Motley Fool Hidden Gems Investing - Slow Growth Silver Linings

Episode Date: November 21, 2023

Zoom’s slow revenue increase may show how the company is changing. (00:12) Asit Sharma and Deidre Woollard discuss: - Why Zoom is more than a videoconferencing company. - What happens when a company’s growth slows. - How big-ticket item sales are impacting Lowe’s and Best Buy. (14:52)  Alison Southwick and Robert Brokamp share some financial gratitude from a motley collection of Fools. Companies discussed: ZM, NOW, CMG, LOW, AMZN, HD, BBY Claim your dividend report here:  www.fool.com/dividends Host: Deidre Woollard Guests: Asit Sharma, Robert Brokamp, Alison Southwick Producer: Mary Long Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. slow growth isn't always the worst news Motley Fool money starts now welcome to Motley Fool money I'm Deidre Willard here with Motley Fool analyst Asit Sharma Asit how you doing today great Deidre how are you doing doing well getting getting prepared for for a little bit of a break but we've got a lot of earnings before we do that big one coming tonight with NVIDIA, but let's talk about Zoom that reported yesterday afternoon.

This one, you know, the pandemic darling, right? And we aren't seeing huge growth here, but they're making steady improvement in a bunch of different areas, they're growing enterprise. What makes you feel positive about Zoom, even though this isn't the growth story we had during the pandemic? Deidre, I think what makes me feel positive, let's put this on the plus side of the ledger, is the company is doing what it said it would do. Eric Yuan, the CEO, and Zoom's management team have been insistent over the past several quarters that they need to improve with enterprise customers and just let the retail customer segment of their business do what it's going to do. They're experiencing

churn there, although that's decreased some, and they've made progress there. I think that this enterprise growth, we saw 5% in year-over-year growth in accounts. That's decent, but pay a little more attention to that $100,000-plus in annual contract value segment, that was up about 14% this quarter. This cohort contributed 29% of total revenue. Now, if you follow software service models and cloud companies, you know that successful businesses are often growing their 100,000-plus customers at much faster rates, like, say, 20%-plus year-over-year. But for growth-challenged Zoom, it's still a positive. Well, and I think that it wasn't what Zoom maybe started out to be, because the

thing that boosted it during the pandemic was, of course, those retail customers. they weren't relying on that growth engine. This engine works a little bit differently. They're starting to grow services at a time when most businesses are like, hey, I'm not spending a lot right now. I feel a little positive about this, but I'm thinking about this company a lot differently because the Zoom part of it, the part that we're experiencing when we think about the company, is maybe over time going to become less of what the company is known for and gets its revenue from. Yeah, true. I mean, I've been looking at the contact center for a long time.

This is a capability that Zoom put together after it tried to buy its way into this business with the acquisition of a company called Five9 that didn't go through. This has been a long journey for Zoom, stretched over several quarters now, feels like a couple of years. This product, while it's very robust, has only 700 customers to date, but they're good customers and enterprise-type customers. Note that CEO Yuan says that Zoom is going to double down and triple down on Zoom Contact Center. That tells you a lot about their effort to expand beyond just the interfacing via video. With this, you're going to have, for those who are our patient shareholders still, I think, a lot of slogging ahead, but it's a product

with a lot of potential. With their investments in AI, maybe they can have that long-awaited catalyst come to life within the next few quarters. I think the market, though, is just looking at this as a much slower growth story, not one that has a clear way to propel itself It's just, we're going to have to watch for one of these investments, I think it might be the contact center, to start gaining some momentum. Yeah, I'm interested in the contact center, too. I know that on the call, they talked about Dollar General as a client. And I'm not counting them out.

When they first launched Zoom Phone, I was like, ugh, I don't know, that's such a crowded space. And now they've got 7 million seats in there. I'm like, okay, that's big, that's growing. And the AI part, everybody's saying AI, but there are applications for AI when you're talking about customer service, when you're talking about videos and note-taking and things like that. So, is it still a growth story, or is it almost a little bit like PayPal now, where the growth part is over? It's a limbo story. I always like watching videos of people playing the limbo game. It was pretty popular in the 70s and 80s.

you don't see a lot of that anymore. But you always have this moment of curiosity, is this person going to be able to make it under the bar or not? And that's where Zoom is right now. I mean, Deidre, you asked me an interesting question when we were preparing for today's show. You asked me, Zoom is sort of always on the hunt for smaller businesses to acquire, but isn't it also a target? I think, yeah, maybe. The other thing you asked is, if it isn't a growth stock, what is it? And I think this is the hardest thing to figure out about the business thesis. One thing that's very interesting about Zoom is that it's got a market capitalization of around $19 billion, close to $20 billion, but its total enterprise

value is only $13.4 billion. That's because it's got $6.5 billion of cash and short-term investments on its books. I think that might be attractive to a private equity acquirer, I see that big balance sheet that's trading now at only 11.5X the next 12 months free cash flow per share. There's a lot here that a savvy private equity company could do with such a balance sheet. It might not be the best outcome for customers, but I think it's maybe a ripe candidate for acquisition. It could be by a public company, too. A final note on that balance sheet, I'm disappointed in Zoom's investments of its available cash and investments. I was just poring over that latest report. The other income component

in Zoom's income statement is something like $114 million year-to-date through nine months of this year. That's with $6 billion-odd of cash in short-term investments. If you look at similar companies which have a lot of cash on their balance sheet. Take ServiceNow, for example, which has $2.5 billion less worth of balance sheet cash. They have generated $216 million in interest income this year, so about $100 million more than Zoom has, with a lot less investable cash. I wonder about the utilization of their resources. A private equity firm would be looking at stuff like this, saying, wow, we could probably generate a lot more. Now, we shouldn't penalize Zoom too heavily here. Maybe they've been investing in longer-term

duration securities, and they've been doing this for a while. But there's some lack of optimization going there. So, I think various companies are still looking at Zoom as a possible acquisition target. Another metric that gets talked about, but maybe not as much, is stock-based compensation. People want to see the total shares go down. that they're worried about the stock-based compensation, especially now if it is not the growth story. So it feels to me like you get a little bit of a hall pass if you're growing like crazy and you're a stock-based compensator. It's like, oh no, we got to do this in order to attract the talent. That story shifts a little bit if we're moving away from growth, right?

It does. But I guess if we asked Zoom's management team, they might come back at us and say, yeah, we're slower growth. But, baby, look at this cash we're generating, $1.3 billion through the first nine months. What are you worried about? $800 million or so in stock-based compensation. So what? Even when you throw that in, we generate a heck of a lot of cash. I think that's the one thing they have going for them that other companies, which have curbed a little bit in their growth, don't. Zoom is such a highly cash generative business. That's the one saving grace there when you try to poke holes in that huge stock-based compensation expense component. Yeah. I feel like this show is maybe a little bit of the like slow, but don't count them out

kind of show. And I want to pivot a little bit, talk about retail, because we got a cluster of retail earnings this morning. Two of them that I want to talk about, Lowe's and Best Buy. Also, you know, sort of the, it wasn't a great quarter, comparable sales down for both companies. The message I keep receiving from all the retailers and all the earnings calls I listen to is it's all about the big discretionary, right? So people are still spending, the consumer is still out there, but they are very cautious about appliances for Lowe's or like giant TVs for Best Buy. I'm an investor in Lowe's. I'm waiting it out. I still love this business. I really like Marvin Ellison as the CEO. I believe in the business. But if you're an investor and you've

got these retailers, how do you draw the line between, okay, it's the macro, everybody's down and, I don't know, maybe something's wrong with what they're doing. DJ, I think it's very related to the exercise we just did, which is to look at maybe not a close competitor. So, Zoom and ServiceNow, they do different things, but they're structured similarly. Here, we can look at a comparable company, Lowe's and Home Depot. Both have struggled a bit this year, and both have called out the same things. The big-ticket items are no longer flying off the shelves. Well, refrigerators never fly off the shelves. They're very heavy. They have to be delivered. You get my sense.

But there is a difference here a little bit. It seems like Home Depot leaned much more into the pro segment of their business, trying to make sure that they're good with the contractors who are out there in a tight housing market. They've invested a lot in that space. Lowe's has too, but they seem to be getting less of a yield out of that pro business, and they have more exposure to the do-it-yourself segment. That seems to be a drag. Now, both companies are exposed to the falling price of lumber as we get further and further away from those supply chain issues that were prevalent during the pandemic. That hurts the revenue that you can recognize when one of the major components of what you sell is just cheaper for you to buy, and you pass

on that pricing to the customer. There's something in the nature of temporary headwinds combined with that uncertain macro environment that everyone can rightly blame, but not entirely. When you've got those close competitors, a shareholder can look over his or her shoulder and try to see why this business is not quite reacting in the same manner as its peer rival. I think with Lowe's, for me, it comes down to just a little bit of lost focus on the pro segment. I'm sure they will double down on that, because this year that's proven to be a good place to play. But overall, a very strong business, a very great appeal with what Marvin Ellison has done in terms of store presentation, improving that distribution

technology, getting the right inventory, what customers want. I think the long-term story on Lowe's is still possible. They still are a very plausible rival to Home Depot. Let's talk a little bit about Best Buy. One of the things I'm fascinated with them is that they're trying to do these membership tiers. I like to follow memberships and loyalty programs a lot for retail and for restaurants, because I think they have real value. But the thing, there's a difference between like a loyalty program where you're just in and you get rewards and a membership program where you're paying. Now, with Best Buy, they've got about 6.6 million members in their paid membership tiers. They've got different levels

depending on how much service you get. Surprising growth. And I really like this because I think this gives them a little greater optionality. Still a small number, though. So, how should we think about the Best Buy membership portion of things? I do think it's important, Deidre. I think that when you cultivate both subscription-style memberships and loyalty programs, what you're often doing is winnowing out some customers. You'll always attract customers at the margins, those who want to try a loyalty program or try a subscription or membership-style service. You do get a core, though, that remain loyal or keep renewing their memberships and use them. Those tend to be valuable customers

because of the data you can collect about them, because of some offers you can make during the year. When we see the numbers shake out in a company like Best Buy, which is struggling with that softer sale in the big-ticket item category, but is still moving along, I think handling this tough persistent inflation environment pretty well. Those members, while they're not huge, they provide some support to the core numbers that we just don't see. It's harder for us to see how they're utilizing both the data that they get and the interactions they have with those customers to support the business. Without it, these numbers could look a lot worse. I do feel that that's an important part of Best Buy's business.

and they do a great job of it. Another company that I think does very well with this, it's a different industry, is Chipotle. But that's for another day. If you're a regular Motley Fool Money listener, you're probably well aware of how dividend stocks have the potential to really supercharge your portfolio's returns. Dividends have accounted of around 40% of the total return of the S&P 500 since 1930. And of course, have been an important tool for all-time greats like Benjamin Graham and Warren Buffett. Our top-notch analysts at Motley Fool Stock Advisor certainly agree and have put together a list of five quality dividend payers that are also recommendations in our Stock Advisor service. The report is free to you. Just

as a thank you for listening to our podcast, no purchase necessary. Just go to fool.com slash dividends, and we'll email it directly to your inbox. That's fool.com slash dividends to claim your five dividend stock recommendations now. We've got a lot to be thankful for this season. Alison Southwick and Robert Brokamp share some financial gratitude from a Motley collection of Fools. It's the week of Thanksgiving, so tis the season to be grateful for family, friends, food, and finances. If you have a roof over your head, a turkey on the table, money in the bank, and stocks in your portfolio, chances are someone along the way helped you get to the net worth you have today, even if that someone was yourself. So we asked Fool employees the

following question. What is a financial decision you made or somebody made for you or with you in the past that you are thankful for today? And so we received many responses and they all fell into a few themes. We'll discuss each one with the help of some of our fellow fools. So the first thing we're going to talk about is the fools who are thankful for a helping hand. Hi, my name is Savannah S. Worthy. I'm on the editorial team. I'm thankful for two different financial decisions that were made for me. One is I was in the investing club at my undergraduate university and a random mentor in that club encouraged me to open a Roth IRA, which is something I'd never heard of. So I opened one up at 18 and subsequently taught my sister to do the

same. And now just seeing the growth already, I know that it's definitely changed my sister's and my financial futures for the good. The second is for my grandfather who invested a few thousand dollars for every grandkid when we were born and then gifted us those accounts when we turned 18. And we were able to use them in any way that we pleased. It could have been some people use it for down payments. Some used it to pay off student debt or pay for their senior years of college. But all of us have been able to use that money to set us up for a more successful financial future.

And it just also showed us the power of investing and compounding because we were able to see how just a few thousand dollars was able to turn into something much greater over 18 years. and it wasn't touched in that time. So it also taught us to set it and forget it and leave our investments alone. So it gave us lessons that will last a lifetime. And I'm so thankful. My name is Leah Melton

and I'm on the Motley Fool Canada's marketing team. I am thankful for my father who set up a custodial account for me and gave me an allowance every week that I could choose to save or spend. Surprise, surprise, when I turned 21, I got a huge present that I had unknowingly built myself. My father used the Motley Fool to choose the right investments for me.

He seemed to even if I did not touch that account since, I would be fine when retirement comes. This mail order DVD company called Netflix is up 17,000%." Ah, yes! Remember the Netflix DVDs? I remember calling my wife from work saying, you know, did the next episode of Lost come in the mail? Those were the good old days. Okay, so opening an account for your kids, very powerful, as you can tell from these two stories. And we had other fools who told similar stories. So just some pointers on if you want to do this for your own kids or grandkids, nieces, nephews, something like that.

You can just open an account in your name, like Savannah's grandfather did. That way, you retain control over the account, and then you just gift it to them when you think that they are ready to get it. The cost basis of the investments go over to them. That's one way to do it. Another way is what Leah's dad did, and that is to open a custodial account. In that case, when you open that account and you fund it, it's their money forever, but you control it until they reach the age of majority in their state. It varies from state to state. A couple of possible downsides to this, and that is, it is an asset of the kids, so it

could have an effect on financial aid eligibility for college. And also, they get the money when they reach that age of majority, whether they're responsible or not. So, that's a consideration. And then another thing they can do is, if your kids have any kind of earned income, summer job, part-time job at McDonald's or something like that, they can open an IRA. And that's what my wife and I have done for our kids. In fact, we were just talking the other day about how we need to get their final paychecks

for this year to see how much they've earned. Therefore, we know how much we could contribute to their Roth IRAs. It's just a fantastic way to get your kids started saving for retirement or some other goal, but also to teach them a little bit about investing. So we just heard from Fools who were thankful for a family member who helped them out. But we actually heard from a number of Fools who were thankful for people who weren't even friends who gave them help and guidance. Hey, Fools. Lauren Hurst here from the product team working behind the scenes on services like

Stock Advisor, and I'd like to share why the least exciting part of your financial plan might be the most important. In my early 20s, I fully understood the impact of investing sooner, but I delayed putting any money into the market until I had a solid emergency fund. Then after my first year of investing, I saw a chance to start fresh in a new place, and I pursued it solely because I had cash savings to dip into before landing that next job. Not exactly a remarkable story, right? Well, here's the alternate timeline. Either I don't make that leap and I miss some of the lucky breaks that led me toward the life I have now, or I suffer the double whammy of needing to raise cash by selling during a market downturn

and then paying early withdrawal penalties on top of it. That could have sent me back to square one too demoralized to continue investing. Remember, cash might not improve your returns, but it gives you extra choices when you need them. And I'm so thankful that I had mentors planting the seed all those years ago that step one is securing your emergency fund. Without that in place, I honestly don't have the marriage, the career, or the friendships I have today. I'm Mike Mulligan on the member services team. The first place I ever worked, first big kid job, I'd had dozens of high school and college jobs prior to this. Had a wonderful HR rep who took the time to explain what a 401k is and why I should absolutely sign up for one. I was 21 at

the time. I had a mountain of college debt ahead of me and very little financial knowledge. If not for her, I'd be in a very different place right now. So like Lauren, I actually had an experience in college that stuck with me, but it wasn't from a professor. It was actually a literature of the American South class. And one of the student's dads was a financial advisor. And he asked the professor, if you could speak to the class for just 10 minutes about the importance of saving early and the power of compound growth, the professor said yes. And I still remember that class more than 30 years later. But in Mike's case, all it took was a nudge from an HR person. So, if you're listening to this podcast, chances are you have above average knowledge about

personal finances and investing. And you probably know friends or relatives who could use a little education and encouragement. So, you know, give some nudges, plant some seeds with those friends and relatives. And maybe many years from now, perhaps someone will say, if it weren't for you, I'd be in a very different place right now. We also heard from Fools who were thankful for family members who were prepared for when they could no longer manage their finances, either temporarily or eternally. I'm Deidre from the programming team. One of the decisions I'm most thankful for is that when my father found out he was sick with cancer, he prepared heavily for the future. So while he was battling the illness that would eventually claim his life, he set up a trust, medical directives, and he introduced me to his lawyer and his financial advisor.

This made the most difficult time in both of our lives easier because I was able to make decisions the way he wanted, both before and after his death. It was a tremendous gift. And what it really taught me is that one of the most important financial decisions we can make is to make our finances simple and clear for our loved ones. This isn't a question of wealth or a move that only the wealthy or the elderly should take. My father wasn't wealthy. He was in his 50s when he got sick, as I am now. It's really a question of financial caring for the people that you love. I know the holidays aren't necessarily a time you want to think about things like incapacitating health issues or death or estate planning, but they actually are a good time to talk about estate planning because you actually may be spending some time with your family. I know it's not an easy topic to bring up. Maybe don't bring it up around the table when eating Thanksgiving dinner or by the tree Christmas morning.

But as Deidre suggests, one of the greatest gifts we can give our loved ones is to not leave them with a complicated financial mess. So, it's important to do your own estate planning, but also to check in on your parents, siblings, other relatives to see if they need a little nudge because you don't want to be the person left with the complicated mess. One way to do it is just start talking about what you've done. You could even use this episode to bring up the topic. You say, you know, I was listening to this podcast and they said people should talk about

estate planning with their families. And hopefully that'll lead to a productive conversation. We also heard from Fools who were thankful for their past selves, for making good financial decisions. I'm Mike Clesta, and I head up our paid channels team. I'm so thankful for having automated my monthly savings. No matter how large or small the amount, setting up automatic deposits into a savings account

helped me and my family build out an emergency fund, and we were able to grow from there. I'm Stephanie Marini, and I work on the financial planning team here at The Motley Fool. The financial tip that I'm most thankful for is that I have been able to save half of every increase since I've started working. So every time I got a raise or a promotion, I would take half of whatever the percentage was and put it in some sort of savings. It could be HSA money, it could be retirement 401k, or even just a high yield savings. But half of that was always put in to one of those accounts. So I still got to treat myself and still got to increase my lifestyle,

but also took care of my savings and retirement funding as well. So Mike's giving us the second shout out for an emergency fund. Very nice. And he did it with automatic savings, which really is the way to go, right? You just sign up to have a certain amount of money transferred from your checking account into a high yield savings account, maybe a brokerage account, 529 college savings plan, IRA, anything like that. have it done on a monthly basis or whenever you get paid. It's a set it and forget it decision, at least for a while. You probably should check on it every year or so, but it's a great way to have money just automatically build over the years. And Stephanie's strategy of banking half

of every raise is an excellent way to supercharge your savings as you make more money over your career. Years ago, we heard from a podcast listener named Dave who did this when he began his career in the Army, and continued to do so when he left the Army five years later. By the time he was in his 50s, his savings rate was more than 40% of his income, and he was able to retire early. Hi, bro. Well, before we go, I think we should share something that we're thankful for, a financial thing or decision. Like the people we just heard from, I am going to be thankful for myself and my past decision to marry my husband who is, it was actually sitting five feet away from me, but he's my

partner in financial matters. And he's a good egg when it comes to managing money, spending and investing. I remember a while back, bro, you said, you know, one of the best financial decisions you could make is in who you marry because their financial decisions and their financial mistakes are your financial mistakes in the end. And so I'm very lucky to have married who I did. So way to go past Allison. I agree with you. He's a good guy.

So I would say my mom was the first person to talk about investing to me. So I'm very grateful to her. She took me to the library when I was a teenager and showed me ValueLine, which was this stock-raking service that published reports in binders. It was very expensive, but many libraries had it. She got me at least thinking about investing. I would say the other moment I'm grateful for happened when I was an elementary school teacher in my early 20s, not making much money, and I stumbled upon a radio show from Rick Edelman, who is an accomplished financial advisor

and author. He was talking to a listener who called in and he was helping her go through her budget. She mentioned how much she spent on Diet Coke, and it was a lot. Rick said, you have a choice. You could spend your money on depreciating assets like cans of Coke, or you can spend it on appreciating assets like shares of Coke. It was the moment for me when it really sank in that the secret to growing wealth was to be more of an owner than a consumer. Very soon thereafter, I opened my first IRA, bought some stocks, and I've been investing and saving for retirement ever since. 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 Deidre Willard. Thanks for listening. We'll see you tomorrow.