Motley Fool Hidden Gems Investing - "The clock is ticking."

Episode Date: November 3, 2022

Some companies have bright futures, while others simply run out of time. (0:21) Tim Beyers discusses: - Roku having more cyclicality than investors might expect - Whether Peloton can produce lower inventories over the holidays - Fastly's CEO declaring a commitment to growth (15:26) Ricky Mulvey continues his conversation with Ben Foldy (Wall Street Journal reporter and host of the podcast Bad Bets) about the current state of Nikola and the rising interest in hydrogen-powered vehicles. Companies discussed: ROKU, DIS, NFLX, PTON, FSLY, NB, NKLA, BMWYY, TM Host: Chris Hill Guest: Tim Beyers, Ben Foldy Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. When the CEO of a troubled company says things are turning around, it's a good idea to ask, how quickly? Motley Fool Money starts now. I'm Chris Hill. Joining me today, our man in Colorado, Tim Beyers. Good to see you. Good to see you too, buddy. Fully caffeinated, almost ready to go. You're going to need that caffeine because we're going to start with Roku, which is a business and a stock that could use some caffeine of its own. Third quarter revenue was higher than expected for Roku, but the guidance for the fourth quarter has the stock down more than 12% this morning. If you're looking for silver linings, Tim, I guess it's that

overnight, it was worse. Overnight shares of Roku were down close to 20%. So, we're seeing a little bit of moderation there with the stock today. What do you see when you look at Roku's business right now? Well, they're getting hit by advertising, Chris. The softening in demand for advertising that we've all been expecting is hitting them particularly hard. And as they estimated for their holiday quarter they came in at a number that is much lower than the street expected so for their upcoming quarter they guided to 800 million dollars in revenue and the consensus according to what i see in s p capital iq is almost 895 million that is way way short and what

anthony wood the founder said is that advertisers are cutting spending across the board in other words not just us it's everyone and we see softening everywhere and he was talking particularly chris that i think this is one of the worries as he was talking about consumer goods companies that normally might advertise on roku coming into the holiday season saying nope those budgets need to be cut that has dual effects that has people worried that for a roku's business and b the broader economy because we do depend so much on consumer spending so that really does stink i can understand why this stock is down so much in you know on the day so far having said that this is still an outstanding business just i'll hit a couple of quick numbers here chris and then we

We can keep talking about it. Revenue's still up 12% year over year. Platform revenue up 15%. But here's the thing that Roku almost always does this. It's not always the case, but almost always. In this case, in the third quarter of 2022, average revenue per user up 10% year over year to $44.25. Active accounts up 16%. Streaming hours up 21%.

1%. So, people are still using Roku. This is still a valuable platform. So, Chris, this sucks for now. It does suck for now. But this is a platform that people like, people are using, they are engaged with, and there's no reason to believe they're going to stop engaging with it. I think that's important, particularly when you think about what you said regarding advertising. And if you want to go back to the commentary we got from Alphabet last week. I think that's important for any business that is making any amount of money from advertising to look at, when judging the health of a business right now, it's important to look at, well, what is the environment? If it's an environment

where marketing departments are spending money hand over fist and you're in the business of selling advertising and you can't sell it, well, then something's probably wrong with your business. But the overall environment is such that, as you said, we've got this softening from consumer goods companies going into the holiday quarter, which is so important. And I'm still thinking about something we got from Alphabet last week about entire categories that are just going down, one being cryptocurrency. Like, cryptocurrency advertising has been basically cut to zero. And so, when entire categories just go away, the ripple effect of that is going to be felt. Yes, absolutely. It's absolutely going to be felt. In this particular

case, it would be different if the Roku channel usage was down significantly. But the Roku channel, the core channel where they can sell advertising for the highest margins, total hour stream were up 90%. That's a huge number. So their bets on original content on their own channel, not just licensed programming, are, at least for now, starting to pay off. They still have a lot of cash on the balance sheet. I think one of the key questions for Roku is how much are they dependent on these cyclical moves? So if they are tied to advertising cycles, we should know that and we should pay attention to that and maybe factor that in as investors. In the meantime, I'll tell you what Roku is saying. They believe that as these advertising tiers pop up on other stream channels, that the tools that they have for advertisers, analytics, and other types of tools, they think those tools are going to be in demand for third-party publishers.

And so they look at Netflix. They look at Disney and say, how would you like to do more business with us on our tools because we've been doing this for a while? They think there's an opportunity there. It remains to be seen how big that opportunity is, Chris, but I think that's a net positive. It's a, we are starting to see signs that Roku is a more cyclical business than we want to believe. So let's keep watching it. Next quarter will be instructive. How well they do in the holiday quarter amid this horrible guidance is going to be pretty instructive. Let's move on to Peloton. First quarter results, it was more of the same. The loss was nearly double what Wall Street was expecting, the revenue was light, and worst of all, Tim, the guidance for the holiday quarter was weak. CEO Barry McCarthy says the ship is turning. I'm not going to-

Towards a waterfall? What's it turning towards? I'm not, I don't have a stake in this company. So I'll take him at his word that the ship is turning. I will simply add, the clock is ticking. This is a business that if it doesn't start to show significant turnaround potential, someone is going to come knocking on the door with a check and say, thank you, Peloton is now part of XYZ Corporation. Right. So, he talked about several things. When he talks about the ship is turning, he talked about making improvements in gross margins, and there were. They were up significantly year over year from around 25% to close to 36%. And

they model for the next quarter gross margin to be in the 36% range. They model for free cash flow break-even sometime in fiscal 23, maybe the back half of fiscal 2023. So sort of stemming the losses a little bit. But I'll tell you, Chris, there's something that stands out in the Peloton results. If the ship is turning, I really want to see the inventories being worked down. I'd like to see some more normalization here. And so when I look at it, in June, the inventories were about $1.1 billion. And in September, the September quarter, they were $993 million. Okay, that's a little bit. That's a little bit of improvement, but it's not a lot of improvement. So here's what I would look for in the holiday quarter, how good is that? Forget about the free cash flow number.

Forget about most everything. Do the gross margins stabilize? And is there a meaningful inventory drawdown? Because in a holiday quarter, if you are a consumer products business, your inventory drawdown should be significant. You're building inventory in the beginning of the year to sell it in that holiday season. So let's see, Chris. I mean, show me that inventory drawdown. If I don't see it, I think that's going to be a much bigger warning sign. But right now, I don't know where the ship is turning to other than maybe rocky shores, but it doesn't look good right now. That's for sure. We're going to end on a positive note. Shares of Fastly are up 10% after third quarter results. And I'll leave it to you to tell me if Fastly is the benefit of

low expectations. Remind me again, Fastly is one of those companies, I don't own shares of, I don't follow closely. And every time it comes up, I think, wait a minute, are they cybersecurity? Are they content? What do they do again? Yeah. And you could have said all of the above, but really the best way to think about Fastly is they make stuff on the internet faster. That's what they do. They have a network, they have software. Some of the stuff they do is security primarily the business historically has been what's called a content delivery network in other words i take somebody's content i put it on our network i deliver it faster because it's closer to you i have a whole bunch of things a network that exists around the world and i have

a way to deliver content to you chris hill much much faster that's the fastly business now they've been trying to expand beyond that they are getting into security but you ask the question is this rising because expectations were just so abysmally low. And the answer is, yep, that's exactly what happened. The numbers are okay, Chris. I wouldn't say they're great. They're okay. A couple of things, though. The growth rate was nice. It was up 25%, 25%, total revenue of 25% year over year. Gross margin was down. That's not surprising. I believe that they are getting hit with price wars. I think they are facing competitors who are trying to gouge them a bit. So it's nice to see them largely holding up. The new CEO,

Todd Nightingale said, and I think this is something that investors really appreciate and may also contribute to that bump, Chris, he said during the call that every dollar at Fastly has to be put towards growth. And so there was this conversation in the call about careful capital allocation. In other words, there is no play time here. We're not giving you an amorphous vision, hopes and dreams. Let's get to the real work. Every dollar we bring in, we're going to put it towards growth. We're going to invest heavily in security. I think that gives folks some comfort as we figure out how big the future product called Compute at Edge actually can be. We really don't know that yet, but at least we have a guy who sort of has the look and feel of

an operator who wants to put cash to work in a beneficial way for shareholders in the company. Did he give any sort of a timeline on that? I'm assuming at some point in 2023, shareholders will get an update. I mean, absolutely. And I'm still looking forward to the investor day that was canceled back in May. I want to hear that again so we can get a little bit more color on when Compute at Edge becomes accretive to the business. We just don't know that yet, Chris. We don't have a timeline. He mentioned Compute and Compute at Edge 13 times in the conference call. Yes, I counted because I wanted to know. And he still talks in very high-level terms, but he also talks about it as an incubation project and what's

really driving the business, in addition to the legacy product, which is content delivery, is security. And the security product is good. The next generation firewall, web application firewall, that is a good product. So we'll see. I think they beat their expectations. Nobody really expected them to do anything. So it's like, hey, not dead. Let's celebrate. As good a place to end as any. Tim Fiers, thanks for being here. Thanks, Chris. All right, before we get to this next segment, I want to tell you about something we have planned for later this month. On Thanksgiving, we were planning to take the day off, but instead,

we're going to be doing a different kind of episode that will be familiar to anyone who listened to our Market Foolery podcast over the past decade. It's something we like to call apropos of nothing. No stock talk, no investing analysis, just me and a couple of longtime fools talking about the kinds of topics that you're more likely to overhear at a bar or a barbecue. Past apropos of nothing episodes have included discussions of important topics like, if there was a Mount Rushmore of greasy food, what would you put on it? Who would win a fight between a shark and a tiger. Why isn't tug-of-war an Olympic sport? Let me be clear, this episode is not going to be for everyone. Historically, there are listeners who skip apropos of nothing,

and there are listeners who count these among their favorite episodes ever. Regardless, if you would like to suggest a topic for us to kick around, drop an e-mail to radio at fool.com. Again, no stock talk, no investing or finance, just three good friends talking nonsense for a while. And if you're stuck in a Thanksgiving Day nightmare, either because of traffic or possibly the people that you're with, hopefully we can be a fun distraction for you. We're going to record this in about 10 days. So again, if you have any suggestions, email us, radio at fool.com. Up next, Ricky Mulvey continues his conversation with Ben Foldy, reporter for The Wall Street Journal and host of the podcast, Bad Bets.

They talk about where Nikola is today and why automakers are investing in hydrogen-powered vehicles. Even to today, Nikola is still operating. You could buy, not that I'm planning on doing it, but you could buy stock in Nikola. You can buy a truck from Nikola now, actually. Yeah, they delivered in their latest quarter, they delivered 48 trucks. Is there anything they're doing, though, at this point? Because one of the things that Trevor did is he was just either counterfeiting things by stenciling onto trucks that this is run by hydrogen, or he was simply bringing in other parts and cobbling it into his own vehicle and calling at technology. I mean, through to today, in your reporting, have you seen Nikola building any

unique technology within either electric car making or electric vehicle making or hydrogen-powered vehicles? I think a lot of traditional automakers are facing this, too, of that. The auto industry has never been somebody making everything and making all the core components and i think you know classically you know in a internal combustion engine kind of world gm and ford and toyota and all these companies you know they spent a lot of money on developing engines and transmissions but in the ev world there aren't going to be engines and transmissions and electric motors are commoditized and um you know as our battery sells and you know the differentiation is going to come in software and experience and these other

things so i don't think that nicola as it related to the semi trucks was kind of out of line and being a systems integrator i think most oems are kind of systems integrators where nicola is kind of real where the where the kind of starry-eyed vision of the future that trevor sold was really unique was not just the trucks but this kind of whole systems model of bringing about a hydrogen economy, where Nikola was producing its own hydrogen, pumping its own hydrogen into the trucks. In the podcast, I describe it as both the next Ford Motor Company and the next Standard Oil or ExxonMobil. We could talk about this with the hydrogen cars, but hydrogen-powered vehicles aren't new. Like anything, there's issues to getting them to product from prototype.

But if you live in California right now, you can buy a hydrogen-powered car. I think the BMW CEO yesterday said that hydrogen-powered cars are going to be hip. And there's a company, Toyota in particular, I think, really thinks that hydrogen is the way of the future. And so that's not new, but what's lacking is, I know that I can say that I've never seen a hydrogen station. I've never seen a hydrogen-filling station. I can say most Americans haven't, because I think there's about 50 of them, and they're

all in California. I think there's maybe one in Hawaii. you don't have the neighborhood filling station you don't have the infrastructure you don't have the hundred years of of kind of petrol based infrastructure that's been built up and that's that's what you know hydrogen would need to catch on battery electric vehicles don't need that because we have the grid we have you know we have the uh the fuel is you know the infrastructure for the fuel is out there and you can say you know that you know there's not enough charging infrastructure and you'd be right but it's not like you need to invent the grid whereas with

hydrogen, you'd need to, you need to invent kind of that infrastructure. And that's what Trevor was going to do. So I think there was some real original kind of systems level thinking in Nikola of, you know, we're going to have solar, we're going to have cheap, cheap electric will allow us to make green hydrogen will allow us to, you know, build out this hydrogen economy and, and, and to tailor it to heavy trucking, which I think makes sense because, you know, your average american driver drives their car something like 20 miles a day you know your average trucker drives much further than that and doesn't you know can't have a heavy battery cutting into the weight they can haul so hydrogen makes more sense as this kind of transportation fuel uh than it does for this

kind of you know everyday american driver fuel is that kind of the the advantage over electric is that if you're building a hydrogen battery for a vehicle you just have a lot more storage capacity than an electric battery that would run on something like a Tesla? Fuel cell electric vehicles also have a battery because they still have electric motors. But what it does is, it's best to almost think of it, I think, as a range extender. So you have a battery, but then you have a fuel cell that rather than stopping to recharge the battery, the fuel cell is generating electricity for the battery to power the electric motors, not dissimilar to a locomotive or a diesel locomotive where a diesel generator runs into

an alternator into the electric motors. So, you know, it's almost like thinking of it as like an onboard power plant. The other upshot is there's no emissions. So you still have that BEV kind of no emissions, but you don't have the heavy batteries. Oh, and I think I didn't answer that part of your question. But yeah, lithium-ion batteries are incredibly heavy. In a Tesla, for example, they're basically the whole bottom of the car. And they're very heavy.

You know, it's not a huge problem for a car. You know, if you've seen a Tesla, they're relatively sleek, you know, silhouettes. They're made with lightweight materials, but if you're pulling 80,000 pounds and you're 13 feet tall, you're going to lose that aerodynamic advantage. You're not going to be lightweight. You're going to need more batteries to pull all that weight, which there's diminishing returns, because the more batteries you add, the heavier it's going to be. Hydrogen is potentially the answer to that, in that you can have smaller batteries constantly

generating electricity. You can do all that. But again, the drawback then is if I tried to drive a hydrogen truck right now from New York to Chicago, I am almost certain that there is nowhere for me to put any fuel in that truck. Yes. And even if you're driving it around California, it does seem that delivering the compressed hydrogen is both expensive and difficult to do, at least where this stage of the technology is. Yeah, for sure. The economies of scale that have come with other clean utilities and gas and everything else, like they just don't exist in hydrogen. So again, I think that's where Trevor's idea kind of shown was that, you know, is this integrated model where, you know, either cheap solar electric, you know, could be used to make green hydrogen on site and pump it into the trucks. They had to move away from that, I believe. But that was the vision, this integrated model. I think Trevor often called it the chicken and the egg, solving the chicken and the egg, where it's not like you induce the demand by selling your trucks, and then you fulfill the

demand by selling the stations. I know Trevor Milton and his PR team haven't been too keen on talking to you. He's just been convicted of securities fraud on a few counts. Let's do a hypothetical. Let's say Trevor Milton says, you get to ask me one question, Ben Foldy for your podcast? And I'll answer it honestly. I'll even throw that in. What would you, what would you like to ask Trevor Milton? The big question. So I've, I've spoken to some jurors and we wrote a story a couple of days ago that has some of those conversations and the trial really boiled down to these questions about his state of mind and intent. And so I think my question would just be, I don't know how, I don't know how you ask someone about self-awareness, but it would be

kind of how self-aware are you you know what was your intent what is your intent were there moments that you considered that this might be securities fraud you know like like the state of mind issue because it's a really interesting case because it's not like he hid you know the evidence of of making material misstatements is all over the place right these were public statements these are public comments they were broadcast all over the world that's not that question. What's at question is the state of mind and the intent. That's the mystery that I think remains a little bit uncertain. Chris Hill 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.