Motley Fool Money - Can Zoom be More than Zoom?

Episode Date: August 22, 2024

Zoom is great, but it needs to find something outside video conferencing to get investors and the market excited about where it is going.  (00:21) Jason Moser and Dylan Lewis discuss: - Whether AI and expanded offerings can create a next act and growth pillar for Zoom. - Why Lowe’s and Home Depot continue to hold up even as home improvement projects dry up. - The early signs that Target’s focus on loyalty and value are getting customers back in the stores just in time for back to school shopping. Companies discussed: ZM, LOW, HD, TGT, WMT Host: Dylan Lewis Guests: Jason Moser Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Colagard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. Target's outlook is a bit off target. Motley Fool money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Jason Moser. Jason, thanks for joining me.

Hey, hey, Dylan, how's it going? It's good. I'm back from podcast movement. We have a week full of earnings to catch up on, which is really, you know, a podcast host dream. Because there's no shortage of things for us to discuss today, Jason. And abundance of content of options is always a nice, nice. problem to have. Yeah, and some big moves, which I think is always fun to discuss. Why don't we kick off with Zoom? Up 15% this week following the company's earnings release. Top and bottom line

came in slightly ahead of expectations, and it seems like part of that was demand for the company's AI tools. Yeah, I mean, I think with Zoom, the big question a lot of us have had over the last few years is, we know how effective and useful the platform is, but the big question is really, how are they going to be able to grow beyond this massive enterprise presence and direct consumer presence that they already have? I mean, they have a very good service. But at the end of the day, video conferencing itself is basically a one-trick pony, right? I mean, there are other options out there, and it's not exactly terribly specialized.

But again, I think Zoom has, to my mind, the source. superior platform of all of them. And so what we're seeing is efforts for management to expand the platform and the services that they offer. And they're doing things like that, sort of the platformization of Zoom workplace, right, becoming that place where you go get all of your work done. Introducing things like Zoom docs, which ultimately is helping employees sort of cobble together all of the stuff that's going on in these video conferences and summarizing them into actionable insights and documents that can help sort of monitor the workflow, so to speak. And then to your point there, they continue to invest in AI all along the way. AI is kind of the fuel, right? It's what's

working behind the scenes to really help all of these developments. It's adding more functionality and utility to Zoom's platform. So I think we're starting to see signs that we understand how they can grow. The big question is going to be, will it actually work? I mean, it was absolutely, I think, a respectable quarter revenue of just over $1.1 billion. It was up only 2% from a year ago, but that's better than down front 2%. Right, Dylan? And it was a little bit higher than the expectations that management set. Enterprise revenue grew 4% from a year ago. That represents 59% of total revenue now versus 58% from a year ago. And then I thought what was encouraging, They mentioned on the collie. Online average monthly churn came in at 2.9%. That's down from 3.2%

in the second quarter of fiscal 24. And that's the lowest rate that they've ever reported. And so for that online segment, that direct-to-consumer kind of segment, I mean, that's really encouraging to see that folks are sticking around and seeing the utility in the platform. When we look back at companies that have had what I will call a useful product, a large customer, but have been looking for that next, that second act, that thing that expands them out beyond, you know, their current monetizable offering. There are plenty of examples of that working out, and there are plenty of examples of that not working out. Yeah.

I'm curious, you know, so far on the user side, it's felt like so much of the AI stuff that we've been seeing and some of these next offerings have been kind of baked into this experience that we're already really recording the show on, right? We're on Zoom. We're within the boxes here. Do you think it's going to kind of live within this, or are you looking for something and maybe something that the market would need to be excited about that looks and feels a little different than traditional video conferencing to really give this company a shot in the arm?

Yeah, I think that's a good question. I think it's going to need to be something that expands beyond just our traditional view of just basic video conferencing. And the challenge is going to be making that seamless, right? It's doing more with the technology that they have. And remember, not all that long ago, right? They made the effort to acquire 5-9, the contact center business. They were looking to build out this contact center side of the business with this acquisition

of 5-9. That acquisition, we know, now didn't go through. But I thought what was neat to see on the call, they really are building out this contact center side of their business, regardless of the acquisition not going through. They're still going full speed ahead on trying to build. that capability, that functionality, which makes a lot of sense. When you see the benefits in that, it does make a lot of sense. And then they recently, you know, they made a small acquisition of a company called WorkVivo just late last year. And ultimately, this is, it's an

employee communication and engagement platform. So rather than focused on like your customers and whatnot, this is sort of an internal type of mechanism that helps employees within the organization and stay up to speed with what's going on. And they're seeing some green shoots there, right? They're seeing some promise there. So I think the challenge for them is going to be trying to make it as seamless as possible while expanding that opportunity into those other capabilities, those functionalities like the contact center, like employee engagement and whatnot.

I'm curious. At this point, Zoom holds, I think, the wildest round trip I have ever seen when it comes to a company's stock chart, shares still slightly down for the year, essentially flat since the company came public in about 2019, after that 600 or 650% rise during the pandemic. With the initiatives that the company has going on right now and where the company currently trades, is this interesting to you at all? Or if not, is there anything that you could say, I would want to see this before it becomes interesting?

Well, it is interesting in the sense. So I recommended Zoom and our AR, our augmented reality. and beyond service several years ago. And yeah, it's been a wild ride, to say the least. And so I think from evaluation perspective, I like the business. I like what they do. I think they offer a great service. And it's encouraging to see leadership continuing to try to innovate and bring new capabilities to the platform. So for me, that's very interesting. And I think when you couple that with the valuation today, and again, remember, this is all about from today looking forward. What can we expect? Is this a good opportunity today? Well, I mean, their outlook right now

for the full year, they're looking at earnings for share of around $5.30. And that puts this stock today at around 13 times full year projection. That is not expensive for an enterprise software-type business like this. I mean, this is a software business, one that in theory should be able to enjoy robust margins, right? And their long-term gross margin target is 80%. And they're right there near it. So that, to me, is exciting when you look at that valuation. I think the one thing I would keep an eye on, and this is just something I noticed in the call, but it's something at least to pay attention to you. The trailing 12-month net dollar expansion rate for their enterprise customers in the quarter came in at 98%. Typically, I'd like to see that at better than 100%.

And that was versus 109% from a year ago. And so given that their explicit strategy is to try to continue expanding the relationship with these enterprise customers. They're kind of pushing up on, they're only going to be able to sign so many enterprise customers, right? So the key is to be able to expand those relationships. That's the thing I would keep an eye on. Again, this is just one quarter, but it's definitely a number to follow on the coming orders. All right, over at Lowe's and in the home improvement market, the struggles continue. In the company's earnings report this week, management revised full year guidance and comps down from original forecasts. Jason, maybe this one not all that surprising, given what

we saw from Home Depot earlier this earning season? Not surprising at all, to me, at least. I mean, I think Home Depot and Lowe's are very much like MasterCard and Visa. You just kind of know what you're going to get with them, and they typically kind of mirror each other for the most part in the good times of the bad. Now, I mean, this has not been a bad year for Lowe's considering the macro backdrop right there. I mean, they're underperforming the market a little bit. But again, given that, macro backdrop. The fact that the shares are actually up year-to-date, I think is pretty encouraging. The numbers didn't inspire a ton of confidence, at least in the near term. Revenue of $23.6

billion was down modestly from a year ago. Comp sales down just a little bit over 5%. They did see encouraging signs in the pro sales business, and that's something that Home Depot has done very well. They've really executed on that pro side, and it's good to see Lowe's trying to capture that as well. They saw mid-single-digit positive comp growth there. And then online sales, 2.9% growth. And they saw better conversion rates and continue to expand the same-day delivery, right? They're expanding with more delivery partners. And I think I saw on the call, they were incorporating Uber Eats into their network as well. So it's kind of funny when you see DoorDash and Uber Eats delivering you your lows. But I think that speaks to

just the mobile nature of our economy these days, right? They are. They are witnessing continued soft demand on the do-it-your-your-soft side. They do see a little strength there on the pro side to offset that. But I think with Lowe's, you want to look at the three core drivers of this business, which kind of make me wonder if we're not looking at a little bit of a coiled spring at some point, right? Home prices continue to appreciate modestly, which is increasing levels of home equity. We're at a position now where disposable personal income is actually growing faster than inflation.

And so that's something that could play into their numbers positively. And then obviously, the aging housing stock just means there are going to be a lot of projects on tap here as the consumer continues to get a little bit stronger, and as the housing market continues to recover. So I think there's reason to be optimistic. It was interesting. Management noted this quarter in the call. I think 90 percent of Lowe's customers are homeowners, and most have fixed 30-year mortgages

of less than 4%. Jason, I feel like until rates come down, we are going to be staring at a very similar situation quarter to quarter. There's going to be this waiting game that happens, particularly for some of those more expensive projects that might need financing. As you noted, I'm impressed that the company and Home Depot, too, have held up as well as they have, given the headwinds that they're facing. It's a slightly different story when you look at a company that is related to this industry,

but not quite in the robust home improvement space. Trex. I mean, this is a business that we would associate with home improvement, but they're much more narrow in their scope. They're down 20% year-to-date, and there have been some very sharp sell-offs to their recent results. What do you make of the kind of divergent market experience for these companies, given the headwinds are very similar?

Well, it's funny. I feel like I've had so much to draw on here just from personal experience. I mean, we, my family, we are one of those families with a 30-year-old. fixed mortgage at an absurdly low rate, I think it's 3% now. And it's very difficult to rationalize giving that up anytime soon, just given the cost of capital today, right? And I think that's the way a lot of folks are feeling. So definitely the interest rate environment is going to play into that.

I mean, the nice thing about home ownership, and even from the rental side, I mean, housing is a necessity, right? It's not something that's going to go away. It can be cyclical. It can ebb and flow. But those projects eventually are going to need to be done. to need to be done. And it's interesting when you mentioned Trex. We several years ago had our deck replaced at our house with a full-on Trex deck. And I'll tell you, it is unbelievable. I mean,

this is a great product, and it's durable. It's easy to clean. It's long-lasting. It really does up the value of your home. The flip side of that coin, though, it's not cheap. It is expensive to put in a Trex deck, no matter the size. And so I can understand why people would be putting those types of projects on the back burner. If we see home prices continue to appreciate, we continue to see equity build, and we can see that interest rate environment start to come down, that's going to make accessing that capital a little bit easier through things like home equity loans and lines of credit. And so I suspect when we see that tied turn, we'll see Trex's numbers improve a little bit.

But you're right. Trex is absolutely more niche, and I think a much easier project to put on the back burner than some of your typical DIY projects that Lowe's and Home Depot would benefit from. All right, rounding us out with retail, some signs of life from Target this week. Retailer had shares up 7% following earnings that were ahead of expectations. And on the one hand, company sales return to growth. On the other, comps guidance still not all that inspiring. No, I mean, this wasn't a wall. Walmart level quarter, but it was a decent quarter, and it definitely points to things headed in the right direction for this company, I think.

The consumer continues to focus on value, and that's an area where Target can really shine. Looking at the numbers, the revenue was up 2.7 percent to 25.5 billion dollars total, comps up 2 percent, and then they saw adjusted earnings per share growth of 40 percent versus a year ago. All of this was fueled by traffic growth of 3 percent. offset a modest decline in ticket size, which is not surprising at all. And then we saw digital comps grow 8.7% with strength in things like same-day services, drive up, the Target Circle 360.

You know, one of the encouraging things, too, about this business, and I didn't realize this was as large a part, but it makes sense, is the Target Circle program. And I mean, this is essentially like their loyalty program, like you'd go into a grocery store, or you have your Safeway or your giant card or whatever it may be. But the Target Circle program is really gaining traction. It's free to sign up. They have now over 100 million members. And I mean, this is one of those loyalty programs that drives engagement.

It drives repeat visits. And then it also gives them the opportunity to pull on Amazon. And they had what's called Target Circle Week, right? Where they can really try to showcase this program. and the savings and the deals that consumers can get. They saw the highest digital traffic of the year so far with their Target Circle Week this year. So, again, I mean, didn't like the world on fire, but definitely feels like these guys are headed in the right direction. Heading into this quarter, I feel like some of the main focuses for management were that loyalty program, you just mentioned,

and also the focus on value and really looking to get prices down. I think they wound up reducing prices on like five. thousand different everyday items, things like milk, things like diapers, just to be able to get customers back into the stores. It seems like that's starting to show up a little bit in some of the traffic numbers that we're seeing from them and the trends that we're seeing from them. I think that's right. I mean, as they noted, they're in the penny business, right? I mean, these retailers are not operating on huge margins. I mean, when you get down to that bottom line, your big retailers are operating on very razor-thin margins, and they know that

they have to compete on cost. And that's going to be just the way that is. I thought it was encouraging to see. I mean, again, I kind of went back to, they are witnessing some top line challenges, right? I mean, continuing to grow that traffic is tough. And we saw the traffic growth offset by a little bit of a shrinking ticket size there. But they've done a very good job on the operating side, focusing on the costs of the business. And so while they're witnessing some challenges on that top line, they are still seeing a little bit of an acceleration on the bottom line. They actually raised adjusted earnings guidance for the year up to a range of $9.70 to $9.70. That was up from a previous range of 860 to 960.

So you look at this business at the midpoint of that guidance and put shares around 17 times full year estimates. That doesn't seem unreasonable for a business as well-established as target. I mean, they're always going to have to compete on cost, and they're always going to have to compete with the Wal-Mart's and the Amazons of the world. But the good news is, it seems like they're doing the right things, beyond just being that physical retailer, introducing things like the Circle program, focusing on e-commerce and drive-up, delivery, whatnot.

So, again, a very difficult market in which to compete, but they are giving it their all. Certainly, the back-to-school season, another opportunity for the company to re-engage with some of those shoppers that maybe aren't making quite as many trips to the store. Jason, you have a couple kids heading off to college this season. I'm guessing you've had a couple trips to Target recently. I was going to say Target, yep, we just moved our older daughter back to college for her sophomore year, and our younger daughter is headed off for her freshman year.

Target has definitely gotten a few of our dollars of this back-to-school season. So for those of you think back-to-school season is just up through high school, you're wrong. If you got kids going to college, I dare I say, you'll probably spend a little bit more at Target for those college years than you ever won those elementary in high school years. Having been in the stores and had your boots on the ground there, any impressions just from the way that they're positioning some of the back-to-school stuff or the dorm stuff or anything like that? It's always, when you go in there, they always just seem to be very thoughtful about having

that type of merchandise front and center, so it's obvious, right? I mean, they're big stores, and you can get a little bit lost in trying to find what you're trying to find, but they do seem to really capitalize on seasons like Back-Dxen. school. And then they mentioned the holiday season as well. I mean, that's just around the quarter and we're going to start seeing a lot of Halloween stuff. And I mean, they just always make the in-store experience rather pleasant. And maybe that's a function of the fact that they're not as big as Walmart and probably really not as busy as Walmart. So stores are maybe a little bit less crowded in some cases. But generally speaking, they do seem to really be operating

with some real rigor in making sure that that retail experience for the customer is always a consistent and a good one. We'll see if management notes a Moser bump in next quarter's management earnings call. Jason, thanks for joining me today. Thank you. All right, and as we wrap up here, listeners, just a quick programming note. No second segment for us today, but we'll be back with our regular shows next week. As always, people on the program may own stocks mentioned, and the Motley Fool may have formal recommendations

for or against. So don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thank you for listening. We'll be back tomorrow.