Motley Fool Hidden Gems Investing - Snap Goes Down, Takes Others With It

Episode Date: May 24, 2022

It's a rare day when a single $20 billion-dollar company drags much larger businesses down with it. (0:25) Tim Beyers discusses: - Snap's 40% drop and CEO Evan Spiegel's less-than-great communication around guidance - The ripple effect on Alphabet, Meta Platforms, The Trade Desk, and others - How the current environment has little patience for nuance - Zoom Video's strong results and upbeat guidance - The underrated health of Zoom's business (15:00) Robert Brokamp talks with Dan Caplinger about a couple of ways investors can fight inflation. Stocks discussed: SNAP, FB, ROKU, PINS, GOOG, GOOGL, TTD, ZM Host: Chris Hill Guests: Tim Beyers, Robert Brokamp, Dan Caplinger Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Chris Hill. If you're keeping a list of CEOs who could be doing a better job of communicating with investors, we've got one more name you can add. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Tim Beyers. Thanks for being here. Thanks for having me, Chris. Fully caffeinated, ready to go. Likewise. We are going to get to Zoom in just a little bit. We have to start with Snap, because Snap is having ripple effects hitting shareholders way beyond just the Snap shareholders.

For those who missed it, CEO Evan Spiegel warned that the company is going to miss its own quarterly targets for profits and revenue. Shares have snapped down 40% today. And the ripple effects I referred to, it's basically any company that relies on digital advertising of some form or another. Shares of meta-platforms, Roku, Pinterest, Alphabet, Trade Desk, just to name a few, down in the wake of this market environment where nobody gets the benefit of the doubt and everyone is assuming the worst all the time. Right. Yeah. When your stock is down 40%, you can no longer be called Snap. We have to call you Snapped. You've been Snapped now. It's terrible, Chris. It's really frustrating, to be honest, how this came to pass.

So, Evan Spiegel got asked about basically the state of the business at the JPMorgan conference and said, yeah, our guidance is going to come in down below the low end of our guidance that we issued a month ago. It was probably the biggest shrug emoji of an announcement of bad news that I think I've seen in a while. It was really weird. was almost like a Hollywood moment where we have to freeze the frame and say, wait a minute, did that just happen? And then, of course, to follow this up, Snap issued an 8K, and an 8K

filing is an SEC filing that is required when the company discloses something that could be material to an investor. In this case, it is material that Snap investors thought they were going to see a certain amount of growth. Now they're not going to see that. And so they put out this 8K filing that essentially repeated what Spiegel said during the conference. And then there really wasn't any more color commentary on this, Chris. So let's talk about what we know. The two things we do know, when Snap announced guidance on April 21st, so literally a month ago, 20% to 25% year-over-year growth, that's what to expect in the coming quarter, and zero to break even to $50 million of EBITDA. And now, so we know two things. It's going to be

less than 20%. And snap, if I have my numbers right here, has never grown less than 17%. So they may set a new record for low growth with this coming quarter. And they're going to have another EBITDA loss. For those who don't know what that means, EBITDA is earnings before interest taxes, depreciation, and amortization. Chris, they've piled up tons of losses in that category for years. They were finally going to turn the corner here, and now they're not. I would say Snap's response, sort of casually putting that out there, is more concerning than the actual numbers. Spiegel's also getting some flack for laying a decent chunk of the blame at the feet of the macroeconomic environment. And I think a lot of analysts and a lot of investors rightfully

are sort of looking at the business that Snap is in and saying, it really shouldn't be affecting you to the tune of 40%. And certainly not in a month. So there are two possible answers there. Either things have deteriorated at a massive scale, which would explain some of the carnage that's hitting other stocks. So either things from a macro perspective, if let's say Spiegel's right, things have deteriorated at a breathtaking pace. I'm not intending this to be snappy as snap, or their internal controls and forecasting are horrible. It's really either one of the two, Chris. I think what's more likely, is it that things have deteriorated so dramatically that everybody should expect whiplash in their own forecast, like Meta will cut back guidance,

Alphabet will cut back guidance, the Trade Desk will cut back guidance. I think it's presumptive to say that they will. It feels much more likely to me, Chris, that Snap made some assumptions in its business, and now they've had to go back and say, well, wait a minute, we were wrong about those assumptions. So, this feels more like forecasting error than it does draconian macroeconomic downturn. I don't discount that there's probably some deterioration, but this much deterioration, that feels extraordinary, and I'm having a hard time swallowing it. Last thing before we move on, one of my favorite comments I saw today that I think cannot be emphasized enough for all investors, regardless of the stocks in your

portfolio. And it was an analyst at JPMorgan Chase writing about Snap saying, you know, the guidance is less emblematic of the macro environment than the messages that we have received in the banking industry. And the note went on to highlight, like, look, they're going to do like $6 billion in revenue this year. And the quote that stuck with me was, this analyst wrote, that said, this is not a market that is spending much time on nuance. And I just immediately, in my mind, gave that a standing ovation. Because if listeners take nothing else away from what's been happening over the past couple of months, at least, please, please take that into account, that this is absolutely not a market spending much time. I would say

spending no time on nuance. It's just- 100%. Yeah. Can we just say that at least for the moment, hysteria is the new normal? It is. It is. And for long-term investors like us, that can create opportunity. That can create a lot of opportunities. Yeah, that can create a lot of opportunities. I mean, but before you pivot here, the quick thing is, so is it a long-term opportunity for Snap? I would just say for right now, Snap sort of left it for us to kind of shrug and say like, I don't know what this means for you. And so I don't think this creates an immediate buying opportunity for Snap, even though it might. They just left too much unsaid, Chris. But it might be. I think you got to wait for the report.

Absolutely. And that will be a conference call worth listening to. Let's move on to Zoom video communications, because first quarter results were good. They had upbeat guidance for the second quarter. The stock is in positive territory. And as you and I were talking earlier, this was one of those reports and guidance for Zoom that you just think, gosh, if this were just an ordinary day in an ordinary market, this stock would probably be up a lot more. I think it'd be up at least 20%. I mean, I really do. If the NASDAQ were not down over 3% as we're talking right now, Chris, if there wasn't so much hysteria in the market, it, Zoom would be up far more than it is. Let's just hit the numbers quickly on an adjusted

earnings basis, $1.03 in earnings per share for the first quarter of fiscal 2023. The final estimate was $0.87, so they blew that out the water. The revenue estimate was much closer, 1.0738. That's a little bit higher than the average estimate for analysts. They beat marginally, but their revenue guidance was terrific. They came in with guidance that was right in what the market wants, and again, with higher guidance in terms of their earnings per share. Calling for in the next quarter, $0.90 to $0.92 and $3.70 to $3.77 for the full year. That's material up almost 4% better than the average estimate here. The fact is that Zoom is doing incredibly well here, Chris. I think a couple of things, two major points.

Zoom right now is on track, even if you get rid of all the artificial sweetener, all the stock-based compensation, and you account for all of their investments and capital expenditures and just building out the business, they're still on track to generate a billion dollars, a billion, with a B, of free cash flow just this year. In this quarter, they were able to buy back about $133 million in stock. That is funded entirely, Chris, through free cash flow. I cannot stress enough how healthy this business is. Zoom has a mountain of cash. fact that they only bought back $133 million worth of shares using their existing free cash flow to do it and stay conservative, stay thoughtful and reinvest in the business, this is one of those

companies that got tarred as a pandemic play and has quietly gone about its business of just executing, just executing brilliantly, Chris. Let me give you one other thought on this one. It's a relatively cheap stock. It's likely to end the day at a free cash flow yield that's over 4%. To put that in perspective, that's the kind of yield you expect for a company whose growth is slowing, not persistently growing and doing incredibly well with an unbelievably sturdy balance sheet. Chris, this one is, I think, emblematic of the hysteria in the market. We just don't want to give Zoom enough credit. Chris Hill Over the past year, the stock is down 70%. I think this goes to the narrative that you rightly

pointed out that, well, this is just a pandemic stock. I think you can look back at where Zoom was a year ago, where the market was a year ago and say, yeah, this thing got overheated, this got out ahead of itself. Maybe some investors who were looking at, wow, it's another quarter of triple-digit revenue growth, thought that was going to go on forever, which is a mistake to have thought that for anyone who did. But now, to your point, it's certainly a much more attractively priced stock. We talked earlier about the opportunities that get created in an environment like this. I think you and I are in agreement, Snap is not there because we both want to hear what they have to say when they come out with their actual earnings.

that we've seen this with Zoom, priced where the stock is, for people who haven't ever bought shares, do you look at what's happening today and think, this is a pretty nice point to get in? It feels like that to me, Chris. If you could call it cheap, I think you could fairly call it cheap. I'll just call it reasonably priced. I think this is a very reasonably priced stock. But there's going to be some people who are going to look at the top line and say, this thing is only growing 12% year-over-year because that was the quarterly growth, it was up 12%. They're going to see that and they're going to say, no way, that's a slow growth business, it's in decline. I think you're crazy if that's where you're at here. Let me give you a couple

of more stats here on the customer metrics here, Chris. Their largest customers, 198,900 enterprise customers, that was up 24% year-over-year. 2,916 customers contributing more than 100,000 in recurring revenue, that was up 46%. What does this add up to? Trailing 12 months, net dollar expansion rate of 123%, so spending 23% more. They have a large cohort of big customers that are growing their spend on Zoom consistently. Are we surprised that it's generating this much cash flow? I'm not. I don't think we should be. This stock is underpriced compared to its position, its earnings power, its cash flow, and its importance to customers who just keep voting with their dollars about how they see this as part of their toolkit

for doing business in a post-pandemic world, Chris. Really appreciate the time, Tim. Thanks for being here. Thanks, Chris. Am I the only one who thinks inflation is not looking very transitory these days? a couple of ways that investors like us can fight inflation. Here's certified financial planner, Robert Brokamp. It's been a rough year for investors. Inflation is up and our portfolios are down. The consumer price index in April rose 8.3% year over year. And as of last Friday, the S&P 500 is down 18% so far in 2022, and the NASDAQ is down 27%. This is a problem because

you invest today in order to pay for something in the future. And you have to make sure that your portfolio can cover those future higher prices. Joining us to discuss four ways your portfolio can fight inflation is Motley Fool contributor and former financial planner and lawyer, Dan Kaplinger. This week, we're going to talk about two inflation fighters, and then Dan's going to join us again next week to talk about two more. Dan, welcome to the show. Hey, I'm glad to be here, bro. It's been a while since I've been on this show, but it's always fun to join you. Well, we called you in here because we know that you're a smart guy and you can talk about all kinds of different things, including some

things that a lot of people really didn't pay attention to for many years because, frankly, they're boring investments. We're going to start with this No. 1 inflation fighter. It's inflation-adjusted investments offered by none other than Uncle Sam. I know. Whoever would have thought that the U.S. Treasury would come out with a set of investments that were among the hottest, most in-demand products right now? But with inflation high. A lot of folks are discovering these for the first time. There's two different types of these securities. One is the Series I Savings Bond, better known as I-Bonds. The other is the cumbersome Treasury Inflation Protected Securities, better known as TIPS. And both of these

are bond investments. And so it's important to understand this plays a different role in your portfolio than stocks. It's not going to replace stocks. It's for the portion of your allocation in your portfolio that you've got to fixed income outside of the stock market. But these particular bonds do something that most bonds don't. They adjust their value based on changes in the consumer price index. And because they are issued by the U.S. Treasury, they're backed by the full faith and credit of the federal government. So you don't have to worry about default risk. Worst case, the U.S. Treasury can always generate more money to pay these off. And so what you're able to do is see returns that keep up with inflation. And so when you see inflation

pop up, you'll see the returns on these bonds go up as well. And that's what's getting so much attention, bro, because if you buy an iBond right now since the beginning of May, you will get an interest rate of more than 9.6%. Yes, not a typo, not 0.96, 9.6% on an annualized basis on that iBond. But before you think, okay, boy, I should just replace my whole stock portfolio with these guys, there's a couple of things to keep in mind. One is, interest rate on the I-bond changes every six months. And it's based on what happens to inflation over that ensuing six-month period. And so, the reason that we're getting 9.6% for this six-month period is because inflation, the consumer price index, went up by that amount on an annualized basis. The other thing to keep

in mind about these I-bonds is that there's a limit to how much you can buy. Generally, each taxpayer, each social security number can get tied to $10,000 worth of I-bond purchases in any given calendar year. So that means that if you're married, then you can buy $10,000 worth, your spouse can buy $10,000 worth. But it's not something that if you've got a million-dollar portfolio, you're going to be able to get everything into these I-bonds and get that guaranteed 9.6% rate. Another thing to keep in mind, I-bonds, you have to hold onto them for at least a year. You can hold onto them. They continue to generate interest for up to 30 years. You don't have to hold them that long. If you cash them in before five years goes by,

then you'll pay basically an early withdrawal penalty of three months' worth of interest. But a lot of folks are getting into these just because you're seeing declines in the stock market, you're seeing declines in a lot of bond mutual funds and ETFs. And so these offer a way to get yourself sort of a guaranteed positive return because they can't lose value. And they're easy to get through treasurydirect.gov. In addition, you may be able to, if you have a tax refund coming, you can direct that tax refund into the purchase of I-bonds up to $5,000 in additional iBonds. So definitely something to keep an eye on. With iBonds, you pretty much have to get them directly from Uncle Sam. Tips are a different story. Tips are a way you can get them directly

from Uncle Sam, but you can buy them in other ways, right? That's right. Tips are a different animal. It's important to understand the difference because there are some things that iBonds have that tips don't and vice versa. Tips are also auctioned through the U.S. government. You can get them on the Treasury Direct website on a relatively infrequent basis. I think that they auction off new tips once per month. But you can also buy them through your broker. Now, that's not the case with iBonds. But with tips, you can buy them through your broker, and you can choose from a variety of maturity dates, anything from just a few months out to as long as 30 years from now. The thing that you have to worry about when you buy tips on the open

market is that many of them are trading at premium prices compared to what they will pay out when they mature, at the date of their maturity. That's the safer side of your portfolio. Let's take a look at the riskier side of your portfolio and some of the things you can invest in that will give you a better chance of beating inflation. Looking at inflation fighter number two, we're going to talk about dividend stocks. Over the long term, stocks in general are a good inflation hedge. Over many historical periods, stocks have outpaced inflation by 6% to 7% a year on average. It makes sense, because inflation is the result of companies charging higher prices. You could benefit if you own shares in those companies. But the short term is a different story. We've

seen that this year. However, I think it's important for you to remember that the return from the stock market comes really from two sources, price movements and dividends. And while prices are down this year, dividends have kept on growing. According to Standard & Poor's, U.S. companies have grown their dividends by 9.5% in the first quarter of this year. And I think people don't really often think too much about dividends or kind of an afterthought, especially nowadays. The yield on the S&P 500 is 1.37%. The last time yields were this low were the early 2000s. Plus, not every stock pays a dividend. But dividends can really be a resilient way to fight inflation. In a recent MarketWatch article, Mark Holbert wrote

that based on the average of all rolling 12-month periods since 1940, dividends per share growth has outpaced inflation by 2.4 percentage points per year. Plus, companies are really reluctant to cut dividends. They represent a long-term promise, and investors do not respond favorably to dividend cuts. Let's say you like this idea of buying some dividend payers. Of course, you can go out and buy individual companies that pay a dividend, but you also can get an instantly diversified portfolio through ETFs that track a dividend-oriented index. There are several of these out there. most are offered by the big-name brokerage firms and mutual fund companies. But it's important to understand the criteria for a company to be included in the ETF.

Some of these ETFs focus on companies that have higher yields today. Others only on companies whose yields actually may not be particularly high, but the dividend is growing at an above-average rate. Also, the index methodologies often result in different sector weighting. I think it's perfectly reasonable to own more than one dividend-oriented ETF to round out your exposure. And as for how these ETFs have done so far this year, most are holding up better than the overall market. Still down, but the declines are mostly in the single digits. 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.