Motley Fool Hidden Gems Investing - Which Pandemic Stocks Are Holding Up?

Episode Date: March 1, 2022

The latest results from Zoom Video seem like as good a reason as any to check in on the state of "pandemic stocks". As we've witnessed repeatedly throughout investing history, some businesses are more sustainable than others. (0:25) Tim Beyers discusses: - Zoom's continued customer growth and gross margins - CEO Eric Yuan's steady approach to offering guidance - Why he believes DocuSign and DoorDash have staying power. - Ritch Allison retiring as CEO of Domino's Pizza and handing the keys to the corner office to COO Russell Weiner. - Pizza preferences! (15:30) Alison Southwick and Robert "Bro" Brokamp talk with Matt Argersinger about the ins and outs of being a landlord at a time when real estate is still hot. Stocks discussed: ZM, DOCU, PTON, DASH, DPZ, ABNB Our email address is [e-mail] Host: Chris Hill Guests: Tim Beyers, Alison Southwick, Robert Brokamp, Matt Argersinger Producer: Ricky Mulvey Engineer: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Today on Motley Fool Money, a look at pandemic stocks and a surprising CEO change. That and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst Tim Byers. Thanks for being here. Thanks for having me, Chris. Caffeinated up and ready to go, or maybe I need a little bit more caffeine. Can't speak. Get some more caffeine. We're going to start with Zoom Video because, look, it's March 1st. I know for everyone, the pandemic starts at a different time, probably. As an investor, I timestamp the start of the pandemic as March of 2020. Zoom Video is as big a pandemic stock as exists out there. We'll get to the group in a second, but I am curious to get your thoughts on the fiscal year they just wrapped up.

It was interesting to me to see that, and we've seen this a lot over the last six months or so, they came out with their fourth quarter earnings report after the closing bell yesterday. The headline is about the guidance, and after hours, the stock was down somewhere in the neighborhood of 7%, 8%. As of the market open this morning, it's up almost 1% as people had more time to digest it. Just in terms of the year they just wrapped up, what stands out to you? Because there are a lot of numbers to digest, but the one that stood out to me was the customers they have paying $100,000 or more, and the growth in that category seems pretty impressive. They're up 66%. I mean, like, okay, I think that's pretty good. I mean, pretty good, 66%.

Yeah, agreed, Chris. I know we're being a little bit snarky here, but let's just hit some of the numbers overall. So year-end number of customers, over $100,000. So big customers, that was up 66% year-over-year. Total revenue for the year came in at just about $4.1 billion. We'll call it $409.9 million, but that was up 55% year-over-year. Overall, the income from operations up 61% year-over-year. I mean, these are really strong numbers. I think if you wanted to fixate, You could look at the fourth quarter because that's a hard year-over-year comparison. So, for example, fourth quarter total revenue up 21%, far different, right? Much slower growth.

Non-gap income from operations up 16% in the fourth quarter. So, there was some fourth quarter gap income from operations that was down 2% year-over-year. So, there are some things that you could look at it and go, I don't know, growth's slowing here. But overall, Chris, what an outstanding year for an outstanding company. And I'll say this, let's not forget, this is one of the most efficient companies out there in terms of cloud. This is a profitable cloud company that generates excellent margins, almost 26% operating margins. That's a staggering number. If you think about the number of companies we talk, particularly the number of tech companies we talk about on this show, Chris, who are unprofitable, and we're asking the question, when are they going to be profitable? You don't have to ask that with Zoom. They're profitable now. They generate huge amounts of cash flow, and they're still growing at a pretty substantial rate. So, the stock going from down to up today, I think there's a realization that this is an excellent business that is trading for a pretty reasonable price.

I think part of what we're seeing right now is also a recognition that, and I want to be clear on this, Zoom Video hadn't given any guidance. Right. The quote-unquote disappointing guidance is a function of the fact that they hadn't given any guidance. When they came out with their guidance for the full year, a group of analysts on Wall Street said, oh, we thought it was going to be higher. And I've been saying for weeks now, I don't know why any company would come out with guidance for the next 12 months that is anything other than cautious. Or shrug emoji.

Right. Right. and and right i don't know so in terms of their guy you know so this is not zoom video cut their guidance from three months prior they came out with guidance for the full fiscal year what did you think of it because it struck me as imminently reasonable oh it was it was very reasonable now i will say this like when you look at the it is possible that they're being very conservative and sandbagging here but again to the point you just made chris would you do anything differently knowing what you know that there are so many known unknowns but let's just be clear about this when we're looking at the year-over-year revenue growth so for the full

fiscal year looking ahead this is heading into fiscal 2023 for zoom it's between 4.53 billion and $4.55 billion. Now at the midpoint, that's about 11% revenue growth year over year. So for a company that's been growing as fast as Zoom has been growing, somebody could look at that and say like, wow, okay, that's an immense slowdown. So if you actually believe that Zoom is going to slow to that kind of growth, then okay, I kind of get it that you don't really want to be on this train anymore. But here's the thing. Zoom is notoriously conservative whenever it gives guidance. It has a history of raising its guidance over time. They want to set a bar they can walk over and then slowly raise it throughout the year. Because again, there are a lot of known unknowns. So to me,

I look at that guidance, Chris, and I say like, again, Eric Yuan is showing me that he's pretty smart. He's not going to set expectations that he can't easily exceed. You look at the pandemic stocks as a group, and the two that immediately get name checked are Zoom Video and Peloton. on. We've seen plenty of businesses in this category over the last two years. Their stocks get run up, in some cases, doubling over a short amount of time, and then coming back to Earth, DocuSign, Teladoc Health, Twilio, Wix. Are there ones that you look at and you think they separate themselves because some of them, whether they are profitable today or not, seem like sustainable businesses. Peloton, to me, always struck me as a business

that was having its moment. I think the new CEO, Barry McCarthy, is as good as anyone that you would want at this point in the company's history to get the books right, to right-size the company and get them on a sustainable path to the future. But I look at a business like DocuSign, I just think, yeah, I understand why the stock did what it did. I even understand why it came back down to earth, but I don't see us returning to a world of pen-in-hand signatures, not when DocuSign is able to make … Oh, come on, Chris. You don't want to sit down on your next mortgage and go through 300 pages and have to sign them with a pen? Come on, Chris. What kind of monster are you?

A lazy monster. A very lazy monster. But seriously, in the quote-unquote pandemic stock category, what are the ones that stand out to you as like, yeah, this thing has legs. This is not just a pandemic business. This is a sustainable business. Well, certainly DocuSign checks those boxes. But I'll give you another one that I don't think we're talking about enough, DoorDash. I think DoorDash has, for reasons that are different than some of the other pandemic stocks, has established itself as a business that is going absolutely nowhere. It's tongue-in-cheek evidence here, Chris, but I think just the fact that Uber needed to issue arguably the worst of the Super Bowl

ads, the Uber Eats where we're eating things like toilet paper, it's such a nonsensical ad, but just the idea that Uber had to remind you that, hey, you know, over here, we do this too. We do last mile logistics. It's not just about delivering your order. DoorDash has been so far ahead in the idea of last mile logistics and delivering things other than food well before anybody else was talking about this. Please remember that DoorDash has been eliminating its competitors slowly, steadily, ruthlessly through things like using their tech, creating a better app. Now, to be fair, you could accuse DoorDash from very unsavory tactics. They've had some pricing that has been very unfavorable to some of their restaurant partners and they've

accepted that criticism and they're working on getting better at that. You could definitely hit them for that. You could also hit them for how they've treated their drivers in the past. They're working on that too. But by and large, Chris, DoorDash is so far ahead of everybody else in this space. I don't think they're going anywhere. Let me give you two numbers to sort of illustrate this. So as of today, DoorDash has $3.7, let's call it $3.8 billion in cash on its balance sheet. Overall, it has roughly $4 billion in excess cash. That's after all of its leases, everything else it has to pay. It has no debt. So it has a huge amount of capital available to it right now. In addition to that, this is a cash generator. It's an unprofitable business, but it is a cash

generator because it's very smart about the way that it manages its expenses. So it has a lot of non-cash expenses that show up on its income statement that are actually not cash out the door. They accrue those expenses ahead of time, and it allows them to manage that balance sheet very, very well. I think DoorDash is formidable. I think they're the leader in last mile logistics. I think we came to depend on delivery in a way that we didn't expect during the pandemic, and now we're not going back, and that creates a real tailwind for a company that probably gets a little bit of disrespect, undeservedly, I think. Real quick before I let you go, Domino's Pizza, their fourth quarter results,

kind of took a backseat to the news that CEO Rich Allison is retiring. The stock is down 7% this morning and I get that same-store sales in the U.S. were just 1%, but you have to assume part of the drop that we're seeing is a reaction to the fact that Allison is leaving the corner office. He's been there less than four years. He had a tough act to follow in Patrick Doyle. I think it's safe to say Rich Allison is now officially a tough act to follow. When you look at how that business has grown under his leadership, how the stock has performed, good luck to Russell Weiner, who's the Chief Operating Officer, who in April becomes the CEO. Right. It's sad to see him go. I think part of the reason it's down as well, Chris,

is year-over-year revenue, and due to some supply chain issues, which are understandable. We know this. We know there were supply chain issues for different fast casual restaurants. We've seen it before. We've seen it in different areas like chicken. And Domino's, they're subject to this as well. Even if Domino's wasn't giving you a lot of growth in the top line in terms of the stock, which they are. They have done that. Now, today it's down, but the stock has delivered decent returns just in terms of earnings per share, earnings growth, margin improvements. The stock itself has been solid. On top of that, they're giving you 19% average annual dividend growth. So if you're holding this stock, it's an outperformer just by virtue of how they're

returning capital to shareholders. This is an efficient business. They're going to be fine. They're going to keep paying that dividend. I think this is one to hold for the long-term. Domino's is an outstanding business. You're right. I mean, good luck to Russell Wiener here, but I think he's got a very good business to run, and I expect him to run it well. In honor of Fat Tuesday, is pizza your favorite heavy in fat food or is there another? Because it's very high on my list. Well, look, I mean, yes, but we have to be very specific about this. First, if it is the so-called Hawaiian pizza, like if you're going to throw pineapple on my pizza, we're going to have a problem. Fruit does not belong on pizza unless it's a tomato.

Yes, pizza is my go-to, but it has to be, like, large slice, got to be able to fold it, has to have a little grease underneath so when I pick it up off the paper plate, I got a little spot under there because I know I'm getting a real New York pizza. Like, that is, that's a real pizza. Do not give me pineapple on my pizza. Give me a little grease, a little extra cheese, throw some mushrooms and pepperoni on there, and now we're talking.

Our email address is podcast at fool.com. and I'm sure we're going to get e-mail from the pineapple people and the Chicago-style people as well. Tim Beyers, thanks for being here. Thanks, Chris. One of the surprising winners of the pandemic is Airbnb. It went public in December 2020, and while the stock has had some wild swings, Airbnb is currently trading above where it was on opening day. But before you decide to turn your own home into a profitable rental property, it might help to know the ins and outs of being a landlord. For more, here's Robert Brokamp and Alison Southwick.

Diversifying your income by investing in residential real estate can sound like a really great idea when you do the envelope math. For starters, over the last 10 years, according to the Case-Shiller Price Index, residential real estate prices in the U.S. have increased an average of 7.6% a year. Not too shabby. Now imagine if you invested in a rental property and you're able to get a renter to cover the mortgage payment while you accrue the equity. Okay, that sounds like a really sweet deal. Buying rental properties and becoming a landlord can be an effective way to build your wealth, but is it really the path to easy street? Joining us to talk about the pros and cons of being a landlord is Matt Argersinger. He's the lead advisor for the

Motley Fool's Mogul and Real Estate Winner Services, which focus on investing in real estate. But perhaps most importantly, why we're having him even here is because he's a landlord himself. Matt, thanks for joining us. Hey, thanks, Alison. Thanks, bro. Now, bro, you're going to kick us off here. Yes, I am. So let's just go straight into it. Alison just mentioned potential income, potential price appreciation, but actually there's tons of other benefits to investing in real estate and being a landlord. Why should someone consider doing it? With real estate, you have to remember, you get leverage in real estate in ways that you can't in the stock market. Leverage in the stock

market is kind of a dirty word, but all of us or most homeowners have a mortgage. Most of the time, you put 20% down to buy a house. Well, automatically, you're getting 5% to 1% leverage. And so, that's 7.6% appreciation. Imagine taking 5 to 1 on that. Or just imagine your house appreciates 3% a year. You've got essentially a 5 to 1 leverage with your mortgage. That return is more like 15% if you're looking at just your initial equity in your house. But that doesn't even begin to talk about some of the other benefits like tax benefits, for example. So, most of the time, because of depreciation, most small real estate investors, landlords, will either break even or report a loss for tax purposes with their real estate. But they're

actually generating positive cash flow because maybe the rents are greater than the expenses like utilities, maintenance, and your mortgage. But at the same time, you're deducting operating expenses and depreciation. So you're actually booking a loss for taxes, even though you're making positive cash flow, guys. And depending on your income bracket, you can even deduct some of those losses against your regular salary. So those are really some of the positive investing benefits from being a landlord. So yeah, let's talk about that depreciation because it's kind of crazy when you think about it. Basically, the government is giving you a break, assuming that this thing that you own is losing value because it's getting older. But in truth, in many cases,

it's actually going up in value. That's right. It's one of those perplexing, paradoxical things, whatever the right word is, with real estate. The government lets you treat it as any other asset, as if it's like owning a car or riding a lawnmower. Of course, that's going to depreciate over time. But as we know throughout history, homes, real estate has generally appreciated. If it's in the right area and it's generally a place where people are moving to, or it's near, say, a university or maybe a near tourist destination, generally, over history, that property is going to appreciate in value. Now, that doesn't mean that there won't be maintenance or renovations or capital investments you have to make to maintain

that property. And so, that sometimes offsets the depreciation benefit. But yes, in reality, real estate tends to appreciate over time, yet landlords are being able to offset taxes through depreciation. So it's just enormous benefit. Yeah. And I'll just stay on taxes a little bit more. You talk about the expenses. Almost all the expenses are deductible. Everything from the mortgage interest to the repairs that you make, replacing the appliances, even travel expenses to some degree. That's right. It's all right. You can write it off. And then there's this whole thing about the 1031 exchange in which if you sell the property, even if you have a capital gain, you don't have to pay taxes on that if you roll it over to another property of equal

a greater value. That's right, bro. So, even at the end of your time holding the property, you've deducted all these expenses, you sell the property, hopefully for a nice profit, and then you get to take those capital gains, if you choose, roll them through a 1031, as you said, and defer those capital gains out into the future. And so, that's kind of why the old adage goes, a lot of today's billionaires, a lot of the billionaires out there in the world are real estate investors because they recognize the idea of investing in real estate, this really stable, appreciating asset, then being able to roll it tax-free essentially into new properties and kind of doing that for years and decades even and not paying taxes and building this enormous

equity base in real estate. All right. So we've talked about the benefits. Maybe some people are intrigued. Where do they start? How do they start looking for a property to consider to buy and then start renting out. Sure. Well, I'll go back to my own experience really quickly when my wife and I bought our first rental property, gosh, 12 years ago now. It wasn't really a rental property. It was a duplex in Washington, D.C. And we saw it as a way for us to move into part of the house and rent out the other part. And that, I think, is a really great way for younger or aspiring landlords to get started. You can essentially buy a primary residence. Maybe it's a duplex. or maybe it's a house that also has a rental unit attached to it or separate that you can rent out

to offset your mortgage costs. And that's a great way to get started. I think if you're looking for where to buy real estate, it is a cliche, but location is really such an advantage. And so I think about our first property that my wife and I bought happened to be near Union Station, a few blocks away from Union Station in DC. And so therefore, we always had a lot of travelers or activity going to that area of the city. Never had a problem renting it out. So I think when landlords, when they're looking to buy a property, think about places where there are growing populations, job centers, although that's less important these days with the work-from-home trend, or maybe they're tourist destinations, places where there's

natural demand drivers in that market that your house is going to benefit from. It's always going to be occupied because there's always going to be demand. And maybe your property is going to appreciate in time because that is an area where people are moving to or where there are jobs to be had. One of the things that always occurred to me, and I know this because my parents rented out a townhouse on the beach for many years back in the 80s and 90s, is that there's a bit of a hassle factor, right? So how do you handle the day-to-day of collecting rent, making repairs, finding new renters, things like that. So nowadays, it's a lot easier just given the websites and the applications that are out there for you to manage your property. I know we're going to talk about

Airbnb a little bit, but my wife and I, for example, use Zillow, which lets us market our property, also handles some transactions and lets us communicate back and forth with prospective tenants. That makes things easier. You've got your app. But I also think being a decent accountant is a big benefit, making sure that you're keeping track of all your expenses. Like I said, setting aside that maintenance reserve. Being a good landlord in a sense, being a responsive landlord, I think is really underrated. I spoke with a Fool colleague a few months ago, and he mentioned to me that he's been renting this house in DC for a couple of years and he hasn't had a working oven in six months. And I said, wait a sec, why are you renting this

apartment if your landlord hasn't come fixed or replaced your oven? He's like, well, it's a great property. My rent's decent. I don't want to move. And the landlord keeps telling me he's going to get back to me at some point. And I'm like, that's crazy to me. Because if one of my tenants said our oven stopped working, I'd be there the next day trying to fix it. And if I couldn't fix it, you know, I'd probably look to replace it hopefully within a week. Um, it's so being a responsible landlord, I think also can really, uh, you know, endear your tenants to you, make them good, uh, stewards of the property. Um, hopefully, you know, hopefully encourages them to renew when their, when their lease comes to expire. So all those things that you can do to

be a good landlord, good communicator, um, you know, can make you successful. You mentioned Airbnb. So of course the question is to Airbnb or not to Airbnb. I love the question, bro. Airbnb is the ultimate double-edged sword, I think, of your landlord. On one side, you've got this enormous network effect. You've got 150 million users. You get incredible exposure for your listing. You earn more on a monthly basis by doing short-term rentals, even though the headaches can be a lot greater. Airbnb handles all the financial transactions with the guest. Early on, when my wife and I were doing our first rental property, We actually used Airbnb quite a bit. Again, we were near Union Station. That's a big tourist

destination into Washington, D.C. We had a lot of success early on renting our rental out to Airbnb, and we did really well doing that. On the other side for Airbnb, the fees are very high for both guests and hosts. I don't know if any of you have traveled using Airbnb, but what you pay on a nightly rate gets blown up by about 30%, 40% when you factor in the cleaning costs, your guest fees or any other fees that Airbnb is charging. Airbnb's customer service is also not great, and that's probably being kind. If you do run into a serious problem with a tenant, which I have, my wife and I have a few times, Airbnb is really not going to do much to resolve the issue. It's really on you. And then I think the bigger long-term problem with being

an Airbnb landlord is that you do have a lot of cities that are really starting to crack down on short-term rentals, so making it very difficult and costly to continue doing them. In Washington, D.C., for example, you don't have to register your short-term rental unit with the city. You can only do short-term rentals out of your primary residence. You can't have three or four properties and doing Airbnb in all of them. It can only be one place, and it has to be your primary residence. You can't rent out for more than 180 days. On top of that, D.C. also charges a 14.95% occupancy tax to guests for stays shorter than 90 days. There are other cities that are even more strict. I know New York City and San Francisco and others have also

recently passed new regulations against short-term rentals. That's taken away a lot of the advantages over simply renting your home or apartment long-term. That's why my wife and I, a couple of years ago, decided to go ahead and just move to longer-term rentals. it's just cleaner safer less costly you give up a little bit you know on the rental gross rent side but you end up saving a lot of hassle headaches and expense you talked about having trouble with renters and that was an issue my parents had they they had a some folks that wouldn't leave so they had to evict them and then once they eventually got eventually had them evicted of course the place was trashed so um what's your your not your what could be your personal

experience or just your knowledge? How common is that? How do you factor that into the economics of doing this? Right. Not quite that bad, bro, for us, but we did have a couple of situations where guests booked the place. We had one guest who just moved in, didn't pay, and we had to amicably find a way for them to get out without Airbnb's help. That was a trick. Then we did have a situation where guests rented the house. They had a massive party. The neighbors called the police and it was trashed. And of course, that was a pretty big disaster for us. We had to spend some money to clean it, fix some things. And Airbnb, again, wasn't really too much of a help.

So it's really just, I think Airbnb is a fascinating marketing tool. It's fascinating for transactions and meeting guests and getting your listing out there. It can be tough when you run into challenges. Most of the time, you just have to really be ready for them. You have to set some money aside for the inevitable disaster and just be ready to come up with a plan to take action on your own. It's not a good situation. In a lot of cities, of course, because it's a short-term rental, because you really don't have a lease with these tenants, evicting them or removing them can be very difficult. What has been your biggest surprise in general now that you've been doing it? The surprise on the upside or the downside now that you've

had experience doing it? I think it's mostly been surprising on the upside. I mean, real estate has been a great market over the last 10 years, beyond what I think anyone expected to do coming out of the great financial crisis of the previous decade. And so, I think the biggest surprise has just been the way the rents have grown in a lot of big cities, especially the last couple of years, it's been tremendous. As a landlord, you go in expecting a certain amount of return on your investment. Like I mentioned, a good return on cost is 5%. But in reality, real estate, because of its so many benefits and because you've had this huge tailwind for real estate and rentals in a lot of markets, the returns have just been out of this world. I'm not saying that that can

continue. But the surprise for me was really working at The Motley Fool for so long and knowing the benefits of investing in the stock market, it convinced me that real estate is a very viable asset class. It has so many advantages and benefits, as we talked about. The surprise for me is I wish I'd made real estate a bigger part of my own portfolio years ago. Final question for the folks who really have become interested now in doing this, where should they go to learn more? Sure. Well, I'd be remiss if I didn't point listeners to our, of course, our own website, The Motley Fool. If you go to realestateinvesting.fool.com, that's realestateinvesting.fool.com. There's great content

there on how to get started as a real estate investor. It also has a feed that's always updated with our most recent real estate investing articles. So realestateinvesting.fool.com is a great place to start. As you said, Matt, real estate has done really well for investors lately, but I mean, it's a pretty competitive market right now and not everyone has 20% to put down And also, some people don't want to do plumbing. So maybe we can convince you to come back in the future so we can talk about other options for investing in real estate. Of course, we would love to come back. Thanks, Allison. That's all for today, but coming up tomorrow, Jason Moser and Matt Franco will be here with some thoughts on risk management, portfolio allocation.

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.