-50 joint owner of Aerion Group, which is the Europe's largest space launch specialist. This company has massive cash generation from, well, it is the joint developer of the Leap engine, if you've ever heard of that before with GE Aerospace. It's basically on all new airplanes. They're called the narrowbodies, those single-aisle planes that you get from Airbus and Boeing. And also the CFM-56, which is their older engine that was also on narrowbodies and widebodies, actually, for the big planes that you see, the 747s, things like that. These engines are like the workhorse of the aviation industry, and they generate decades of aftermarket parts and service revenues, just the engines alone,

Starting point is 00:20:38 but same thing with the wheels, brakes, anything that you got to repair on an engine. So much so that 52% of the revenue for the total company is actually in aftermarket parts and service, and that's replicable and high-margin business. So, very attractive on that end. Now, obviously, there are some stragglers in the portfolio, like Ariane Group's been spending a lot of money trying to get a new rocket up and running. But it too appears to be getting its house in order. It has a new heavy payload rocket coming online that's almost as big as the Falcon Heavy. And it's also built a smaller reusable one for low Earth orbit launches, very similar to what we see with Rocket Lab and things like that.

Starting point is 00:21:14 It's not dirt cheap. It's like 29 times earnings. But I think with several catalysts looking ahead, I think it's actually a pretty good investment right now. We have plastic decking, plastic shoes, and plastic interiors for airplanes. So I think that we're really into that classic line from the movie The Graduate where it's like one word, plastics. So good ideas for stocks on our radar this week, anything plastic. As always, people on the program may have interests in the stocks they talk about, and The Mountain Fool may have formal recommendations for or against.

Starting point is 00:21:46 So don't buy or sell stocks based solely on what you hear. all personal finance content follows motley fool editorial standards and is not approved by advertisers advertisements are sponsored content and provided for informational purposes only see our full advertising disclosure please check out our show notes thanks to our producer dan boyd and the rest of the molecule team for matt john and myself thanks for listening and we'll chat again soon

Motley Fool Hidden Gems Investing - Shopify’s Whiplash Day

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.