Motley Fool Hidden Gems Investing - "This is why we can't have nice things!"

Episode Date: February 17, 2022

(0:20) Maria Gallagher discusses: - Nvidia wrapping up the fiscal year with strong results across the board - DoorDash increasing orders as well as the amount of money spent per order - Surprisingly strong guidance for DoorDash's 2022 - Cheesecake Factory having pricing power? (14:45) Jason Moser and Matt Frankel do a deep dive on PayPal. Are you ready for February 18th? Join us at the "Investing Essentials 2022 & Beyond" event by clicking here: http://2022.fool.com Stocks discussed: NVDA, DASH, UBER, CAKE, BRK.A, MELI, AAPL, PYPL Host: Chris Hill Guests: Maria Gallagher, Jason Moser, Matt Frankel Producer: Ricky Mulvey Engineer: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Chris Hill. Today, we're running the gamut from graphics processing units to cheesecake. That's not a euphemism, by the way. Talking actual cheesecake. Motley Fool Money starts now. I'm Chris Hill and joining me is Motley Fool senior analyst, Maria Gallagher. Thanks for being here. Maria Gallagher. Thanks for having me. We're going to look at the restaurant industry from two different angles. Let me start with this, because I have said over the past few weeks, investors should not expect any company to get the benefit of the doubt.

For whatever reason, this is the environment we're in right now, and the latest example is Nvidia. Because Nvidia wrapped up its fiscal year with revenue higher than expected, their guidance for 2022 was good, and the stock is down 8% this morning. The graphics chip maker is crushing it and no one's getting the benefit of the doubt. And this is why we can't have nice things, Maria. This is why we as investors can't have nice things. I think we're seeing this environment where even a beat, even a strong guidance, even consistency, it's just not enough. So revenue for the quarter was up 51%. Revenue for the year was up 61%. Breaking it down a little bit even more. Gaming results for the quarter were up 37%, up 61% for the year. If you

look at their data center results, those were up 71% in the quarter, up 58% in the year. Something really cool with that as well was a team of Stanford researchers set the world record for the fastest DNA sequencing of a human genome using Navidia Clara. There are a lot of these really fascinating achievements being made utilizing these chips. And so then you have in their professional visualization section, that was up 109% in the quarter, 100% over the year. So actually out of all of their reporting segments, the only segment that was down was automotive and robotics, which is one of their smaller segments. And their revenue for the quarter was down 14%, but up 6% for the year.

That was largely due to supply constraints with automakers, not necessarily on NVIDIA's part. And so what we're seeing is you have the CEOs talking about how they're seeing exceptional demand because their chips are useful in all of these applications. They're seeing demand everywhere and their supply constraints are easing. So, their supply is going to increase substantially in the second half of this year. So, not only did everything look really good from a numbers standpoint from this quarter, we're seeing in the future, we're seeing pent-up demand for the chips, all around good news in

terms of how the supply is going to meet that demand. And it still, like you said, just doesn't quite seem to be enough. One more reason I like Jensen Wong, the co-founder and CEO that you referred to, sort of talked about the deal for Arm and just being like, yeah, we tried, it didn't work. I appreciate any time a CEO is straightforward with us as investors and Wall Street as well. Do you look at this as a buying opportunity? I mean, I almost hate to put in those terms. But I look at the strength of this business, as you said, pretty much across the board, every division is growing the way you would want it to. It seems like for those who have looked at NVIDIA and thought, it's such a big company, for whatever reason,

it's on their watch list, but they haven't pulled the trigger. Today seems like a little bit of a gift. Yeah, I would think so. I mean, I will say with the termination of the arm agreement, they did have to write off operating expenses of 1.36 billion, which is not really a throwaway number, but for a company of this size growing this much, I guess some people think it is and it can be in the long run. But I mean, like I said, it's, NVIDIA is one of these fascinating companies because it touches so many things in so many different ways and is so integral to the existence of so many things. So you have examples of partnerships with Meta, partnerships with Tesla, with Neo, with these Stanford researchers, University of Illinois researchers.

So they're being used by everyone all the time. And so it's one of these things that I like it. I think it's a personally one I have always had on my watch list and have never pulled the trigger. So maybe something I'm going to spend more time digging into in the next couple of days. This is why we can't have nice things. DoorDash got nearly 370 million orders in the fourth quarter, and people are spending more on their orders. Shares of DoorDash are up today, so I guess DoorDash can have nice things. But you zoom out, the stock has basically been cut in half over the past year. When you look at a business like DoorDash, what do you find your eyes gravitating towards? So what I think is fascinating with DoorDash is, so you have their users, and then

you see where they think those users are growing. Because what these brands are doing, what these companies are doing, they're fighting to become integrated into consumers' lives, right? They don't want to just be your thought for when you want Chipotle. They don't want to just be your thought for when you want Shake Shack. They want you to be thinking of them all the time, constantly, because when they become ingrained in your life, you're a very loyal user. So what they're doing is they're trying to expand and hope that this happens and you can get anything now on DoorDash. You have partnerships with Bed Bath & Beyond. You can get really whatever you want. Their monthly active users were 25 million, which was up 22%. Their Dash Pass members exceeded

10 million. They said many markets last quarter saw over 20% of these users placing orders in non-restaurant verticals. And that's what they're really trying to emphasize is they increase over the long-term their spend as a whole in the marketplace once you integrate the non-restaurant verticals with the restaurant verticals. And they're trying to get those customers to stay because what you see in this area is, I think this area is really interesting. I think that the area is going to continue to grow, but there's not a ton of loyalty if you're comparing, well, I have DoorDash, I have Uber Eats, I have Grubhub, I have whatever's cheapest. they're trying to institute a way to get people to be loyal to them. So following those numbers

and those breakdown of users and how much they're spending on the platform is really fascinating for me when I look at them. Thank you for speaking to the loyalty piece of this, because while you were talking, I was thinking about how to a large degree, I don't really care who's delivering the stuff to my house, whether it's food or packages. I care that it gets there. I care that it gets there in a timely manner or whenever they say it's going to get there. But I don't really feel a strong sense of loyalty. What is DoorDash doing to engender that type of loyalty, not just with customers, but also with corporate partners, whether it's Bed Bath & Beyond or someone else? Because it would seem like if you're Bed Bath & Beyond, you also have choices in terms of who's

going to help you deliver products to people's homes. It's all about deals. You have deals on the Dash Pass, you have good deals with Bed Bath & Beyond, with Shake Shack, with all of these different customers and merchants. And what that ends up doing is making DoorDash itself less profitable, but for their long-term goal of saying, well, if this works and this scales, eventually it'll be profitable, right? In terms of these ideas of you're cutting deals for everyone so that you're the cheapest platform to be on, or the platform that gives the most, they have tiered pricing for their merchants, right? So they give the most bang for their buck from a merchant standpoint. So they're really trying to fight to get both the merchants and

the customers to really want to be on the app. And then you have the additional layer of trying to get the dashers to be on the app, right? There's no incentive for a driver to just drive for DoorDash when they can also drive for Uber Eats. So it's really, I mean, it's a difficult challenge to try and get all of these three different groups of people to choose you consistently and ingrain you into their lives. So, I mean, it's a big challenge. And I think that they're doing their best. You can see them integrating new pricing strategies, working on being integrated in people's lives, but I think it's going to be difficult, especially in the competitive environment they're in. Their guidance for 2022 surprised me a little bit for two reasons. One,

I don't think there's any incentive to be overly ambitious with your guidance, whether you're a strong business like NVIDIA or a stock that is struggling like DoorDash. So, that's one thing. The other thing is, all of the indications that we're getting, it seems like every day we're getting a new data point about the world opening up again, whether it's companies announcing their offices are opening up, Disney World lifting their mask mandate, cities doing the same thing, schools, restaurants. So, that would seem to bode well for restaurants and businesses and not as well for delivery businesses. Yeah, I would agree. And that's what they're trying to do. And I think that's a big thing

too with their non-restaurant orders, right? They're trying to say, well, it's not just food. You can get anything you need. So as the world opens up, maybe you're busier than you used to be. Maybe you need your bed, bath and beyond delivered because you have all your weekend plans, right? So I think that that's what they're trying to do is they're trying to focus on the fact that they have now everything you saw i don't know if you saw the uber eats um their advertisement i think it was in the super bowl i just saw it on youtube where you can see everyone was trying to eat their things from uber eats but they're trying to say oh look we we can send you anything now and doordash is doing the same thing with i i don't i haven't seen as fun of an ad from

them but it's the same concept no it was a great ad but uh the first time i saw it it wasn't completely clear to me what uber eats was trying to get across and then upon a second and third viewing. I thought, oh, okay, yeah, it's Uber Eats. So, the delivery brand is Uber Eats, but we'll deliver things that aren't edible as well. We'll see how it plays out for them and for DoorDash. Let's stick with the restaurant piece of this for a second, because like all restaurants, Cheesecake Factory is dealing with higher input costs. But their revenue in the fourth quarter was higher than expected. And they say they're planning to raise prices on their menu. Does Cheesecake Factory have pricing power? They seem to think they do.

Well, it depends on what menu items you're looking at because you have 235 options. If you go to Cheesecake Factory, you can get 235 things from their menu. And if anyone's familiar with a lot of the jokes around Cheesecake Factory, that's why. It's because they have so many. They have over 60 just dessert sections. So they have 208 company-owned factories, 29 internationally license. So a bit bigger than I would have thought. What's interesting is that they're really as many restaurants did in the past two years, right? They're trying to get people to spend, to choose Cheesecake Factory when they're at home, right? Not for the ambiance of going to the Cheesecake Factory. So they've had this growth in off-premise sales. They are now about 27% of

their overall sales. What's also pretty interesting is it also wants the restaurant change North Italia and FRC, which is Fox Restaurant Concepts. So what they're saying is they're trying to see a lot of future growth from there. So North Italia has 29 locations. They want to build that out to 200. FRC, they want to have as an incubation, innovating concepts for the future of different types of restaurants. So that's 59 current locations. So they're trying to grow both of those about 20% from a unit growth over the next 10 years. So what's really interesting is that they have the cheesecake factory. They're like, that's going to keep growing. Maybe like you said, the leverage is there is that they can increase their prices. They still don't want to

get too expensive because they're kind of that option when people go and say, we don't want to spend too much, but we want to have a nice meal. We can go there. But what they're also seeing is they're going to try and grow through those other brands as well. So I think it'll be interesting to kind of see as people recover, if there's that strength, what they're arguing, right, is that there's a strength in chains and they're trying to say, we're the chain that people trust in these ways. There's a strength in that when you've seen so many restaurants close in the past two years, when you have these chains, you have that more financial ability to stay open and withstand those hard times. So I think that that's kind of a fascinating argument to make,

and it'll be interesting to see how that plays out for the next couple of years. The Wall Street Journal had a story today about destination weddings and how that business is starting to ramp back up. And part of the optimism around that is people have been cooped up for two years. They've put their lives on hold for two years, and they're saying, the hell with it. I'm going to go and I'm going to spend this money. And I could see for higher-end restaurants, I could see it for a restaurant like Cheesecake Factory, too, as well, where people say, yeah, I just want to go to the restaurant. I just want to have a good time. I'm not particularly concerned with the price of the meal. Although, I mean, I knew the

menu is big. 235 items? And what? And every one of them is equally as good? Exactly. It's too many things to do them all well. And also, if you look at their photos of their integrated bakery, it has the worst photos of cheesecake I've ever seen, which is not a great sign for them. But they have over 60 cheesecakes. I think it's too many. You can't do all of those things well. just stick to one do it well 235 menu options is too many are you a little and i hate to use this word but are you a little pickier with your cheesecake because um you're a proud child of new york city i actually don't like cheesecake oh okay my sister loves oreo cheesecake she always has it for her birthday which is always a bummer for me because i don't really like it

But you have a slice because you're a good sister. Yeah. I'll eat the Oreo part. Maria Gallagher, great talking to you. Thanks for being here. Thanks so much for having me. Some stocks like Nvidia take a hit even though they're posting strong results, but to be fair, some stock drops are for perfectly valid reasons. Up next, Matt Frankel and Jason Moser discuss a financial company whose stock's been beaten down, but the underlying business may be showing similarities to Berkshire Hathaway and Apple. Matt, thanks for joining me this week. Excited to talk with you because we get to talk

financials again this week. We're talking a company in specific, one that we've talked about a lot over the last several years, and that's PayPal. It's been in the headlines here recently, a stock having a not-so-good year. The stock is down 40% year-to-date. A lot of that was really the result of the company's most recent earnings report, which we'll get to in a minute. But before we do that, let's remind our listeners exactly what PayPal is, because it's a big business. As you and I know, it's not just PayPal, it's a lot more. Right. PayPal is best known as the online payments giant. It's the way you pay for things on all your favorite websites. It handles payment processing for a few million merchants

around the United States and around the world. But there's also the Venmo personal finance app that facilitates money transfers, direct deposits, things like that. They also have a buy now, pay later service. And there's a lot more to the business than people just see, for example, PayPal is a big investor, as we've talked about several times. They own stakes in a lot of our favorite businesses, like MercadoLibre and Uber, just to name a couple. They have a venture capital division. They're kind of like a big fintech ecosystem that tries to capitalize on all of these trends. So, there's a lot more than just the PayPal side of the business. It feels like you're describing a modern-day Berkshire Hathaway, in a sense.

I'm only saying that really half-tongue-in-cheek. When you put it that way, Berkshire obviously being very insurance-centric, but not afraid obviously to invest across a number of different markets. PayPal obviously being very payments-centric, but also investing beyond just that space, as you mentioned. That's exciting to me because we've seen the potential of this business. Even though it may be in a little bit of a trough right now, I don't know that I would necessarily caution investors against the stock. We'll come to the conclusions there, but let's dig through this quarter here to really get a better idea of why the market right now is viewing PayPal more with that glass half-empty lens. Because I'll tell you, as someone who's followed

this business for a while, Matt, I feel like PayPal 100% deserved the butt-kicking it got after that earnings report. I have been a big fan of this business for a long time. I still loan shares myself. I was really disappointed in what management brought to the table there. Talk a little bit about that and what we learned from this most recent report. Sure. This is going to sound really negative, like you just said, but we'll get to the good afterwards. PayPal missed earnings. That's the headline. They missed analyst expectations for fourth quarter earnings. But as an experienced investor, Jason, you know better than anybody that the easiest way to tank a stock after an earnings report is to offer weak guidance. That's the

surefire way, your stock is going to go down. That's exactly what happened here. PayPal issued full-year 2022 earnings guidance below expectations. They blamed inflation headwinds and things like that, which, to be fair, is going on. But it's really the user growth that has people worried. Their user base grew by 49 million in 2021, and they're expecting between 15 and 20 million in 2022. That's a big slowdown in growth. They reported 4.5 million illegitimate accounts that they had to back out of the numbers. They announced that they're shifting their focus away from growing the user base to engaging the users that they already have, whether that's a good or bad thing. Remember that PayPal was guiding

for 750 million users within a few years. They're at about 426 million today. That's a big disappointment to the PayPal bulls. Yeah, it really is. I'm glad you brought the user situation up there, because I think a lot of folks probably were focused immediately on that guidance. On paper, it doesn't look like it's that big of a guy down. There was an expectation for around 17.9%, 18% top-line growth for 2022. They ratcheted that back down to a range of 15% to 17%. Earnings growth, consequently, is going to be next to nothing, essentially, at least that's what the guidance is. Now, we know they typically have a good history of exceeding results, so we'll have to see what 2022 ultimately brings. But really, to me,

it all boiled back down to that user situation. That is a big deal. They noted this in the call that they've got this massive user base, but really, it's only about one-third of that user base that's responsible for the majority of the company's revenues. It really does need to focus on a specific segment of that massive user base. In other words, quality matters. I think that's what we've finally come to realize with a business like PayPal, it's not exempt from that. Quality users matter, I think, in whatever business. PayPal certainly is feeling that now. But again, I feel like that's a timing thing, maybe more than anything. I don't mind if they're growing users more slowly. As long as they're getting users,

coming in and using the services, the nature of what they're offering generates consistent repeat use. Folks are using those apps every day in some cases. I understand the market's pessimism in the guidance that was offered, but I don't feel like this is something that necessarily tells us that PayPal is in trouble or this is a bad business. I feel like PayPal is having a similar moment to where Apple was five years ago, but it was transitioning from a growth company to a value company. That's a good example. The question is not, can they maximize their products, which they've already done. Their user growth is slowing down. They see limited growth potential ahead. But can they

double down and maximize the value they're getting from the products that they've established so well? When Apple decided, our iPhone has pretty much saturated the market, how can we maximize its revenue stream, and how can we make it the best product it can be? I feel like that's where PayPal is transitioning to right now. If they can do that, double or triple their average revenue per user, I don't really care if they're growing their user base if they can do that. It remains to be seen how they're going to do it. But I really like the optionality they have. They have a ton of cash. This is a wildly profitable business, over $5 billion in free cash flow last year. That's a lot of flexibility. I'm

curious to see what they do. I think there are a lot of signs in that quarter that showed us the business is doing very well. Total payment volume of $340 billion. It was up 23% from a year ago. Another thing I found fascinating, and I'm a little bit on the fence as to really how material buy-now-pay-later is going to be, it feels like a market that's still taking shape. I'm glad that PayPal is not a pure play in the BNPL space. But they do have that homegrown side of the business now that pushed through $3.2 billion of total payment volume for the quarter. That buy-now-pay-later side of their business is running on a $13 billion annualized run rate. That's not bad, particularly

when you consider other businesses out there like Block that went and acquired their way into that space. Block buying afterpay, I think, for $30 billion. A couple of different ways to get it done there, but then also the Venmo side of the business, that continues to impress. $60.6 billion in total payment volume. That was up 29% from a year ago. The take rate continuing to improve now that they've got Venmo on that profitability train, so to speak. While the future may be a little bit up in the air, it really does feel like the signs from that quarter tell us that PayPal is really doing pretty well as a business on its own. Yeah. Look at some of the relationships

they've built. Amazon's going to start accepting Venmo for payments. That engages 60 million users or whatever, as you just mentioned. Roku just added PayPal checkout to all of its TV operating systems. These are what are going to engage users. The average PayPal user is making 11% more transactions than they were a year ago. If they can continue that trajectory, where their existing user base is using the services more and more, They could be onto something here. It could be a long-term value play now. On that note, let's walk away from this conversation with an opinion for listeners, because I'm sure that's what they'd really like to hear. Management is calling for earnings per

share of $4.67 at the midpoint for this full year. We're seeing PayPal now valued in this 25-ish times forward estimates range, which historically seems like a very opportunistic time to buy these shares. Assuming that the business is firing on all cylinders, as they say, how do you feel about this business today, particularly at the current valuation? Well, PayPal peaked at around a $300 billion market cap. They're at about $135 billion today. They're expecting earnings to grow about 19% year-over-year in 2022. As you mentioned, a 25% price-to-earnings multiple, that's a pretty nice combination, especially if they can execute on maximizing their user base. I would be a lot more comfortable pulling the trigger on PayPal

today than I would have been six months ago. Given its profitability and its strong cash flow, I tend to agree with you there. As a shareholder myself, I think I'm going to hang on tight there and probably bump this one up to the top of the list of positions that I might want to consider adding to here in the coming weeks, assuming these valuations hold. I guess we'll just have to check in next quarter and see how the company's doing. But, Matt, listen, it was great catching up with you again. Thanks so much for taking the time to dig into this earnings report and share with us what you've learned about the recent state of affairs here with PayPal. Sure. We always have some great conversations. I always learn a lot,

and hopefully everyone else does too. Chris Hill That's all for today, but coming up tomorrow, a conversation about the new Netflix documentary, Downfall, the case against Boeing. 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. Thank you.