Motley Fool Hidden Gems Investing - The Wrong Side of The Learning Curve

Episode Date: August 9, 2022

Chips, and the companies that make and use them, dominate the business news. (0:25) Bill Mann discusses: - Micron Technology cutting guidance while also announcing a $40 billion investment in the U.S. - How Micron's current picture is similar to Nvidia's - Take-Two Interactive continuing its rough year by lowering guidance - Allbirds shares falling 23% as the young company learns some harsh lessons about business and growth (13:57) Alison Southwick and Robert Brokamp look to "The Great Resignation" to find examples of what job-seekers should consider if they think we're heading for a recession. Stocks mentioned: MU, NVDA, TTWO, BIRD, MCD, WMT Host: Chris Hill Guest: Bill Mann, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Lower demand for chips means that those companies in the chips business are taking a hit. Details next. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst, Bill Mann. Good to see you. Bill Mann. Hey, Chris. How are you doing? I'm doing better than the stocks we're about to talk about. Just a signpost for the dozens of listeners that it's one of those days. You're bringing me in as the color guy to try and keep things moving on, a little bit of a hard day for some of these companies.

A little bit of a hard day. I don't want to paint it as being dire out there. Let's start with Micron Technology, which is making some news today. The chipmaker says it plans to invest $40 billion over the next eight years to manufacture chips here in the U.S., which is great, but shares of Micron are down about 5% because the company also lowered guidance, said it expects negative free cash flow in the current quarter. kind of similar to the story that we're getting from NVIDIA in terms of lower demand, particularly when it comes to gaming. Yeah. They've been pointing out gaming, I think, in the case of NVIDIA and probably Micron as well. I think crypto mining has a

much bigger part playing in the weakness that they're seeing. What's interesting about the announcement coming from Micron is that they have announced that they're reducing their capital expenditures for fiscal year 23 around their wafer fab equipment. But at the same time, they're announcing a $40 billion capital expenditure ramp up to produce chips in the United States. So they are suggesting by deed, at least, that what they're actually seeing is, I guess you could best describe it as a bit of a dislocation of demand, right? So they're seeing plenty of healthiness in the market going forward. They're seeing reason to harden their supply chain by bringing more of their manufacturing back into the United States.

you've got the CHIPS Act, which is going to have an impact regardless of how it is manifested in terms of the environment around how microchips are made in the U.S. and around the world. Do you think part of it, in terms of the announcement, in the same way that we see companies come out, particularly if they report a quarter that isn't that great, and part of the announcement is, oh, hey, we're buying back some stock. They're trying to send a little bit of, but we still have confidence in the future signal. It seems like whether they mean to send that signal or not, they are. Yeah. You know, it's funny, and I love that you went straight cynic on me. You went right there because you really did do the thing that's like, don't look at that

ball. Look at this one. Look at this ball. This is the one that we're talking about. But there really is in this case, I think, reason to believe that they're playing it straight. They are projecting. I mean, you can't just stand a microchip manufacturing facility up in a couple of days. They're talking about increasing the amount of production for memory for the U.S. to go up from 2% now to more than 10% by the end of the decade. And that does require a really long investment path. It requires a huge amount of capital expenditure. So I suspect, despite your attempt to color them as trying to gild the lily, I think they're probably playing it straight. I also think they're playing it straight. I didn't mean to make it-

Oh, no, no, no, Chris. It's fine. Don't worry. They're not mad at you or anything. Hey, look, I was just going to say, this is a $65 billion company. For anyone who's looking at this and asking the question, how much trouble are these guys in? It's really not that much trouble. Not that much trouble, but that does, in fact, color just how huge this investment program is, a $40 billion investment program. That is a massive, I would describe that as a retrenchment as much as anything else. So, that's a huge, huge move for them. And yeah, I mean, despite your insinuations, I think they're in pretty good shape. Along the same lines, at least when it comes to video gaming, Take-Two Interactive

also lowered its revenue guidance, shares of the video game company down 3%. Not huge, but it does continue the downward trend for shares of Take-Two this year, which at this point are down about 30% year-to-date. Yeah. Hasn't been great for them. They are operating in the same exact environment that everybody else is, who on some levels had to at least think about the possibility that we wouldn't be going outside for a very, very long time during the pandemic. So during the call, CEO Strauss Zelnick did talk about the fact that video games are in fact sensitive to economic cycles. They are not recession-proof. This is in fact a purchase that is optional for people. It is a luxury purchase. So the other thing going on with

Take-Two Interactive is that one of its primary titles, which is Grand Theft Auto and Grand Theft Auto 5, it's a little bit long in the tooth at this point. And so there's a lot of talk and there's a little bit of, I don't know that, German's got to have a good word for this, but English does not, like, hope worry. Because Grand Theft Auto, as we know, is all about this hedonistic adventure. And Take-Two has said that they are not going to do that anymore. It will not be as sexist as it has been in the past. It will not be as openly antisocial as it has in the past. I guess we're going to find out in some ways whether gamers are willing to play the same game and be decent human beings at the same time. I guess now I need to give my email address for

the hate mail that's coming back to us, but it is definitely the case, right? Well, it absolutely is the case. And in the same way that the movie business is driven by hits, so is the video game business. Absolutely. Maybe even more so. Yeah. So, for all of the artistic effort that goes into different video games, make no mistake, when it comes to the business, what drives this business are major franchises and Grand Theft Auto is among the biggest, if not the biggest. Yeah. Yeah. It is a triple A game and triple A is a way of basically formulating how much the developers are spending to develop these games. And really that limit's going to be somewhere

above $70 million. That is a massive, massive budget for these games. It is absolutely driven by hits, the way that Take-Two Interactive practices its trade. I mean, they've bought Zynga, which is much more of a singles and doubles type of franchise. But the Take-Two Interactive, their big titles are absolutely built around these massive releases and one going badly could hit it very, very hard. There are some risks in execution and in understanding its audience that Take-Two Interactive has in front of it. The stock of the day is Allbirds. Shares of the footwear company are down 23%. Yes, it's the stock of the day for that reason. Allbirds cut their full-year guidance and in less than one year, Bill, the stock has gone from 32

to 4. As far as I'm concerned, this is the poster child for the idea that you should not buy a stock simply because you like the product. Not at any price, for sure. The Allbirds arc to me has been incredibly fast. I remember that my first Allbirds that I bought were in its store in San Francisco, and it was the only store that they had their only physical presence, and their corporate headquarters were upstairs, and that was it, and everything else was done online, and they have gone and built massively, and it just hasn't really paid off. Now, some of this, I mean, I think that there's a little bit of a meta-discussion around Allbirds, because Allbirds came public through a SPAC, right, it merged with a SPAC. And as we talked

about back in 2020, when SPACs were the hottest thing, we actually made the warning and went out and said, you know, when there's a really hot thing out there in the market, you should be a little bit careful, because the people who market stocks and have no mistake when companies are going through an IPO, it is a marketing process. Know that they can bring out things at any price and people will buy it. And so, Allbirds has grown massively in terms of its footprint. It's grown massively in terms of its employee base. And now they have to retrench. I love this product. Oh, I do too. I'm wearing some right now. I was saying to you before the show that, by far, the most comfortable shoes, I am a repeat

customer, I will continue to be a repeat customer. But the business, as you said, the way that they expanded, and maybe, who knows, maybe the temptation to go public at the time was just too great. But one of the reasons, and we've talked about this before, one of the reasons we are wary of SPACs is because companies going public via SPAC do not have to go through the full reveal of filing an S-1 and laying out all of their numbers for everyone to see. Right. They get to go through something called an S-4. I understand that this is This is probably horrific podcasting to talk about the different forms from the SEC, but it is important because in the S-1, they really can't promise anything. They've got to tell you the

is's. In the S-4, they can say, well, we're going to do this and we're going to do that. By the way, I'm not accusing Allbirds of anything other than being a fairly immature company at the time that it went public when money was thrown at it. When you see a company that is this young, that's already retrenching and it's already doing cost-cutting, you have to ask yourself if the management learned all of the wrong lessons during the period of time in which money was cheap, because they actually have wasted a fair amount of money chasing something that didn't exist. And now, with the market cap at a much more reasonable $650 million, you have to wonder how much longer is this company going to be a standalone public company,

because it's not going to shock me if someone comes in and offers them just a little bit more than their market cap right now for a quality product and customers like you and me. Oh, absolutely. It is a dynamite product, which means that Allbirds doesn't have the same problem than a lot of other companies do. They absolutely positively have fanatical Lululemon-level addicted buyers of their products. That's good news for them. I happen to think that this is a high-quality company, but they're on the wrong part of the learning curve right now. Unfortunately, they've done it with shareholder money and not as a private company. I think that has a lot to do with having been rushed out as part of the big SPAC hype machine in 2020 and 2021.

Bill Mann, always great talking to you. Thanks for being here. Hey, thanks, Chris. If we are closing in on a recession, then the labor market hasn't gotten the message. research. Alison Southwick and Robert Brokamp take a look at the great resignation and what those looking for a job should consider if they think we're headed for a downturn. Last week, we looked at recession indicators, and there's one part of the economy that gets a gold star, employment. All other indicators seem to point to a recession, but the job market? It's just so stubborn, it wants to keep the party going. So, low unemployment is creating

a real buyer's market. Or is it a seller's market? Okay, a market that is largely in the favor of the employee and those looking for jobs. But is now the right time to be making a move, especially if so many people are worried about a recession? All right, well, let's look at the current state of the jobs market, because the numbers just came out. At 3.46%, unemployment hasn't been this low since Woodstock and the first moon landing. What? Yes, 1969. It was a great year because it saw the creation of Sesame Street, Monty Python, and me, though I don't remember much about the job market back then. But as for today's jobs market, well, it's quite remarkable. The Labor Department last week announced that more than 500,000 jobs were created in July, bringing this year's total to

over 3 million. Now, let me remind you that the GDP has declined in both of the first two quarters of this year. According to the Wall Street Journal, payrolls have grown faster than during any other post-World War II period that also featured the start of an economic contraction. But a contraction doesn't necessarily mean an official recession. According to Ryan Dietrich of the Carson Group, there have been only 17 other times when the U.S. economy created 3.3 million jobs during the year. Never once has it gone into a recession during that calendar year, and only once out of the 17 did it go into a recession the following year, and that was in 1973. So, what are employers doing to retain and attract employees? Well, it starts with pay.

Wage growth came in at 5.2% over the year. And employers are increasingly offering hiring and retention bonuses. Even the military has recently boosted bonuses for people who are willing to enlist. But it turns out that employees don't want just money. They also want flexibility in terms of hours and where they work. So, employers are rethinking how they can offer more part-time positions and hybrid work arrangements, work at home part of the time, office part of the time, maybe. And for example, a survey from Mercer of HR executives found that 38% now offer phased retirement up from 17% before the pandemic. And phased retirement basically allows someone to ease into retirement by working part-time or part-year, which in my opinion is sort of like

the quintessential win-win. The employer retains talent, stops a bit of the brain drain that happens when experienced workers leave, and the employee gets more leisure time, a little taste of retirement, while also getting that paycheck and perhaps some benefits. Finally, workers also want professional development. Employers are offering more training and education benefits. As just a couple of examples, McDonald's and Walmart have recently boosted their tuition assistance programs. All right. Well, let's take a trip in the not-so-way-back machine to 2021, when all of this started, right? Because that was the Great Resignation. It became a thing. According to the U.S. Bureau of Labor Statistics, over 47 million Americans voluntarily quit their jobs as part of

the Great Resignation. It was an unprecedented mass exit from the workforce. Maybe they wanted more money. Maybe they wanted to keep working remotely. Maybe they were just ready to retire. Yeah. And so, when it comes to the Great Resignation, I think there are really two things to keep in mind. First, it actually had begun well before the pandemic panic. An article in the Harvard Business Review by Joseph Fuller and William Kerr pointed out that every year since 2009, quit rates, which is what the government calls these, quit rates have been climbing. Now, they certainly spiked during the pandemic, but now they're dropping down to what was the trend line, which brings me to my second point, which is people are unresigning. Some folks are

returning to work for all kinds of reasons. Inflation is one. Others do the drop in their portfolio. They're also basically feeling less concerned about COVID, and they're being lured back by higher pay and more flexibility. Some say they're just bored. In a survey from joblist.com, 60% of the formerly retired are returning to work primarily because they are, quote, looking for something to do. I really think this could be a trend for a segment of the population, especially for those who are older, maybe have saved some money, the kids have flown the nest. Instead of retiring for good, they float in and out of the workforce as they feel necessary and as conditions warrant. But we shall see. Maybe the great resignation wasn't just a

blip, but a long-term trend. Maybe people are returning back to work. Who knows? But even now, McKinsey estimates that 40% of workers are considering quitting their jobs in the next few months. Pew Center puts it closer to 22%. Because I mean, why not? After all, it's a market. People get new jobs while they earn more money. And we've got all these signing bonuses and better benefits and remote work to attract people. Why not skip town and go to another lily pad and mix all the metaphors that you possibly could come up with? All right. Well, but on the other economist's hand, while inflation means that everyone feels the pain to a lesser degree through higher prices, when a recession comes, people lose their jobs, which means

catastrophic pain on the individual level. The experts will tell you, as long as you keep your job, you're likely going to weather a recession and come out the other side okay. A job is even more precious when a recession hits. Yeah. While the party is raging in the labor market right now, we feel like things are going well. But if you look at individual industries or even individual companies, things are not looking quite so good. Companies like Robinhood, Shopify, Microsoft, Tesla, Oracle, Walmart, they're making headlines because of layoffs or hiring freezes. And like we talked about last week, other big economic indicators like GDP, the inverted yield curve, and housing starts are sort of putting away the snacks and

taking the solo cups from the people's hands while saying, oh, wow, look at the time. Yeah. Some indicators want the party to end, but not the labor market. If it's possible that there is a recession on the horizon, is now really a good time to be making moves, especially if you risk being one of those last-in, first-out employees if there are layoffs? Yeah. That's a really, really good question. It depends a lot on your current industry and employer and where you would go if you switch jobs. So, if you are in one of these industries or one of these companies that's struggling, or you could look out ahead by a year and say, you know what, layoffs or pay reductions are on the horizon, now might be the time to look at

switching. Because if the economy slows down further and the layoffs hit later, that's not when you want to be looking. You want to be looking now when employers are eager to hire people offering good signing bonuses and things like that. On the other hand, if you do have a pretty secure job, your employer's doing fine, the industry's doing fine, and you're generally happy with the job, I'm not sure I would necessarily leave right now for the next fintech startup or something like that. That said, if one of your main goals is to make more money, you might have to switch jobs because research from the Pew Research Center found that the people who are getting the biggest bumps to their income are the people who switch jobs. People who stay

in their jobs are getting raises, but they're not keeping up with inflation. So, you have to put all that in mind. And then I'll also just point out that some recent surveys indicate that about 25% to 40% of the people who do leave or switch jobs regret the decision. Of course, that means the majority of people are happy with the move. But it is important to evaluate all the aspects of a potential new job, from the commute to the company culture, I'm sure we have all seen many of the stories of what happens to people when they have taken a new job, but then they get laid off. I think of seeing something on Twitter where a guy moved his family to Canada, bought a house to take a job with Shopify, and then very soon thereafter was laid

off. You don't want that to happen to you. The bottom line is, now might be a good time to switch jobs, but think it through very carefully. 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.