Motley Fool Hidden Gems Investing - The Consumer Is All Right!

Starting point is 00:00:00 Earnings season is in full swing in Motley Fool Hidden Gems. Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoyum, joined today by Lou Whiteman and Rachel Warren. And guys, we've got earnings on the mind today. We're going to get to four different earnings reports, at least touch on them. Lou, the first one that I wanted to get your thoughts on is one that I'm sure a lot of fools have in their portfolio, or at least their watch list. That is so far. The numbers looked pretty impressive. Total revenue was up 43 percent. Net income was up 61 percent. Yet the stock is down almost 10 percent today. Yeah, I think the stock is acting rational. And again, I know I get a lot of hate for this, but, you know,

Starting point is 00:00:44 you just don't like growth, Lou. Let's be honest. I like growth. It's just the question of what you're paying for growth. You know, one thing we learned from that short report, and I think it's important. The short report was mostly just nonsense. But one thing that I think it did highlight is SoFi loves to use marks to market and other adjustments to create non-gap earnings. That's fine. They disclose it. Again, the short report was overstated, but it makes apples to apples comparisons to other banks very, very deceptive and I think flatters SoFi in a lot of ways. On a gap basis, SoFi is trading at 40 times earnings. The average bank trades at 10 to 15 times earnings. I can find you really good ones right now where the dividend yield is, you know,

Starting point is 00:01:34 at 4% or so, and they're on the lower end of that 10 to 15%. So the question is, yes, SoFi is growing faster than these banks. And I think they can justify a premium valuation based on that growth. But I don't think the market is wrong in saying it ain't 40 times earnings, which, you know, and we can go deeper into it if you want. But I think for all SoFi tries to say it is, SoFi is a bank and it should be judged as a bank. It's a fast growing bank. So give it a premium. But I do think the valuation is still eye catching. So is that the criticism of the quarter and the stock right now still is that maybe this is a more attractive bank than other banks because it is growing more quickly. I just don't, I still don't want to pay this price. And

Starting point is 00:02:25 what, at what price do you think it becomes more, more intriguing? Yeah. My criticism is why now guys, we've known this for a while, so I don't know why maybe that there was hope that we were going to see different in the new quarter, but I mean, they are what they are. The, the, the, The fintech business is, it's not nothing, but there are dozens of software vendors that will give you banking as a service. And inevitably, these faux banks come and go left and right. There isn't really any differentiators. So that software business always seemed a little suspect to me.

Starting point is 00:03:01 If you want a great fintech bank story, buy Live Oak. Don't buy SoFi. SoFi is a retail bank. And, you know, at some point we should value it like one. Rachel, do you see this quarter similarly or do you look at, you know, kind of these not only did they grow members, but they actually grew products faster than members, which tells you that their uptake on those products is, you know, a little bit higher. So getting more people in the ecosystem and getting them to use SoFi more. Yeah, I have a few thoughts on this, and I don't necessarily think you can value SoFi the same way you would legacy banks. And but I do think there's a few kind of very practical reasons why we've seen some of the pressure on the stock.

Starting point is 00:03:39 I mean, going back to the quarter, you know, they added over a million new members in the quarter alone. Their base is just shy of 16 million people on that banking side. Management raised SoFi's full year revenue outlook. So that kind of core machine seems to be resilient. Now, it was interesting. I think one of the things investors didn't like, it was, of course, the tech platform segment that dropped 23% in terms of revenue. And that was largely because we saw a major enterprise client that had left the platform at the end of last year. So we've been seeing the impact since then. Full year profit and earnings per share guidance remained the same. I think we're in a market where a lot of investors are hoping for not only a beat, but a raise. The risk that I would be watching here is SoFi is leaning heavily into capital-intensive lending to fuel its growth story. So we saw total loan originations hit a record $14.8 billion. That included about $10.7 billion in personal loans. So, you know, their CEO is insisting that the borrowers are remaining resilient. Personal loan charge-offs and credit delinquency trends are creeping upward across the industry, however. And the reason this matters is SoFi keeps these high-yield loans on its own balance sheet rather than instantly offloading them. So if we see a macro downturn, which I'm not saying we will, but it's something to watch for, or even a spike in consumer defaults, that will hit the balance sheet. And we also saw that tech platform-enabled accounts actually dropped about 16% year over year. So they have seen a bit of an impact from the loss of that major enterprise

Starting point is 00:05:08 client. Fundamentally, I think this is a good business. I think it's a solid one. And I don't think there's anything wrong that is leading to the pressure on the stock. I think a lot of this is just the machinations of the market. I do think that these are elements to watch, though, if you own SoFi or even are thinking about buying shares. We have a name for companies that make loans and keep them on their balance sheet. You know what that is? I know where you're going with this, Lou. It's a bank. Yeah. Let's talk about the products because I and maybe I'm showing, you know, my ignorance here, but I was really surprised by one stat in there that they said the products per member reached one point five four, which is an all time high. Now, I've been

Starting point is 00:05:54 involved with banks for 30 years and most banks don't break down the numbers. But if you hire a bank consultant to to what they come in, the first thing they're trying to do is to get that number to two or three per member. That's why they get you to open a checking account and a savings account at the same time. Right, right, right. 1.54, maybe it just spread. I think it speaks to how much of SoFi

Starting point is 00:06:16 is just paper-thin marketing because that implies that a ton of their customers relative to a community bank only have one product, which I don't know if that's the flex of things. One stat we can use, JP Morgan says that 30% of their retail customers have two or more products. So that's, you know, and again, but that's not an apples for apples. Like I said, most banks don't don't list that. And it's kind of a weird thing to list. But I'm surprised they're flexing that number because I I think there's community banks that I can walk to from my house that would really laugh at that number.

Starting point is 00:06:52 it's it's funny you mentioned that because that is one of the metrics that i do watch with sofi but i have also opened accounts at all of these things and if you open like for example we have a wells fargo account they will charge you to have a credit uh have a checking account unless you also have a savings account and you deposit i think it's 25 a month into that savings account automatically from the checking account that you also created yeah yeah i don't want to be too hard on them. They are a good bank, but I do think as investors and maybe that we, you know, a lot of investors don't look at banks. And so far it's kind of attracted the eye of growth investors just because of the story and where they're based and who runs them. I think there is a lesson here

Starting point is 00:07:32 that maybe I am being too hard, but maybe also the market is being too generous. It is really, really hard for a bank to be anything other than a bank. And at some point there is regression to the mean. And I think investors, they can, both things can be true. It can be a very well-run company with growth that exceeds national averages and still overvalued base relative to the opportunity. Well, we will be keeping an eye on SoFi and I'm sure Lou and I will keep arguing about the future of the company. We'll see who's right over the next five or 10 years. So listen on to this show. When we come back, we're going to check in on the health of the consumer. You're listening to Motley Fool, Hidden Gems Investing.

Starting point is 00:08:14 where some see heroes and others see egos bloomberg sees the era of billionaire athletes while others follow the noise we follow the money learn more at bloomberg.com welcome back to motley fool hidden gems investing let's turn our attention to direct consumer spending there's a number of different companies who are giving us an indication of how healthy the consumer is. Rachel, one that caught your eye was Procter & Gamble. Maybe not the most exciting company, but it's at least telling us how much people are buying diapers and the necessities of life. Right. I mean, this is the company that's known for those household name products like Tide, Pampers, the list goes on. And so it does kind of provide an

Starting point is 00:09:02 interesting insight into how consumers are behaving. And this is, I will note, not a company that is typically high growth, even in the best of macroeconomic times. The margins are slim, you know, a normal year of growth or a quarter, you might see 2% year-over-year gains. But Procter & Gamble actually missed Wall Street's revenue expectations by about $180 million for the quarter. They pulled in about $21 billion in this recent quarter. Volume was flat year-over-year. Operating margins were actually down. They actually saw profits decline by about 15%. percent. And, you know, why does this matter? I mean, their operating margins are compressed because you're seeing companies like this have to spend significantly on marketing to try to protect

Starting point is 00:09:41 their share and consumer staples operate on very thin incremental margins. So any drop in volume hits profits quickly. But I think, you know, what this tells us about the broader consumer is that a lot of, you know, average households are really reaching their financial limits. You know, we're not seeing a dramatic economic crash where people stop shopping, but we are seeing kind of very tactical retreats and approaches to how consumers are putting their money to work. You know, they're looking at these legacy companies that put these household name brands forward, and they're not willing to absorb the higher costs that, you know, companies like Procter & Gamble have implemented over the last few years. They're stretching out their existing household supplies. They're maybe

Starting point is 00:10:18 switching to cheaper store brands. You know, they're buying smaller packages. And, you know, when you're a company like Procter & Gamble, they've certainly, you know, lasted through their fair share of market ups and downs, but it can really come in hard on the margins. I think if anything, this yields continued ground to the likes of Walmart and Costco, who not only control the physical store shelves, but also have their own private label brands and really robust e-commerce presence as well. Yeah, I think Rachel's right. It is the store brands. And I don't know if this says anything about the consumer right now. That's a trend that was going well before this current. Yeah, this is a decade, 15, 20 year.

Starting point is 00:10:55 And I think it just speaks to and we've seen this with Kraft Heinz. We've seen this with so many. I don't think it's just a terrible place to be right now. Consumers have realized the store. I mean, I remember the 80s or when joked about, well, it's the same product. It's just a different label. And that was kind of novel back then. Now it's table stakes.

Starting point is 00:11:15 That vast middle, that big consumer brand with a logo has really suffered. I am reluctant to read anything into the health of the consumer that I think what the consumer right now has showed us is they will pay up for select things like maybe on shoes or something bad. But for most everyday purchases, the fact that it's tied and not Costco brand just doesn't matter. And I think that's what we're seeing. We can talk about Visa, too, if you want, because I think, again, I just I wanted to point out the store brand thing. I think is really interesting because that was one of the things when I started at 3M's biggest manufacturing plant in 2005, the interesting thing there was you would have scotch tape rolling off the line. And then five minutes later, there would be Walmart tape rolling off the line.

Starting point is 00:12:02 It was literally the exact same equipment. They make it a little bit worse. So it is not quite the same product. You want to have that other product be a little bit higher quality. So there is a little bit of a premium there. But it's not like it doesn't hold a piece of paper on the wall. it's not like the the diapers are going to be you know complete garbage so that is something that we've seen for a very long time is that those big companies the walmart's the costco's the targets of the world have the power to say hey you know what if you want to be in our store we want to have our label on what do you think about visa though yeah so this is another way to look at the consumer and it's a much healthier look which is maybe why i'm i'm not sure how to read pg but

Starting point is 00:12:41 But Visa reported 10% U.S. volume growth in payments. That's the fastest growth rate since fiscal 2019. Transaction counts were up, too, about, say, 10%. So this isn't just an inflation story or something like that. There's actual transactions happening. Visa also, and Travis, this is something we've talked about a lot, but the K-shaped economy. Visa said spending is not isolated to high earners. This is strength across the board.

Starting point is 00:13:07 And just last week, the economists over at Bank of America said they believe the K-shaped trade may be reversing in a good way. More spending power across the board with kind of the lower end of that K kind of picking up. I mean, I don't think we know that yet, but Visa's results sort of back up that idea. Now, look, there was more. I mean, I think the World Cup factored in here. There's international experiences, which is kind of the upper end of the K. So I'm not saying that it is all just, you know, perfect and fine, but you know, the quarter was fine. They're forecasting basically status quo for the rest of the year. I continue to think both

Starting point is 00:13:46 Visa and MasterCard are undervalued right now because of the disruption potential. I kind of like MasterCard better, but I think that look, this is status quo is really good here. And this was at worst a status quo quarter. Yeah. Things seem to be okay for the consumer right now. And and maybe that's okay for the market right now. When we come back, we're going to talk about an energy company that just grew revenue 166%. You're listening to Motley Fool Hidden Gems Investing. Where some see heroes and others see egos,

Starting point is 00:14:21 Bloomberg sees the era of billionaire athletes. A fad to some, the future of money to others. We see crypto's trillion-dollar swings. the end of jobs or the end of human struggle we see the endless funds fueling the ai hype while others follow the noise we follow the money learn more at bloomberg.com you gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting with just $1 all day, every day, now until December 31st.

Starting point is 00:15:08 You gotta try breakfast at A&W. At participating A&W locations in Ontario. welcome back to motley fool hidden gems investing bloom energy reported earnings last night and rachel this is one of the more interesting stocks out there right now this stock has been absolutely on fire over the past year or two because this is one of the few companies that can put energy into a data center at a relatively rapid clip revenue is up 166 percent what do we need to know about the quarter yeah it was a great quarter uh for bloom energy i mean their their adjusted earnings per share also were double what Wall Street was guiding for. They raised their revenue outlook as well, looking ahead to the rest of the year. I mean, obviously, as you noted,

Starting point is 00:15:53 the stock's down from its recent peak. I think that this is one of those businesses that is very vulnerable to having volatility based on unrealistic hype cycles. This is a company that's executing well. It's worth noting just about every major AI hyperscaler has now proved their fuel cells to bypass utility grid bottlenecks. But I do think there is a question of when there might be periods where the AI power trade could run out of gas, where we could see the stock vulnerable to sector profit taking. I think that might be something we're seeing right now. I mean, there's this question of when we're going to see this transition from buying a catchy AI narrative to really looking at the capital heavy reality of physical infrastructure. You know, fuel cells are

Starting point is 00:16:34 physical manufacturing business. Generating energy requires real factories, massive upfront capital, very complex installation timelines. Now, Bloom's profit margins improved this quarter. Scaling up production to meet the demand that they're facing is a very expensive endeavor. It will limit their short-term cash flows. Now, I don't think that we need to worry that Bloom's business is broken just because they're down since their summer highs. But I do think that we might be coming towards a point where the market could force some of these AI infrastructure companies to justify their valuations with some real world unit economics. So that could be some of it. Yeah, Loot List does seem to be kind of a theme where a lot of these picks and shovel plays

Starting point is 00:17:13 coming back a little bit because investors are starting to go, wait a second, how sustainable are these growth rates and margins that we see today? Yeah, let's get that in a second because I think that's exactly right. But yeah, stocks down 50% from its highs to 400% over the past year. It's still a double in 2026, even if it is off 50 percent since June. And it still trades at 75 times forward earnings, which for an industrial company is pretty amazing. Corda was fine. Rachel's right. Given the AI power demand, anything short of fine would have been a real negative wow factor. But they held serve. And that's great. Remaining performance obligations, uh rpo that was flat and remember wall street tends to pay for growth from here not growth

Starting point is 00:17:58 that has occurred and i think that is the easiest way to explain is coming back to earth kind of letting some of the air out of tires it's great if they can sustain at this level and i think they probably can given the demand that's a fine company but it doesn't make you a growth stock um picks and shovels i think it's really interesting because picks and shovels it's so clever and everyone loves to like look smart with picks and shovels trades, but they are imperfect trades. They are a trade you do because the underlying asset is overvalued. You know why? If you want to invest in hyperscalers, but the hyperscalers are overvalued, how about investing in their suppliers? It is just a secondary way to play a trend. Right now, you can get the

Starting point is 00:18:42 hyperscalers at much more attractive valuations than the vendors serving them. So why focus on the vendors. I think the market kind of looking away from some of these picks and shovels, I think it's just over for now. Yeah. It'll be interesting to see where that story goes because you're right, that has been a theme, but that when a theme needs to become a fundamental reality, eventually for the market, fundamentals eventually drive stock market performance and Bloom is doing extremely well, but the ROI that we see today may not be sustainable long-term. 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.

Starting point is 00:19:20 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 Hoyum. We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - The Consumer Is All Right!

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.