Motley Fool Hidden Gems Investing - The Antidote to Euphoria? Normal.

Episode Date: November 11, 2024

When companies or crypto go parabolic, force yourself to think: what does normal look like?   (00:13) Tim Beyers and Dylan Lewis discuss: - Bitcoin blowing past $800 and setting fresh all-time highs, and how investors should manage the expectations being built into crypto and companies like Robinhood and Coinbase.  - Axon also feeling the euphoria – up 40% post-earnings – and why the company’s recurring revenue and potential new businesses help it live up to its big valuation.  (19:14) Motley Fool Analyst Sanmeet Deo joins Ricky Mulvey to check in on another 2024 highflyer – Reddit – and why the company’s data is a treasure trove of data for large language models.  Companies discussed: BTC, HOOD, COIN, AXON, RDDT, META Host: Dylan Lewis Guests: Tim Beyers, RIcky Mulvey, Sanmett Deo Engineers: Dez Jones, 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. Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Tim Byers. Tim, has the train left the caffeination station? It has not. I am uncaffeinated today, Dylan, so we're going to see how this goes. Mondays and Fridays are uncaffeinated days now. But you know what? I sense you are still ready to go, and that's the important part. That's what I really need from you.

Since we're talking crypto, I am always ready to go. I get a little wound up about this stuff. That's not surprising to anybody, is it? No, it's a controversial topic, right? And it's one that I think almost everyone has opinions on. Yeah, we're going to be talking crypto today. We're going to be talking Bitcoin. We're also going to be revisiting some earnings that didn't get quite enough coverage last week.

I'm excited about that. Let's kick off with the crypto rally. the post-election crypto enthusiasm continues. Over the last couple of days, Bitcoin blew past $80K, as we tape currently near all-time highs at $84,000. Also seeing a lot of interest in Ethereum, Solana, some of the major exchanges and brokerages that give people access to crypto, Robinhood, Coinbase. Tim, this feels like it is all very much on the expectation that the Trump administration will be a little bit more friendly to the crypto space when it comes to regulatory environment, things like self-custody, all that kind of stuff.

Yeah, I think that's right. I think that I saw a video where President-elect Trump had, I think he was speaking in front of an audience of crypto enthusiasts and talking about just getting rid of regulations. And I think he may have actually said he was going to fire the head the sec which got a rounding just a rousing round of applause um so there is a feeling it does appear inside the industry and i'm talking about the crypto industry that this set of digital assets bitcoin in particular needs to be unlocked so okay if we if we believe that's true and we We believe that this administration is going to be a bit more deregulatory as it relates to Bitcoin and all digital assets. Then I can understand the rally, Dylan, and I have a story about this, but I'll pause for a second here.

This is the kind of moment where I really take stock. I don't look at this and say, wow, amazing. I don't necessarily do the opposite either, but I find moments like these to be like, okay, let's maybe tap the brakes for a sec. I want to hear that story, Tim, because I imagine there's a dose of mindset coming our way here. Well, the story is this. So Alicia Alfieri and I were working at a co-working space. We were doing some work on a recent Rule Breakers pick. It turned out, so now that the pick has been made, I can reveal to listeners that this company was Warby Parker. And so it's a recent Rule Breakers pick.

And I was doing some work, and I was sitting right next to Alicia, and I was like, I found something that I thought was really fascinating. I said, oh, no, oh, man, this is great. I hadn't realized that this was going on. And so I start to get really excited. And I said, oh, no. And then I turned to Alicia and I said, this is the moment of maximum danger. Do you understand why? And she gave me an answer, which wasn't a bad answer. But what I said was like, now I am convinced. And because I am convinced, that is the moment of maximum danger. And I feel like what we're seeing in the crypto market is a lot of people who's like, see, great, I am convinced this is the future. And to me, I've thought, oh, boy, this is the moment of maximum danger because you've been convinced. And the regulatory environment has not changed yet, Dylan.

But it might. But it might, right? So when you hit that area of maximum enthusiasm, recognize that as the moment of maximum danger. You don't have to do that, but I think it's a good mindset practice to say, like, hang on. What actually needs to happen here? What am I betting on? And in the case of crypto, I think there's an argument to be made that the new administration will be friendlier, there will be changes, it will make this a bit more maybe free-flowing in the markets, a little easier to access. So fair enough, right?

Let's say that that does happen. You could still take advantage of that, in my opinion, Dylan, and not overbet. I think the wrong move is to overbet. if you were going to try to take advantage of it, you still have other options. If I were to offer up a why this time is different or slightly different, or maybe how the landscape has changed, there is the tailwind of the expectation that the Trump administration will be more crypto friendly. But I would say that there's probably a second mini force at play here in that this is one of the first times we have seen a lot of excitement around crypto

in a period where we've had widespread Bitcoin ETFs and funds. And that is something that was not the case up until January of this year. Prior to that, it was a lot of the kind of more industry-specific ways that you'd have access or kind of more traditional ways you'd have access. This is kind of a period that is a little unprecedented when it comes to most investors, especially older investors or institutional investors, being able to buy into crypto relatively easily. Yeah. And I think lean into that. I'm probably not going to add crypto exposure so you know where I'm at. But if you're going to do it, if you are convinced something like Bitcoin ETFs give you that exposure without taking you way out over your skis, I would say that is important. But, you know, hysteria knows no bounds.

So if it does really get hyperbolic, be very, very careful. But I agree with you. If you were going to do it, ETFs are a great way to give yourself a maximum amount of exposure while broadening your risk. You get some immediate diversification in there, which is good. I would prefer that for most members if they're going to go down this path. with crypto. And then if you start to get more excited about it and you get more interested in it, you're not me, but if you're going to do that, then I would say, try to build out the

widest array of assets you can and keep your exposure as, as limited as you can. So I often will buy stocks, particularly on the way up, Dylan, if, if I'm buying, you know, stocks at premium valuations. I think the same thing applies for digital assets here. I'll buy just really small amounts and then buy multiple times and multiple times and multiple times, because I just know that volatility is going to come into the equation. I just know it's happening. So, even though I'm buying on the way up, the volatility guarantees that, The thing I bought last month is probably down like 30%, so when I'm buying again, okay, it's a little bit better now. I want to create mechanisms that allow me to diversify my way in strategically.

I know I sound like such an old man, like, be patient, son, but I think it's— We need that note. At the point of exuberance, we need that note, Tim. I think we do. I think we do, Dylan. One of my questions on this is, for people that are following businesses like Coinbase or like Robinhood, who probably have seen some version of this story before, if you go back to 2021, 2022 with those businesses, there's a lot of excitement, there's a lot of activity on those platforms. We go through a period where a lot of that excitement goes away, and the business results

for those companies tend to lag pretty dramatically. Any message for people that are following those businesses, just knowing crypto is such a large part of the activity that can be on the platform for them. Yeah. I mean, when you're studying businesses like that, I would go through, if you're really interested in digging into them, what does normal look like? Like, what do normalized earnings look like? What does normalized revenue growth look like?

What you don't want to do is take the latest period where things happen to just have gone absolutely hyperbolic and then apply that out into the future and presume that it's just going to be that way. That's probably not right. So give yourself the benefit of understanding what does normal look like and then compare that to where they are now so you know what reverting to the mean actually looks like if things don't go the way that you want it. Yeah, just understanding what the genuine growth looks like in a normal period, I think is just useful because these businesses, boy, they have been subjected to just so much crazy, just so many crazy periods that of push them back and forth and up and down and all over the place. So, get a sense of what normal

looks like. I may need you to revisit that note as we switch gears and talk about a company that reported last week that is also going through a bit of a euphoria. Axon's earnings out last week, we talked about it a little bit on Friday's radio show, but it was a quick discussion, and it turns out the market was not quite done reacting to those results. All told, after earnings. Company's up about 40%. The earnings were good, Tim. I'm a shareholder, and I love to see that. But were they that good? Probably not. I'll tell you some things that really stood out to me from this report, Dylan. Overall, what we're looking at here is their their revenue guidance was 30%. That's impressive for Q4. $2.07 billion in full-year revenue,

so that's 32% growth. They're just growing really quickly. But I'll tell you the thing that may have gotten the market more excited. What they said was that when you take the bookings from q3 and then you add in what they anticipate bookings for q4 just that half year that's going to be more than the entirety of their bookings from 2023 that's the kind of statement that gets investors going it's a new world everything is amazing and we should all pile in right now You know what I mean? That's an incredible statement for them to make. It's led to the stock being pushed up to 160X earnings, shares up 140% year-to-date. I think we may have to ask ourselves at some point, what does normal look like for a company like Axon?

Management saying normal looks pretty awesome for the foreseeable future. I like looking at the business, and I like following the business, because it is a tech company that has unbelievably predictable revenue, and their recurring revenue is incredibly strong. And that, even given the nosebleed valuation, gives me some comfort as a major shareholder. Yeah, and I can back that up and say, when you look at what Axon has contracted, it is over three years of revenue, Dylan. Just let that sink in for a second. Over three years of revenue is contracted right now. So what they said was specifically this. Future contract revenue is approximately $7.7 billion. So remember what we said. Like this year,

they're supposed to end at $2.07 billion. So again, over 3X. Over 3X is future and contracted, and that was up 33% year over year. So their future contracts, that backlog is growing faster than overall revenue is growing. So the commitment to Axon for the long term, to your point, is absolutely there. The question is, and they are working to answer this, and we'll talk about this in a second. But the question is, will they stick with Axon? And how much future growth are we going to get? Because, I mean, for goodness sake, Dylan, I mean, how many tasers can you sell? How many cartridges can you sell? How much evidence.com data is there? I mean, that's a fair question, isn't it? Well, I mean, as if the team over there needed another tailwind,

I feel like they are a company where you have a very tangible benefit of AI that they are able to talk about with their customers. They mention their auto-transcribe services. They mention draft one. They mention license plate reading. And they talk about how for all these law enforcement departments, these are things that wind up reducing the amount of time that needs to be working on a task, winds up reducing costs. They also have things like drone detection in the works, it feels like they are able to tell a very clear story to the market and to shareholders about a lot of things that's in the zeitgeist right now. Sure. And because in law enforcement and particularly in investigations, like anything

that you investigate, this is true in investing too, you are investigating a story. And so you're going through process lines. So one process at a time, I need to identify a pool of suspects and I need to rule out that pool of suspects. And so if I can, for example, pull from camera data and I can rule out somebody because they were in their car, I can identify that license plate and they were driving on the other side of town when some crime happened, now I've done something here. So sure, they have a compelling story here. And they want more data. And one of the ways they're going to get it is by employing drones. This is another fascinating thing here. This started back in May. They, you know, acquired a drone defense company called DeDrone. I don't know if I'm sure,

or maybe it's DeDrone. I don't know. I don't know how to pronounce it. I'll take your word for it, Tim. Whatever. It's one of those. And they help enable, you know, they said this in the call, There was a local police department to gain the first FAA approval waiver for a drone as a first responder. That sounds bonkers. That sounds completely RoboCop to me, Dylan, so I don't even know how to process that. But what it will do is if Axon is putting a fleet of drones in the air, and now they are adding to their database aerial data to go with what they have in body cam data, car camera data, they will have one of the largest and most important data sets in the United States, objectively. And so what do you do with that? I mean, that's a big question. And you might end up asking,

does your valuation, 160 times earnings, account for just how big and valuable that data set can get? And can we really be surprised that a business like Axon has some of these other lines of business waiting there for them? Because we don't have to go too far back to remember, this was not Axon several years ago. This was Taser. But the reality is their Axon business, their body camera and evidence.com business became so compelling and useful that they rebranded. And perhaps they have another major growth over there with the drones business. We don't know, but it doesn't surprise me because once you start employing fleets of drones, you're going to have drones with cameras on them. And there may be a temptation to say like,

how do these play out how do they supplement you know a you know law enforcement unit on the ground i think it's simpler than that which may sound cynical it's like you fly these things in the air you're going to be correct you know just collecting mountains upon mountains upon mountains of data that you're going to you know try to use for your profitable benefit and you know what i mean i i would guess that the the data collection that these things uh kick off is going to be extraordinary and it's going to be hard to really value just how important that data is going to be so yeah i it's it's it's gone parabolic maybe for good reason probably be cautious right now yeah if you're if you're buying into axon maybe do it in small bursts over the course of

i would say so future i would say so be be careful tim uh appreciate you hop on with me today and give me that reminder about what is normal thanks for joining me thanks dylan all right fools coming up on the show motley fool analyst sammy deo joins ricky moldy to double-click on Reddit, the social networking platform that owns a lot of data that large language models want to use. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. So Sam, Reddit is a fairly mature social networking platform. It's not a social media

platform quite because most people are anonymous on there, but it's easily my favorite as a user in terms of time spent. Don't want to admit how much time I spend on Reddit. The company, though. It's been around for a while. It's new to public markets and recently reported some blowout numbers. So for a fairly mature social networking-ish platform, they had an increase of 50% in terms of just daily unique users year over year, increase of half. That's at about 100 million folks. So let's start with a fundamental question. This is basically a message board for people to gather based on similar interests. You can find main subreddits like news, pictures, videos, that kind of thing, all the way down to specific subreddits for local sports team,

local food, hobbies, that kind of thing, television shows. So how does Reddit as a social message board make money? Well, it's pretty simple, actually. They make over 90% of the revenue from advertising. Revenue is recognized on cost per click, cost per thousand impressions, cost per view, or fixed fee basis, depending on the contract they have with the advertiser um so that's 90 of the remaining portion is is um comes from data licensing and subscriptions subscriptions are very small data licensing is kind of like the bigger portion of that that smaller portion there and one of the more intriguing um growth opportunities for them so bill man brought this up on friday and it's it was easy or on a friday show i think it was

a couple weeks ago it was easy to look at reddit as a sort of uh twitter 2.0 and when i'm talking about twitter i'm talking about ye old uh twitter not its current private incarnation is is x but what has reddit been able to figure out about advertising that twitter was not able to figure out when it was a public company and for the most part a relative underperformer yeah you know what i noticed while i was uh you know prepping for the show is that you know like you said they reddit's been around for a long time um they haven't been public for a long time they just came public um recently but they've been around for over 20 years and um just recently in the past maybe three years their user base has just really started to accelerate so you know it's a community

based platform it involves real humans engaging meaningful long-form conversations about anything and everything you know they the interactions include like upvoting popular conversations which gets your your conversation kind of moved up to the top you know there's replies and testimonials it gives a advertiser very highly targeted and high intent audience uh you know the platform claims it's the number one in the internet for discussing purchasing products and with 51 percent of purchase purchase related conversations happening on reddit so in addition to this you know like i said it's it's grown rapidly uh it's user base over the recent years you do international expansion improve user experience pandemic kind of really

upped their user base there. Things like the GameStop short squeeze saga on WallStreetBets was a big thing that drove awareness and users to the platform. This kind of rapid user growth combined with like they have a much more cost effective ad product and more of an innovative ad product, which they've revamped more recently about in 2018, 2019, has made it more of an attractive platform versus twitter so they were able to essentially get more uh intent to purchase up with advertisers looking to to sell stuff to folks versus twitter which back in the day was maybe a little bit um all over the place and i mean it's not just the popularity i would recommend it as well like a while back i was looking for um a watch that wasn't stupid expensive and you go on

reddit and you're like all right here's my price point and then a lot of the bots i think end up being driven out because you have a high intent community of people that are willing to call like nah this this this is not actually legit this is bad like you should not listen to this person and the the cream rises to the top um you mentioned earlier that it has this business opportunity in terms of data licensing and this is something that ceo steve huffman brought up to our colleague dylan in their conversation uh when he interviewed him basically reddit has one of the largest corpuses of human information to feed these artificial intelligence training models well think about that as a sort of stockpile of firewood that these llms are just are um i almost

said eating but eating firewood doesn't really complete no you want to do that burning the firewood in order to to uh do a steam engine or whatever horrible metaphor we have not stuck power that ai engine power the ai engine coal it is it is the coal these conversations are coal Anyway, what is this large corpus of information, of conversation mean for Reddit's business? Is it license out data? Is it meaningful at this point? Yeah, I mean, they've already started to, you know, they already even have a couple deals. They have a license deal with Google for about $203 million over three years, a partnership deal with OpenAI, which is potentially $50 million annually.

We don't know exactly how much that is. But not only the AI training data, which these big tech companies and these AI model companies are using, but other potential customers for their data include financial institutions, investors, social listing services. So it's an intriguing aspect of the company that's actually got me interested in what could be a significant high margin growth opportunity. So it seems like this is a tough game for publishers. And Reddit is not technically a publisher. They're not paying the people writing or moderating subreddits. But this is a case where, like, the New York Times is still suing, at the time of this recording, OpenAI to find out what articles the nonprofit OpenAI was scraping for its training data. I mean, is Reddit, you think, the only, like, who are the winners here?

Are any of the content publishers and providers winners in this, like, AI training race? Oh, yeah. I mean, I think like the academic and news publishers, book publishers, media companies, you know, they're all licensing their content to open AI, Microsoft, other, you know, training data, AI models and businesses. You know, some examples are like News Corp, John Wiley and Sons, the Associated Press, IAC. So some of these publishers are benefiting from their content and reaping rewards from them. but maybe the real winner, and I'll see if you agree with this, are the real winner just the big dogs,

the ones you expect, your Alphabet, your Google, which are the ones using the data. So right now, and it could change, Google has an agreement that if you want your articles to show up on Google search, you are then agreeing to using that data for Google's AI training purposes. So if you want your article to show up on the search engine,

you've also got to feed that into the AI learning machine. Is that true? You think the real winners are Google here? I think in the long term, they definitely could be the big winners. But keep in mind, many of these AI companies are just spending heavily on content infrastructure to really train the AI models, build AI models, huge amounts of spending. We've been seeing it in earnings calls. You hear Amazon, Google, OpenAI, Microsoft, all these companies. And we're looking for a return on that investment. We haven't seen that quite yet. In the short term, though, I think like we talked about, the publishers are really the initial winners because they're signing these contracts and just getting cash right away. And they're monetizing their content in the near term. But over the long term, I think it could and hopefully will create a lot of return on that investment for these bigger companies. So I like Reddit as a user.

I still have some questions about the stock. I still have some questions about the value of all of that data. And Reddit is not cheap by traditional metrics. It just started making a positive gap profit, the profit that is associated to accounting, like the standard accounting principles. So that price to earnings price tag is going to look real high. So we'll use the price to sales, the more difficult one to use that people don't like as much. We'll use price to sales. How much revenue has it made and what's the market cap associated with it? Right now, that's at about 19 times. Investors are willing to pay 19 times Reddit's

sales for its stock, this is still a mature company. And that's higher than Meta ever was, even when it was a young company. Revenue's grown real fast. So what needs to be true about Reddit's future for this price tag to make sense today? Yeah, you know, from 2018 to 2023, over those few years, you know, Reddit grew their revenues at a 52% annual compound clip. It's projected in the next three years, revenue could compound at almost like a 35% clip. So, you know, I was looking at CapIQ this morning and around like the forward total enterprise value to total revenue multiple about a couple of years out is just under 10 and 9.8. So while, you know, and I like to look at forward multiples, you know, while this is still

a high valuation on a sales basis, in the context of that 35% growth that is projected, it's somewhat reasonable, you know, in order for that price tag to make sense, though, the company needs to hit those growth numbers, you know, and 35% is no easy task for any company, especially in a longer term basis. But even if you take a haircut off that revenue growth, say 15 to 20% in the out years, you know, that price to sales still doesn't look too onerous. In one quarter, Reddit does about $3 in terms of revenue per active user. I estimated meta at $12, four times that of Reddit, which can make sense because you have, um, I would say more engaged users on there that are sharing more data with the platform. So you're getting more targeted ads,

but does that mean that it has a lower ceiling than a lot of these bigger social media platforms? I don't think it necessarily has a smaller ceiling. Um, you know, with meta, you know, their monetization is very high. They, like you mentioned a couple of things, you know, they have a very diverse and global user base and it seems like almost anyone and everyone is on one or more of meta properties, including Facebook, Instagram, WhatsApp. You have a lot of rich user data. Like you said, a lot of people give lots of personal information on the site voluntarily. Reddit, most of the users are anonymous. You don't have specific personal data. You have what they talk about. You know, there's more frequent daily engagement on these

meta properties. You know, Reddit users, maybe except you, sometimes engage less frequently. You know, they might be like, hey, I find a topic that is interesting. I'm going to go jump on Reddit and, you know, there's a product I want to purchase. I'll go see what the reviews or what testimonies or what people think about it. And then maybe I won't be on it for a little while. So not as frequent with the social media and meta platforms. People tend to be on them. You know, I think I don't think they ever get off, you know, and meta has a very mature ad platform.

They've been developing it over a very long period of time. a variety of ad formats, video, text, you know, so forth. So while I don't think Reddit has a ceiling, I don't think they can get as big as Meta when it comes to this area of their business. But you know, they have a lot of growth opportunities ahead of them and they can create their kind of own niche and purpose for the advertisers. Are these growth opportunities interesting enough to you as an investor? Do you think Reddit stock is worthy of a place on our listeners' watch lists. Oh yeah, absolutely.

I mean, it's on my watch list. I've been, you know, I still don't know what to do if I want to buy it or not. I mean, they had some great earnings report recently. So that definitely perked me up a little bit more. I think the data licensing could be a rich source of future growth.

And it's a unique platform with a unique business. So it's definitely worth keeping an eye out on. And as we close out, you got any favorite subreddits? you know i just started using reddit as i was started researching it so mostly my favorite subreddits are sports teams some health and fitness trends like breathwork or meditation have any good suggestions for me um so i so you're in new york yeah and i think new york city food

so this goes for whatever city you're in the more hyper local interest the better it is so i i'm out in denver in the denver food subreddit has guided um a lot of my purchase decisions and uh i yeah i really like it also whoa dude sometimes we'll get some cool stuff on there very nice pools it's veterans day and we're grateful for all those that serve in the armed forces we know a lot of businesses and schools in the u.s are closed today but the stock market is open and so our doors are too listeners appreciate you taking your day off to spend time with us As always, people on the program may have interests 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. All personal finance content follows our editorial standards and is not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.