Motley Fool Hidden Gems Investing - Starbucks Heats Up, Lyft Stalls

Episode Date: May 4, 2022

Ride-sharing stocks took a hit today, but don't assume they're the same. (0:20) Maria Gallagher discusses: - Uber's scale outweighing Lyft's - Prospects for Uber reaching profitability by the end of 2023 - Challenges in China contributing to Starbucks suspending guidance for the rest of the fiscal year - Starbucks 12% same-store sales growth in the U.S. - Match Group getting a new CEO (15:03) Emily Flippen and Asit Sharma discuss the business of pets ownership and the prospects for small-cap Rover Group. Stocks discussed: UBER, LYFT, SBUX, MTCH, BMBL, ROVR, CHWY, FRPT Our Investing Starter Kit includes 15 stocks and 5 ETFs. Get a free copy here - http://fool.com/starterkit Host: Chris Hill Guests: Maria Gallagher, Emily Flippen, Asit Sharma Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill. Joining me today from the financial capital of the United States of America, It's Motley Fool senior analyst, Maria Gallagher. Good to see you. Nice to see you too. We've got the latest on Starbucks and Match Group. We're going to get to those, but we're going to start with the ride-sharing businesses, Uber and Lyft, both out with first quarter reports. There is a tendency to lump these two together, not just because they're in the same line of work and because they typically report earnings at about the same time, but also because for a long time, their businesses tracked one another. I feel like what we're seeing today is

representative of some divergence between the two businesses, and not just because shares of Lyft are down dramatically more than shares of Uber. But it seems like they're in different places in terms of where they are investing. Part of why shares of Lyft are down is they're talking about how, hey, look, we're going to be spending more money. We need to spend more on driver incentives. It's not that Uber is suddenly magically a profitable business, but it seems like they're, I don't know, are they more mature as a business? What do you see when you look at these two? Yeah, I think it is really important to understand that they are really used interchangeably colloquially, right? In terms of what ride are you getting? It's either going to

be Lyft or Uber probably. And so understanding the difference in scale is really important. So if we're looking at Uber, last quarter, their gross bookings were $26.4 billion, which was up 35%. Their revenue was up 136% to $6.9 billion. Trips grew 18%. There are 19 million trips on Uber a day on average, which is just so many. And then if you look at that in comparison into Lyft, their revenue was up 44% to $875 million. And they have about 17.8 million active riders. And Lyft spoke more about increasing spending and investments and drivers and marketing. And when you're thinking about comparing the two, so we can think about that diversification in Uber. We had delivery gross bookings up to almost $14 billion. They

have more acquisitions, more investments. But also, at the same time, Uber reported a $5.6 billion-dollar headwind related to equity investments in Grab, Aurora, and Didi. Uber is working on a deal with taxi drivers to fill demand. Lyft isn't. Uber has much more diversification, much more scale than Lyft does. Lyft is really doubling down and saying they're going to continue to increase spending and investments in drivers and continue to spend in marketing, whereas Uber is saying they're going to be profitable this year, they're going to have positive free cash flow this year. There are different parts of their journey, but I do think as a user, I use mostly Lyft, but I use both. And I think it's one of those things where sometimes great products

aren't necessarily always great businesses. And so I feel the same. And I think that's kind of how the markets reacted to both Uber and Lyft for their times as public companies. But that divergence, I think, is continuing to expand as we see today. Yeah, it's hard to see how either one of these businesses has dramatic pricing power. There's no switching cost. If you're in city and you're looking to get a ride, you probably have both of these apps on your phone. I'm glad you mentioned Uber and their cash flow, because if I'm reading between the lines correctly, it seems like Uber's CEO basically came out and said, we're going to be profitable by the end of 2023. For the sake of the business and shareholders,

I hope he's right, but I don't know. It's both aspirational as a goal, but it also seems like, okay, well, that's not very far away. We're 18 months away from the end of 2023. Say what you want about the state of Lyft's business, they're not talking about profitability in the same way that Uber is. Yeah. I think the thing is, with both of these companies, there are so many many moving parts because you have the drivers, you have the users, and then you have the state government. So you have all of these different things that they have to answer to. So an example is that Uber talks about how Washington state has declared there has to be a minimum pay standard for ride hail drivers. They have an earning standards for ride hail companies in the state

of Washington. They're going to have to have healthcare and different benefits. We saw the conversation happening in California. There are all of these legal problems that they're experiencing as well. Uber talked a lot about how they had to reclassify what drivers are in the UK. They have such a big scale. And so I think so you have that element, you have drivers depending on it, you have the low switching costs for both drivers and users. So drivers usually drive for both, users usually use both. And so you have all of these interchanging parts. So the unit economics to me have never been quite that attractive in either of these companies. Do you foresee a time in, say, five to 10 years where the unit economics get dramatically better

for either of these businesses? I don't know. I don't think so, because they're interacting with all of these things. And because of the competition between the two of them, neither of them really has pricing power because you have that other option. So unless one of them goes completely defunct, and then you have just one option with a ton of pricing power, that might happen. But then they would run into legal challenges if that's the case with Monopoly. So I don't know. I think they sit in an intersection of an interesting business. They created an entire business that didn't really exist before with calling cars on your phone, right? That just didn't exist. And now I think they've created something exciting and interesting

as a user, but not necessarily as an investor. Let's move on to Starbucks. Second quarter results and guidance were good enough, the shares are up today. Pick your headline. Is it China? Is it the same store sales growth in the U.S.? Is it the suspension of guidance for the rest of the fiscal year? What stood out to you? If I'm choosing my own inventor, I'd probably go China. We saw the net revenues up 15%, comparable store sales up 7% globally. They opened 313 net new stores this quarter. They have about 34,630 stores globally. The stores in the U.S. and China comprise about 61% of that global portfolio, over 15,000 in the U.S., over 5,000 in China. But the number in China is important because

this quarter in China, their store sales were down 23%, 20% down in comp sales, 4% down in average ticket volume. So that is something that I think is going to be really interesting to continue to watch over the next couple of quarters. That's where Starbucks has repeatedly said so much of their growth is going to be. And if we're seeing that growth already slow down or change their relationship with how they're investing in China, that's something I'm going to be paying attention to. I also think it's going to be interesting. They're focusing on enhancing new parts of the business. So they're accelerating their store growth. They're adding in drive throughs. They're accelerating renovation programs. They're trying to make it more fast

pace, which is also different than the, you go to Starbucks, you have good Wi-Fi, you sit for many hours. It's now saying you're in and you're out. I think that is also going to be pretty interesting to watch for the next couple of quarters as well. Yeah. About a third of their locations in China were effectively shut down this quarter due to rolling lockdowns. When you look at where that is in terms of the store base, yeah, it's obviously going to have a drag. Unfortunate because the same-store sales growth of 12% in the U.S. was much higher than Wall Street was expecting. I completely understand why they would suspend guidance for the rest of the fiscal year, and nobody's really dinging them for that. Just point to China and be like, look,

if you can tell us what's going to happen in the next six months, we're all ears. Interestingly, when you mentioned where they are going with their locations, because I had had a similar thought. Because Howard Schultz, in now his third trip around the bases as CEO of Starbucks, this is someone who openly and unironically talks about the soul of Starbucks. He talked about this is the third place. This is really how Starbucks grew in the United States, where it's like, you've got your home, you've got your work location, and we're the third place where you hang out. As a Starbucks shareholder, I was happy to hear him talk about like, no, we're not trying to double down on the third place concept. It reminded

me of what we saw from Chipotle a week or two ago, where part of their latest earnings report was the locations that we're planning to open this year, most of them are going to have those dedicated Chipotle lanes for digital orders and that sort of thing. So, good to see Starbucks saying, no, the days of we're the third place, that's in the past. And getting as many people through drive-through lanes as possible and building our stores accordingly, that makes sense. Yeah. I really like to have options, right? And you like to have my companies give options to their consumers. And something that's also interesting about those numbers in the U.S., there was a 7% increase in average ticket. And

what's kind of consistently been the Starbucks story is people saying, how much more are people going to spend for coffee? How much more are people going to spend at this place? And they really continue to defy the odds and say, people are going to keep paying. They have so many of their rewards members. They have a lot of loyalty. They just are everywhere. You can just see them all the time. You have the consistency of presence as well as the consistency of value for the customers. I think that's also something that every time I see that number increase, I always just am impressed. Again, they're defying the odds of how much people are willing to spend on one trip to get coffee, maybe a cake pop, maybe some lemon loaf. Last thing before we move on,

how much, if anything, should I read into the fact that Starbucks is moving up its investor day from December to September, and they're moving it from New York to Seattle. The location of the event, I think, is probably less relevant and meaningful than the fact that they're moving it up. Or should I not read anything into this? I wouldn't really think too much about it unless something really dramatic is going to happen, and I will come back and say, I really should have saw that coming. But right now, I'm not too concerned about it. Match Group's first quarter results were overshadowed by the news that CEO Sharduby will resign at the end of the month, Zynga President Bernard Kim is going to take over the corner office at Match Group.

You tell me, bigger deal, the CEO switch or was there something in the results worth highlighting? I think that with Match, it has so much scale, it has so much presence. I don't think that a turnover in CEO is that exciting. I think it's going to be interesting, but I think they have such a plan in place and they have executed on the plan so consistently and so well. I don't think that that is that alarming to me. So they had their total revenue last quarter up 20%. Tinder direct revenue is up 18%. Other brands grew their revenue by 22%. They have more expansion plans. They have things like Tinder Explore, which has festival mode, which is working with Live Nation. So, you can connect with people before or during festivals.

They have Tinder Coins. They have Hinge launching internationally. They're launching in Germany. Hinge is on track to 10x their revenue between 2019 and 2022. They're launching this new app called Stir, which is for single parents. So, I think that match has a nearly unmatched scale. They have a consistent game plan. They continue to execute on it. They know exactly what they're doing with their brands. And I think that this new CEO is going, it's kind of an interesting choice coming from Zynga, but I don't think it's that different of saying, okay, we're looking at a global brand of games. Because a lot of people kind of think about dating as a game. You want it to be fun. You want it to be rewarding. And app dating especially is treated as a game. And so

I think that kind of makes sense. And I think it could be kind of fun to see what he does with it. When you look at the stock, which is down a little bit today, over the past year, down about 45%, I'm assuming it looks more attractive just because it's roughly half the price it was a year ago. But I guess my question is, how much more attractive? Is this genuinely a value opportunity right here, or is this still a business that you look at like, yeah, it's 45% lower. It's still kind of an expensive stock. Well, I think the thing with Match, like I'm saying with the fact that it kind of, other than Bumble, if you are interested in online dating as something to invest in,

Match is really generally your best bet. They have this unprecedented scale and they're going to continue doing that. I'm sure if you are making a new app, your hope is that it's either bought by Match or Bumble, but probably Match because it has more money. So I think just from that standpoint, it's kind of hard to rival them. They're not cheap. They're not trade. They're still trading at about eight times their last revenue, um, almost a hundred times earnings per sale. So per share. So I, it's not necessarily cheap, but I just think if you're thinking about the complete ecosystem of online dating matches kind of your best option and one of your only options. And I think that it's going to, it's going to continue to grow online dating, going

to continue to become the way most people meet people. And I just think that Match is going to continue to profit from that. Maria Gallagher, always great talking to you. Thanks for being here. Thanks so much for having me. On yesterday's show, Asit Sharma and I talked about the travel industry heating up. As more of us make summer vacation plans, it can leave you with questions like hey, who's going to watch my dog? Asit and Emily Flippen look at the business of pet sitting and one company that may have a lot of room to run. Emily Flippen here joined by Asit Sharma, and we have a really exciting dive into Rover today. Asit, I have to kick off with a quick question here. Do you have any pets? Emily, I feel like you're putting me on the spot because

I feel like you probably know this already, but I don't have any pets. It's been a while. I have thought over the last year or so, maybe it's time to get back into the puppy game, but I haven't pulled any triggers yet. I happen to know, though, you are a pet owner. I am a pet owner. I have to say, I'm in the majority here. Two-thirds of American households own pets. While I don't have a puppy myself, I do have a cat, which makes today's conversation really pertinent for my own uses because I am not only an investor in, but also user of Rover services. Rover, for investors who don't know, is the world's largest online marketplace for pet care. Anything you need that maybe a friend or family would normally

fill in for. Rover can come and provide that service to you by contracting with local people in your area. I use mine for having somebody come and sit and watch my cats while I'm on vacation. Other people may use it for boarding services or walking. Really, you name it, Rover can do it. Yeah, Emily, it's a very fun platform to use. I have dabbled with it, even though I don't own a Pet, researching this company. It, of course, is a digital app like every other type of platform service today. They say they've got about 3.5 million reviews on the site, really easy to use. They place a big emphasis on trust and safety, so they do background checks on pet sitters. They have a lot of penetration within major metropolitan areas, which is

something I like. Rover says that they're in 96% of coverage in the U.S. This is really widespread, but I wouldn't say it's a hugely known platform either. As you mentioned, they've got a concentration in overnight services, so boarding, pet sitting, but a lot of daytime services too. I think you've talked about those as well, doggy daycare. They even have in-home grooming, as well as dog walking services. They cover the conceivable array of services that you can come up with if you think about having someone else take care of your pets. I personally love this service. I do have to say, from a consumer's perspective, it can be a little hit or miss because what you're doing is finding a person who is, at

that point, a stranger to you and trusting them to care for not only your pet, but also potentially come and stay in your house or drop your pet off at their house. There's So, there's a lot of trust built into this platform, but interestingly enough, over 97% of all reviews on Rover's platform were five-star rated reviews. So, while it can be hit or miss for that small minority of people who do have poor experiences, for the people who have great experiences, they love the platform. And more than 40% of people who have booked on Rover actually came to the platform through word of mouth.

So, people like myself who have only had great experiences telling you, Asit, when you buy that puppy. You should use Rover next time you go on vacation. I think you have me convinced already, Emily. Something else that is convincing about this company is its numbers. This is not a small business. Rover reported gross booking volume of $522 million last year, so half a billion dollars. Of course, that's not the revenue that they take home. But their take rate, the rate that they make in charging both the pet sitters and also the buyers of the service, overall, that hovers around 20%. So, the company did have revenue last year, which was about 20% of that half a billion dollars worth of gross booking

volume. So, they increased their revenue 16% to $110 million last year. I like that about this platform. It's not profitable yet, but it's scaling towards profitability, not far off from it. The thing that you mentioned also catches my attention, Emily, because that word of mouth helps the economics of the business. Their customer acquisition costs have been steadily decreasing over the years. That has decreased dramatically. I think in this last quarter that Rover just reported, they had a customer acquisition cost of $13. If you go back to the fourth quarter of 2019 before COVID, that customer acquisition cost was sitting at $42. And you can actually look at it too through the amount of bookings that come through paid

channels as an example of how that's come down. In the most recent quarter, only 38% of all bookings came through a paid channel, and that was down from 46% in 2019. So they're getting a little bit of scale here. I know the CEO and founder, his vision for the company is for Rover to become a household name. When somebody says, I'm getting a pet sitter, they say, I'm booking a Rover. The same way you'd say, I'm booking an Airbnb or I'm calling myself an Uber, that's where this business wants to scale up to. It is a very lofty goal. While their gross booking volume is large, as a portion of the market here, they're still a very small player. why competition is so interesting to analyze, because they are 10 times larger than their

next largest online marketplace. That lead has grown seven times just over the past year, so they have scale. But still, 90% of the market here is friends, family, neighbors, and it's free. You're asking for a favor to your friend or somebody in your neighborhood. Can you come pet sit for me while I'm out of town? Can you take my dog on a walk while I'm injured, those sorts of things. You have to provide a really good value if you're Rover to say, I'm taking what is normally a pretty free market and I'm monetizing it. Yeah. Let's talk about that market for just a second because this company was on a very fast path to growth before the pandemic. They reported a 94% compounded annual growth rate

over a five-year period in their gross booking volume up till 2019. And of course, the world came to a stop in early 2020. Rover is now growing again, but it's unlikely to reach that kind of growth. And so I believe what the task is for management is now at a slower rate, but still a meaningfully quick pace to try to build on that word of mouth, to give customers an alternative to that family and friends network. And this is why I like their concentration in big cities. A couple of times that I went into the platform and hit zip codes in, let's say, downtown New York, in Chicago, I was amazed at the numbers of sitters that there are. And this is part of the dynamic, which is interesting, because where cities are very

densely populated, you've got a lot of turnover. You've got people moving, both moving in and potential sitters who are moving out. You've got family that may not be accessible. So, this is where they can thrive. I think less so in less populated areas where you're just going to reach out to your cousin or your brother who lives close by to take care of your pet. In cities where people tend to live in more isolated fashion, and there is that turnover in the market, this platform makes a lot of sense. It's a really good value for the sitters in cities, because as you mentioned, the demand is higher in these areas. When you look at an average, I think two-thirds of their caregivers, so these are pet sitters, they have had three

or more bookings in their first year alone. That group of caregivers, those two-thirds, then go on to have about 90% revenue retention rate on average in their second year. It can actually turn into a pretty lucrative side gig for people, whether you be in school, maybe you have a part-time job or you're studying, to make a little money on the side. The big risk that I think investors should be aware of is ensuring that these transactions continue to happen on the Rover platform. That 20% fee is nothing to scoff at. If you're a pet caregiver, that's a pretty hefty portion of the amount of money that you would otherwise bring in. There can be the temptation to set up a relationship with somebody on the Rover

platform, then once you get to know them a little bit, take that transaction off platform in order to save on the fee. But the idea behind Rover is that that fee helps pay for they call the Rover Guarantee, which is essentially an insurance program for both the pet parents and the pet caregivers that protects them in an emergency situation. If there's some type of medical emergency or an accident with the pet, it removes the liability that you would otherwise be liable for. You could argue that that insurance ensures that the transactions will, for the most part, stay on Rover once they're facilitated on Rover. I think this is a risk for the business. It's interesting. Of people who use Rover, 67%, the company says, came from a reliance on family

and friends before. There are more people than you would think that actually migrate over to the platform from using resources at hand that are free. But the temptation to save that money, that big fee, I think it's persuasive. If you're in these dynamic cities, as we talked about, there is the tendency for someone who you're working with to just leave. Let's say you employ a college student or hire them through the platform, and they graduate and move on. It doesn't help for you to take that relationship off-platform in that case. And even if you do, you're likely going right back to Rover to find someone else. So, there are some, I think, built-in puts against the risk, but still something we should consider. So, Emily,

we should wrap up by talking a little bit about any more competition and this desert island question that we've been having the last few times we've gotten together on this podcast. I think we covered competition, so maybe let's jump straight to the desert island question. Three companies, and this time you chose the companies, between Rover, Chewy, and Fresh Pet. If you could only invest in one right now, which would it be? I love all of these businesses and I am a shareholder in many of them. I don't think you can go wrong in the pet industry right now. I will say though, I think if I'm deciding between these three today, I would give Rover a chance. I know it's risky, especially because

pandemic has really changed the trends that we would normally be able to see for things like booking volume, which are very opaque for this business right now. It is hyper-risky, profitable, growing relatively slow, again, thanks to that lack of transparency from the pandemic. I think for those reasons, it's definitely a risky proposition, but I think it genuinely fills a needed hole in the markets, and it is so dominating in the online space that I think I'd probably choose Rover out of that list today. You're almost persuading me here, so I prepared my answer. I have to be honest with myself here. I can't change in midstream. I chose Chewy, but let me explain. I am partial

to Rover. It is a $1.1 billion market cap company, so a lot of room to grow there. I think both of us think this could be just what management says, the go-to brand in its space. Perhaps there's a lot of white space ahead. Chewy, though, I think has achieved that brand dominance already. They are growing at scale. I have some quibbles with the amount of expense that Chewy runs into for its logistics operation, but I think over time with their distribution network, they'll overcome that and gradually find those two to three percentage points of gross margin that I just want them to grab from a low range in the mid to high 20s. Fresh Pet, very interesting company, but here's the deal. All three are platform

businesses, Emily. Fresh pet itself is the most that you can identify as a manufacturer. They are in the business of providing fresh meals for pets. That is labor-intensive. It's production-intensive. When you read through management's conference calls, you do feel like you are looking at a manufacturing company. They're talking about the overhead allocation of costs, commodity inputs rising, how they manage production and demand. That's just a lower-margin business ultimately than a Chewy, or in the best case, a Rover, which I think has the best margin profile of the three companies. If they do succeed with their business model, perhaps Rover is the place you want to be. I'll have to stick, though, where I came in with a Chewy for now.

Hey, well, maybe Chewy will acquire Rover one day. Is that just too bold to dare to dream? It would be a wonderful acquisition for them. They're cheap right now. It's a billion bucks. they can raise that. Well, Asit, thanks for joining for today. It's always fun to talk pets with you. Same 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.

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