Motley Fool Hidden Gems Investing - Snap’s Specs Gamble

Starting point is 00:00:00 Is the AR future here? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoy. I'm joined today by Lou Whiteman and Rachel Warren. And guys, we've got to talk about probably the most entertaining story of the week. That is Snap introducing its new augmented reality glasses. Lou, these seem to be right up your alley.

Starting point is 00:00:27 I assume you're already in line to buy these $2,200 AR glasses that look like there's a there's like a reflective film on them. How in the world does this product? I'm actually a believer in the future of AR and VR. We're kind of moving in that direction with a lot of different platforms like Google. But this doesn't seem like it. And Snap just can't seem to be getting anything right at this point. I'm not going to, you know, you know, isolate snap here. I don't get it for everyone. OK, but definitely with snap. I this seemed like a bad Saturday Night Live sketch. If you watch Evan, Evan Spiegel talking about this on CNBC, was it CNBC or Saturday Night Live? I'm not sure. You know, the expression the beatings, the beatings will continue until morale improves. I feel like the goal here now is for this whole industry to keep telling us that it's inevitable until the consumer somehow kind of gets brainwashed into thinking, oh, I guess I have to buy these.

Starting point is 00:01:28 I'm skeptical. Spiegel's pitch here is after two decades with the smartphone, quote, people are ready to think about computing differently. My take on that is after two decades with the smartphone, we need a new product to sell. You know, I don't think people are out there thinking, gosh, I wish I could have one eighth of the screen always in my face because I'm just so sick of looking at this nice screen that I can use for all these things. Unproven form factor, unproven user interface. Look, Snap's answer to people questioning, should we be on the phone as much as we are, is to put a smaller screen in our line of vision 24-7, which is a really bold move. I don't think neck pain is the reason people are starting to have a conversation about, are we online too much, right? But somehow that's the answer.

Starting point is 00:02:22 Even the timing here is wrong. Travis, you mentioned the price. This is probably the worst economy in the last 15 years to try to launch a premium product, especially in Snap's demographic, which, to be honest, is much younger than me. These are not the people that are saying, you know what, I'm sick of my iPhone. I want to spend twice as much for something new right now. I just don't see it. Yeah, Rachel, it does seem interesting that I'm not surprised that these AR glasses are coming out. I'm actually kind of excited about the potential for them.

Starting point is 00:02:51 I don't know if it's necessarily something this year or next year. But you look at a $2,200 price point, that's almost as much as the Apple Vision Pro, which was a complete flop. So is there any silver lining here? Yeah, well, I think that's the big question. And this comes at a time when Snap's business is struggling, right? I mean, you look at their Q1 results. They had 12% revenue growth. They generated a little under $300 million in free cash flow, but they're operating in a net loss.

Starting point is 00:03:18 daily active users grew just 5% year over year in the recent quarter. So you're already in a time where the business is not really giving growth to write home about. So specs, right? Their first true standalone consumer augmented reality glasses. So these feature a 51 degree field of view. They use these really advanced nanostructure waveguides. They project see-through 3D graphics directly onto of the physical world. They are even featuring an integrated multimodal AI assistant because of partnerships with OpenAI, with Google. The price tag sits in a bizarre sort of purgatory, if you will. So they're cheaper than Apple's Vision Pro, but they're dramatically more expensive than the MetaRay bands, which have somewhat captured the mainstream cultural

Starting point is 00:04:04 zeitgeist. But I think the important thing to note is these are still a really far cry from looking like normal everyday eyewear. This is not something the average consumer is going and purchasing en masse. They're very bulky. It's a tough sell for people to wear them outside the home or office. And that price tag around $2,200 is also notable. Another thing, you know, Evan Spiegel, he was saying Snaps burned about $3 billion over 11 years developing AR hardware. And, you know, there's the argument that this R&D budget is something of a vanity project being funded by a volatile advertising business. And I think that's another really key point to make. This is a business that is struggling to find its operational footing. They initiated yet another

Starting point is 00:04:46 restructuring of the business, slashing about 16% of their workforce just a few weeks ago, and their longtime CFO just left. So this is a company with a really turbulent internal period they're seeing right now. The growth is not what it was a few years ago. Does this feel like the right time to launch expensive AR glasses? I wonder. That remains to be seen. I don't think this is going to be a big cash cow for Snap. I don't want to pile on here, but just one more point to kind of just show how ridiculous and non-serious this is. OK, on that CNBC interview, Spiegel justified the price tag by saying not that it is definitely not an accessory to the iPhone or to your phone, that it is a replacement. And that's why it's

Starting point is 00:05:34 worth the price it is. These things have four hour battery life, four hours. So this is going to replace your phone. You can get rid of your phone. Maybe it is a solution to our smartphone addiction, because by default, we're going to spend most of the day, we're going to get rid of our phones and then spend most of the day charging these things. Good luck. Good luck. The crazy thing for Snap is that this is a company that also has a lot of financial risk. They have currently about $2.8 billion worth of cash. They also have $3.5 billion worth of debt on the balance sheet. That debt only started coming on the balance sheet in 2018.

Starting point is 00:06:13 I just, this is one of those companies that I have wanted to root for a turnaround for a competitor against a company like Meta in the past. but I just can't get over these what seems like continual missteps and the financials never quite seem to turn around. I don't know. I think we're in agreement. This probably doesn't seem to be it. When we come back, we're going to talk about more layoffs in the market, this time from Rivian.

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Starting point is 00:07:08 Hurry into your local Sleep Number store today because we have your number. Welcome back to Motley Fool Hidden Gems Investing. Rivian announced another round of layoffs. I think this is the fourth round in the last couple of years, Lou. This time it's hitting customer service and marketing. We talked, I think it was last week, about them officially launching the R2. This is supposed to be the product that really brings them into the mainstream. They should be in this growth phase.

Starting point is 00:07:38 Why in the world are they laying off people in what should be an area of growth, you would think at this point? Yeah, and I think where these layoffs are coming matter. You mentioned customer service and marketing. Yesterday on the podcast, we were talking about Robinhood layoffs. It was mostly layers of middle management. That I find easier to dismiss because I do think a lot of these companies are bloated. And if you're just trying to get rid of some layers of middle management, but it's hard to spin layoffs in customer service and marketing at a time you're trying to ramp your product

Starting point is 00:08:08 in a good way. Now, look, you know, there are people out there who say that this is just as ridiculous of a product as those glasses we were just talking about. I know there are a lot of mixed reviews on what the R2 looks like. I don't think we know yet whether or not it's going to be a success or not. I don't want, I'm trying to take the glass half full approach here, which is, I think, you know, Rivian, they do need to lower their burn to the extent they can, hope that other people have more positive feelings about the R2, that they can gain scale here.

Starting point is 00:08:42 I don't think that layoffs you can look at it and say this is, they're definitely doomed, definitely success. But look, here's the thing. Automaking is very hard. Tesla was the exception, not the rule in that they made it. And look, they almost went under a few times. I think anyone investing in this, if you believe in the R2, I don't think the story is ruined. If this is a popular product and they can start generating cashflow, marketing would have been a nice to have and not a needed. But this was a long shot even when things were going well. And it definitely, I think, highlights the risks here. Yeah, Rachel, one of the things that stands out to me is that the cash from operations is negative $1.3 billion over the past year. That's the thing

Starting point is 00:09:27 they're trying to answer. It just seems like, like Lou said, the place and the timing is a little bit strange when you're launching your most important product ever. Yeah, it is a bit strange. I mean, this layoff comprises about 2% of the total workforce. But you have to think, right? You noted that one number, but Rivian also lost almost $4 billion last year. They're losing thousands of dollars in every vehicle they build. And that era of easy, unlimited startup capital is gone. And so if you're looking at this, trying to take the bull angle here, maybe you look and you think, okay, management, they're executing these cuts now. Maybe they're trying to show institutional and individual investors that Rivian has cost discipline. We already know the R2 has

Starting point is 00:10:09 an enormous backlog of reservations. So I want to kind of add that angle, but there is a bear case here. And I think the optics are concerning. I mean, one of the things to note is the R2 is supposed to be the vehicle that transitions Rivian from, you know, more of a niche luxury brand for those early adopters into a mass market powerhouse. So, you know, early adopters have maybe tolerated the bugs, the long wait times because they love the tech. Mass market buyers probably aren't going to do that. And so when you're seeing cuts to customer service, support staff, marketing, right as we are expecting thousands of new R2 vehicles to hit the roads, that's an operational gamble. And I think that's something that investors need to watch.

Starting point is 00:10:50 The other question I'm asking is, you know, if demand for the R2 is as massive as Ravine is saying, why are they cutting back on the teams that are meant to handle that volume? It begs a lot of questions about, you know, their cash runway, obviously concerns about profitability. So if you're an investor looking at this, maybe it's a positive. If you're a consumer waiting on an R2 order, this has to give you pause. I think regardless of where you stand on this news, Rivian is walking a bit of a razor thin tightrope. I think it remains to be seen how successful the R2 is going to be for the business. So let me give you what I think management's answer would be to Rachel's points. And, you know, I'm not saying this is my view. I don't think we know really.

Starting point is 00:11:27 But, you know, the reason these two conflicting thoughts can be in the head together is because you can only build the thing so fast. So you can only recognize cash flows so fast. So there is a world where they both still see a lot of cash coming in over the next, you know, 18 months, two years, and they don't have the cash on hand today. That is the kind of perfect sweet spot that they're trying to ride here, that that is kind of the bull case. there's a lot of things that can go wrong even if that is an accurate portrayal so i don't want to to sugarcoat it but there's a world where this all makes sense together and it's just the timing of cash flows yeah it'll definitely be an interesting one to watch because i think we sometimes don't realize how hard it is to be an auto manufacturer and how unique it was that tesla became the

Starting point is 00:12:17 valuable company that it was because that still trades for a much much higher multiple than you get from traditional automakers, which periodically go bankrupt. When we come back, we're going to get an update from the latest acquisition in the pharma industry. You're listening to Motley Fool Hidden Gems Investing. Welcome back to Motley Fool Hidden Gems Investing. Eli Lilly is buying another company, this time 4E. Rachel, can you explain to me what 4E is and what this deal is all about. Yeah, well, I think a thing I want to highlight before I dive in is that Eli Lilly is completely swimming in cash right now. They obviously have their blockbuster GLP-1 franchise, the broader portfolio is doing very well, and they're using that capital to aggressively build

Starting point is 00:13:03 a protective mode outside of the GLP-1 space. So this buyout of 4E Therapeutics, this is Eli Lilly's 11th acquisition this year alone. They've spent almost $20 billion. I bet they are hiring in their I think they are, yeah. They've spent almost $20 billion acquiring businesses over the last few years. So for e-therapeutics, what do they do? They specialize in a class of drugs known as MNK inhibitors. These are oral drugs. They're designed to block chronic pain signals exactly where they start in the peripheral sensory nerves while completely avoiding the brain and spinal cords. So this is designed to eliminate heavy risk of addiction, cognitive impairment, and other issues that can come with traditional opioids. And with this deal, buying 4E, Lilly is absorbing a

Starting point is 00:13:50 very specific clinical pipeline. So their lead drug candidate is designed to treat intense nerve damage, neuropathic pain. It is also the first MNK inhibitor for pain to ever clear phase one human safety trials. 4E also has next in line clinical candidates that could be really notable for Eli Lilly. They target chronic migraines, acute pain. Both are ready to move into advanced regulatory development. Now, bear in mind, Eli Lilly has been expanding its presence across multiple medical fields through acquisitions. Last year, they spent about a billion dollars buying another pain startup called SiteOne Therapeutics. This last month, they dropped about $4 billion on three different vaccine developers. They also just bought a company

Starting point is 00:14:32 called Ajax Therapeutics to scoop up a blood cancer treatment. So the 4E acquisition, it's important to note that developing pain medications has historically been one of the hardest, highest failure areas in all of medicine. And Eli Lilly recently had to shelve two of its own pain candidates because trials failed. So this is a very strategic move on their part. The GLP-1 franchise is generating billions. They can comfortably absorb those losses and move into acquiring that growth. Yeah, Lou, it seems like they're making a new deal every week. And I got to say this makes sense. You have the cash flow coming in from GLP-1s. You have Red Atrutide coming that could be, you know, I've heard it called a trillion dollar drug. Why not continue

Starting point is 00:15:15 to add more optionality to the business? That's it exactly. And I think this is why I really respect this management team. I'm not here to tell you what GLP-1s end up being. I hear the hype. I get the hype. I think the hype might be true. But history shows us that the benefit for the actual pharma company is limited, is fleeting, right? You know, just the patent cliff happens. Look at statins. Look at so many of these just breakthrough drugs. These are not, Pfizer isn't the $2 trillion, $3 trillion company today, right? You know, so these things happen. The most important thing you can do is ride the wave, take advantage of your cash inflows to diversify for your future. Half of these acquisitions probably won't work out. That's the nature of this business,

Starting point is 00:16:01 maybe more than half, but if they are planting a lot of seeds here, as this plays out, if they just get one or two hits out of this, it will have been well worth it. And this is what long-term investors should want them to do. Yeah. The only challenge that I see looking at Eli Lilly, I think they're executing extremely well right now, but this is a trillion dollar company. A lot of this growth that we're talking about that we're excited about the market knows about, you know, trading for 40 times earnings 15 times sales that's a that's a big tech margin not usually a pharmaceutical multiple not usually a pharmaceutical multiple so as much excitement as there is they're requiring a lot of these companies to maybe live up to that valuation that's already priced in by the market

Starting point is 00:16:43 as always people in the program may have interest in the stocks they talk about in the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you here. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis William. Thanks for listening. We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - Snap’s Specs Gamble

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