Motley Fool Money - Celebs, CRMS, and Avocado Robots

Episode Date: September 18, 2024

Salesforce throws a party, while Chipotle streamlines guacamole prep. (00:21) Asit Sharma and Mary Long talk about two types of automation: one for agents, and another for avocados. They also discuss: - The enviable guest list at Dreamforce - Salesforce’s positioning in the AI arms race - The future of casual dining Then, (18:41) Fool Contributor Travis Hoium joins Ricky Mulvey for a close look at Crocs, the market-beating clog company. Check out the Range Rover Sport at www.landroverusa.com Companies discussed: CRM, NVDA, CMG, MCD, CROX, NKE, OTC: ADDYY Host: Mary Long Guests: Asit Sharma, Travis Hoium, Ricky Mulvey Engineers: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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May the agent force be with you. You're listening to Motley Full Money. I'm Mary Long, joined today by Asset Sharma, Asset Fabulous, as always, to have you here. How are you doing? I'm doing well, Mary, better since we started taping. Can't wait for this conversation. Isn't that always the case better when we start taping? Always. I feel like we've got to address the elephant in the room before we kick off. Today is Fed Day. We're recording this in the morning, mountain time, before J. Powell makes any announcements about rate, huts or what have you. We aren't going to be talking about that today because we don't actually know what's going to happen. So we'll save that for tomorrow's show. But did just want to address that unless, Asset, you've got anything that you want to leave listeners with before we get more

news from Powell and Friends. Enjoy your ice cream. That's a non-securter. It shows how not dialed I am into today's bed conversation. So we can keep moving. We can keep moving. And we'll move right on to Salesforce because it is holding its Dreamforce conference this week. This thing is a party. If you look at the speaker lineup, it includes Matthew McCona Hay, Cary Washington, Simone Biles, Alona Mayer, Kate Hudson, Jane Goodall, Pink is performing tonight. I mean, just looking at that lineup, granted, there are other more businessy speakers also involved, but with those names alone, I don't know that I would guess that this is a conference for Salesforce. Asset, if you were in charge of next year's lineup, who would you be adding to that

guest list? Well, at least Keanu Reeves. I mean, who would wouldn't want Keanu at a conference like this, or bring it back to something real, bring it back to something that's going to almost pull a tear out of your eye. And at the end of the lineup for music, I say Jane's addiction. They're having a rough year. They had a reunion tour, Mary. I don't know if you've seen this, but two of the band members got into a fight on stage. So they had to cancel the reunion tour. There are, I understand, some, maybe mental health issues going on there, So they're going to try to work out. And I hope they do work it out. Let's hope for a comeback for sort of a fringe band from way back when to make it on stage to Salesforce, Dream Force, Agent Force, etc. Force 2025. I mean, in all seriousness, like, we list off those names and those celebrities. What is the purpose of this kind of conference?

First, Salesforce will tell you, okay, the focus of this event is on the company's changing AI strategy. But like, why do they need all these celebrities to do that? A long time ago in a galaxy so far away, you couldn't trace it with the best of astronomical instruments. There used to be a thing called a Developers conference. And this is where companies would have a few days to have developers learn the latest releases of the software before things just started getting updated to the cloud. And these were very important get-togethers because developers became sort of like internal salespeople. for companies. And it helped a company like Salesforce be able to predict when it could re-up its contracts with its various customers. And it made for advocacy, I think, in a growing ecosystem

between all these like hardware and software products that proliferated going all the way back to the 1990s. And you come to today, Marian, and what's happened is that these have become such big events, partly their PR events, but with so many companies throwing conferences now that often seem far removed from their original purpose. You've got to attract eyeballs and you've got to attract budgets because there are many, many software-as-a-service company businesses that the typical enterprise business or smaller company deals with. So how do you get people to come? You turn to celebrities. They still have the core events that I think are sort of useful. for customers. They've got lots of training. They do showcase the latest innovations in software

or hardware. But these conferences now have become almost events in and of themselves, in which the, I don't know, the fluff part of it is just as important as, or the celebrity pool is just as important as the learning that takes place. Salesforce would argue that their latest innovation is agent force. What exactly is that? apart from the name of a product that continues with this forced, force wordplay? Yeah. So in a way, agent force is an evolution of the chatbot innovation that Salesforce and other companies have been promoting for a long time.

It's different because the latest AI models allow agents to do more things that are specific to the user occasion. So in the old days, like a chatbot would have a lot of canned answers, you or I would be on line waiting for it to type something that wasn't going to help us. Now what agents do, and we'll stick in this context of chatbots, is they pull from very specific databases of relevant information. They have much more flexibility in how they can answer a query. They have guardrails, so they don't start hallucinating in these interactions.

This is one type of agent that is sort of the old chatbot on steroids. Now, there's another universe of agents, which are thought of as like, autops. autonomous helpers to humans. You've probably heard the term co-pilot. The agent force is sort of Salesforce's answer to the whole co-pilot metaphor. But these get really interesting because they take generative AI capabilities. They can be used for training. They can be used for all sorts of other tasks than basic chatbot functions. And so what Salesforce is trying to do is to get ahead of the curve. As AI evolves, naturally, companies are probably going to be using less of human time and productivity to achieve simple task. We're seeing that in real

time. So they want to sell the product that companies are going to turn to. And that's what Agent Force is all about. It's about promoting these very capable bots and autonomous agents before companies either develop them on their own or buy them from someone else. Mark Benioff has called this the third wave of AI. And I might be concerned trolling a little bit here, but it seems really fast to have reached the third wave of AI. Yeah, I think Mark is a really great salesperson, and I think he's also trying to get ahead of a wave and just name the wave that he thinks will be most important to Salesforce. I think back to the 1980s when computers started first appearing in automobiles.

I mean, that's sort of what has evolved from that point on. So if this is a third wave of AI, we've been in it for a long time. What is different here for Salesforce is that the tools are shifting from hardware capabilities to software capabilities. Inference is shifting onto devices, so laptops, mobile devices that salespeople will use, and we are leaning more into that other side of LLMs, which is getting the answers we want very quickly and then doing things in real time with LMs. So he wants to maybe put a clever phrase on it, but it sort of falls flat with me.

I don't really think that's something that a year from now, you and I are going to talk about saying, oh, yeah, the third wave of AI. Remember when Mark predicted that? And it's so evident to us? I don't think so. Remember when that happened? Yeah. So another thing that they mentioned at this conference was this new partnership with

NVIDIA. And again, I could be concerned trolling. It seems a little bit like name-dropping NVIDIA is like the new name-dropping AI. It's like, oh, look at us. We've got this partnership, too. Is this something that investors should be paying attention to? How significant is this partnership with NVIDIA? It's significant, Justin, that Salesforce has to keep ahead of the curve. I think they felt a little bit of envy this time last year when companies like Microsoft and Service now touted some early partnerships with NVIDIA. They all sort of look the same, which is using not just NVIDIA's GPUs, but also some services, they call them microservices that they have on their platform. some model customization tools that they have to make your solution, your co-pilot, or your agent better than you could do so on your own. But it's not a game-changing partnership, again, that you or I will be talking about this time next year. I'm glad they did it. Good for them.

And it's a great partner to have. But at this point, it is just sort of flag waving that, hey, don't forget about us. We're working with Invidia, too, on these tools. When we talk about AI so often, it's the same names that get brought up. up, Nvidia being one, but also Microsoft, Apple, etc. Where does Salesforce sit in the AI race right now? Yeah, this is so crazy to contemplate, because on one hand, Salesforce is the type of platform that should be benefiting from AI. And I don't mean to imply that it's not benefiting.

They are a SaaS provider of tools. They've been in this game forever. For example, if you're a salesperson of any type of ability, if you don't use their tools for customer relationship management, you're using. using tools that are based on their original innovations in the marketplace. The thing that's been difficult, though, for Salesforce is differentiating what it brings to the table with AI. I think they found that very hard to do.

And they're a little bit at sea. Not this past quarter, but the quarter before this last one in May, the stock took a hit because they said, look, our revenue is really flatlining here. A lot of customers are delaying those bigger contracts. We've seen that with other tech companies. But I think companies are evaluating the need for some of the AI tech that's being put in front of them. I'm going to give you an extreme case, which is super interesting to contemplate.

There's a company called Clarna. I think most listeners would have heard of this as a buy now, pay later firm. The CEO is obsessed with AI. And he has gone so far as to try to develop all the systems he can in house. Clarna recently announced that they were getting rid of software, and the name dropped Workday and Salesforce, two huge platforms that you would think a company that size couldn't live without if Salesforce is the CRM product that you ended up choosing, or at least something like that. Mark Benioff actually commented on this, and he was like, I wonder if they realize what they're

getting into. I mean, there's not just the functional part of our software. There's compliance. There's data storing. There's connectivity between recent data and older data. He listed off a number of things that maybe Clarenet, and, you know, and, and, you listed off a number of things that maybe Klarna hasn't contemplated yet, but just the fact, Mary, that they could pull out that really important piece from their software stack, gives you an idea of why other

bigger companies might be thinking, do we need all of this Salesforce.com software? Can we get by with some of it? So I think they're at a real crossroads. It's a company with a huge balance sheet, and obviously they've got great enterprise contracts. It's not like they're going anywhere, but the growth question is becoming really interesting as time goes on. We're going to pivot to a very different kind of automation. Chipotle announced earlier this week that it'd be rolling out robo-chefs in a couple of its California kitchens. These robo-chefs are bots.

They're called otocados because their sole task is to have skin and core an avocado. This machine can do that in 26 seconds flat. The avocado parts that get smashed up by the autocados, then get turned into guacamole. by actual humans. Chipotle says that guacamole making process typically takes 20 minutes when it's made fully by humans. Asset, what's the return on investment of those save 50 minutes? That is such an interesting question. But first, I got to lodge a complaint with VEbu. It is hard enough to pronounce avocado quickly than to use these two terms in the same sentences. It's like a tongue twister. Otocado is trying to help you.

reduce the time it takes to, and you said it, I'm not even going to try to repeat it, but to process avocados. Okay, so that 50 minutes is very interesting because it's right now all manual labor. So, Chipotle, who is using otocado, is paying its employees to carefully process the guacamole, remove the pits, as you said, peel it, whatever, and then smash it into guacamole. Now, that is a time-consuming process, and when we think about it, there are a few processes that are manual that Chipotle has that probably take more time than this. Now, I think the return on investment is going to be coming from a surprising place. Let's work backward. First, we don't know the cost of these machines. I tried to look it up.

It's not disclosed yet, but Vibu says that a test case can mean millions in savings for a company, and Chipotle is the only test case they have on their website. What this probably is, is a percentage of time of the total make-ready for food. And I think that's going to improve margins potentially by something really small, on the order of a half or 1% of total per restaurant operating margin. Where there could be a bigger boost, though, is not in trying to save money at the bottom line, but Mary, if you or I, let's say we're working beside each other at a Chipotle, and neither one of us has to process guacamole in our shift.

That's freed up a lot of time for you and I to do other things, to help with the make components in the other lines, to help man the register. This is going to affect throughput, because throughput is something that becomes very visual. If it takes you more time to bring customers through your line, often times you're missing out on more sales because someone is driving by the Chipotle store and seeing there's a longer line, I'm going to go on to Chopped or some other place. even walking in the door and turning around. And we've seen this with Chipotle over the years. They're obsessed with trying to get throughput to its optimal degree because they know if they

can't move people through the restaurant, others are going to turn away. So I think this will result in some invisible top line momentum. That could be maybe a percent or two on the top line. That starts to become significant. So just as a heads up to listeners, this otocato machine, that's otocado, not avocado, has been made possible through a partnership with, with Bebu, which Asset mentioned, that is an investment in Chipotle's venture arm, which is a $100 million fund called Cultivate Next. And so the Auto Cotto is one piece of that. They've also got partnerships with other startups that are making different machines. One, also being rolled out in California that builds bowls and salads underneath the current prep line. So it kind of speeds

that up too. So this is not the only automation that we're seeing Chipotle test out and Cultivate Next, that Venture Arm also has a few other non-machine-related projects that they're working on as well. Ascent, you talk about throughput. Chipotle obviously is not the only restaurant that's experimenting with automation. Last year, we've got a lot of news about sweet green testing out robotics in different kitchens. I stopped at a McDonald's in Rollins, Wyoming last Thursday on my way up to Jackson, and the only way to order was through a self-serve kiosk. Is this the future of casual dining?

Are we going to see this kind of automation in its various forms? programs play out in nearly every casual restaurant that we experience? Yeah, my guess is as good as yours and everyone else listening today, but I'll give you my personal opinion. I mean, I myself was traveling recently, Mary, and on the wall of my local airport, RDU, there was this really interesting display. It looked like such a futuristic automat. It's basically a collection of windows with brands that you and I recognize. So you could go to any one of these windows, download the app, pay, and pull your food out. So this is the extension of the dark kitchens concept where you don't have the restaurant,

but you have the output of the restaurant. I think that the only reason someone would use that automat is because they're familiar with the brands, and they're going there from a previous experiential draw. So if we cut down too much on the experience, you start to lose your connection with the brand. And brand surprisingly plays a role in creating our sensations and our understanding of what the food tastes like. That experience can be all important. You can have a wonderful food experience that's just spoiled by all the sensory deprivations or imposition, you know, in your senses of a bad restaurant.

Maybe it's not clean. Maybe it's loud. Whatever it is that ticks you off. So I think that pendulum is probably swinging right now towards automation. There's going to come a point in time where restaurateurs understand that it's not all about improving their margins or making it super convenient for us. And then we will see that pendulum swinging back to the human touch. But for now, that's the near-term trend, is more and more of this stuff. But as our friend and your co-host, Ricky Mulvey often points out, there are things

that come and go. And he was mentioning Flippy. Who remembers who flippy is the burger flipping robot? I think they're still under development. But the technology is not 100. percent yet still under development. Yeah, the names of these robots are really, really something to behold. Chipotle also has Chippie, which, as the name suggests, is responsible for tortilla chip development, creation. Asset, as always, pleasure talking to you. Thanks so much for the time and all the knowledge that you shared with this today. I appreciate it, Mary. This made me hungry. Some of the best lessons don't come from a classroom. They come from experience. On the power of advice, a new podcast series from Capital Group, you'll hear from CEOs, investors, and founders

about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast, published by Capital Client Group, Inc. If you want to beat the market, try wearing some clogs. Over the past five years, Crocs, yes, Crocs, has been a four-backer for its shareholders. Motley full contributor, Travis Hoyam, joins my colleague, Ricky Mulvey, to walk through this unlikely winner and see why its stock may still be undervalued. Back to school season and one footwear brand might be on sale. Or it's stock in this case. We're talking about Crocs.

That is the footwear company that also includes the Hey Dude line of shoes, which are lightweight casual sneakers. You probably know Crocs already. Travis, are you a Crox wearer? Are you a fan? You know, I own the stock. I have never owned a pair of crox, but as a father, I have purchased many a pair of crocs. Okay. So you're a buyer.

You're a customer of the company. There are plenty in my house. Yes, they're just not mine. Many would have guessed that crox would have been a shorter term trend, myself included. In fact, Crocs are prominently featured in the movie Idiocracy. It is the shoewear brand that is worn by pretty much everyone in the film. You know, the director, Mike Judge, had them included in the film. because they were a little short on budget, and his costume designer said,

hey, let's put these in the movie. And someone asked him, you know, what if they get popular? Mike Judge said, these are so stupid looking that they'll never be popular. And at the time, Crox was just a small startup. Let's fast forward to today. The company made $4 billion over the past 12 months. Why do you think Mike Judge was wrong? Why have these shoes stayed so popular?

If I knew the answer to that, I would have been invested in Crox earlier. What I think Crox has really ended up doing is it's become a sort of meme of itself, if you will. If you go to Crox website, they have partnerships with basketball teams and colleges and Disney, every single brand you could possibly think of. And it's almost ironic the way that they're even designing their shoes. I mean, they have a partnership with Salehi Bemburi, who I was not familiar with, apparently a very famous designer. It looks like the shoes have, you know, stepped in a bunch of goo,

and that's what's at the bottom of the shoes. But they sold out in minutes. So they really leaned into sort of what they are, this sort of simple shoe. I think there's a lot of momentum coming out of the Great Recession, where maybe we're looking for a little bit lower cost shoes, maybe we're being a little bit more casual when we're going out. I'm seeing people wearing these in restaurants. So it's just sort of become this popular thing.

I think it obviously started with kids, and then those kids have grown up, and now it's people like me wearing Crocs, maybe not myself, but absolutely my kids that are still a popular brand. So it's surprised me, the durability of the Crox brand, but it's absolutely real. I mentioned Hey Dude earlier. This is a sort of, it's a casual shoe brand that honestly, it has some Allbirds vibes to it. Important because Crox purchased this in 2021 for about $2 billion in cash and $450 million in stock. The clogs weren't enough. Crocs was worth about $9 billion then for contacts

for that $2.5 billion acquisition. So we get back to 2024. Now sales are declining about 15% on the quarter. Three, two. Now sales are declining about 50% for the quarter year over year for the Hey Dude section of the business. In the meantime, Crocs is also opening more outlet stores for the brand. CEO Andrew Reese is promising to, quote, significantly accelerate its marketing investment. Travis, Hey, dude has some Allbirds vibes. That's not been great. And, you know, when we look back on this, do you think this acquisition has been a good idea or de-worsification? As we stand today in 2024, it's been a terrible acquisition. I don't think there's any way to get around that over the past two years. The compound annual growth rate

of the Crocs brand, just so just Crocs shoes is about 12%. Hey dude, negative 8% over that period of time. Like you said, it's gotten worse just over the last few quarters. The question is, is their strategy of basically reducing the number of retail outlets, reducing the number of distribution partners they're working with? That's something they put in place almost a year ago now. And they knew that that was going to have negative impact on their revenue. But does that mean that they're going to have better margins and better growth in the future? So is 2025 look better? Is 2026 look better? If that's the case, we may look back at this moment right now, as we're recording, it's kind of an inflection point for the Hey, Dude brand.

But we haven't seen it yet. And this is where you're kind of judging, you're allowing management to do their job. They have a strategy that they've been implained, and they've been very successful with the Crocs brand. Can they replicate some of those things from a distribution? side, from a branding side. They're doing some more things with the Wendy and Wally brand for Hey, Dude. They've got some interesting partnerships. I'm not bullish on Hey Dude at this point. It's sort of like an anchor that you get along with Crocs, which I really, I really like that brand. I like the way it's growing. I like the durability. But from a stock standpoint, Crox is so cheap that if this anchor becomes a sale, that is what's really going to take the, to the,

take the stock to the next level. If you're playing Armchair CEO, wouldn't you just rather see Crocs invest in, you know, the clogs, the original recipe? As we are today, I think they're too deep in, hey, dude. I mean, it's just they've spent so much money on it. They've got dead on the balance sheet from that. I don't know what you do with it because it doesn't have any value if you spin it out or try to sell it to somebody else.

So you've got to try to make it work. The mistake happened, you know, two or three years ago when they made the acquisition. and things may be a little bit. But that is one of the reasons that the stock is as low as it is today is because there's a good brand and a bad brand within Crocs in one stock. I threw a bit of mud at CEO Andrew Reese, but what else should investors know about him? He's really engineered the turnaround of Crocs,

and I think allowing this company to be relevant, like you mentioned early on. I think a lot of us would have thought 10 years ago the Crocs would be kind of an irrelevant brand by now. It's a fad. It's not something that kids are going to still be wearing today in 2024, but they absolutely are, and it's partly because of his leadership and vision. When you look at the steady growth, you just look at a chart of the Crocs brand growth. It's like a machine growing quarter after quarter after quarter. They have a great foundation in the U.S. They're expanding into Asia. That's where they're having tremendous success right now. So I think that is something that needs to go to leadership.

That said, it hasn't all been roses for this leadership team. Yeah, a lot of the growth story is international. Crox had 70% year-over-year revenue growth in China, 22% revenue growth overall internationally. That's the growth story. You've seen that as a risk or an opportunity here with this company? I think a few years ago I would have seen this kind of as a risk because there's not a lot of differentiation with Crocs. Pretty easy to copy with the growth of brands like team.

and those kind of retail outlets, you would think that there would be a lot of Crox competition out there, but it hasn't really materialized. So I think the brand has much more staying power than I maybe would have thought of a few years ago. This is one of the reasons that I've been bullish on the stock, is that if the company isn't going to be disrupted over the last three or four years, what's going to change over the next few years? So I think they're sitting in a pretty good position in these international markets.

And look, they still have a really low-cost product. I think that's something that we can't forget. This is not Crox going in with a $150 shoe, and that just not resonating with buyers who maybe aren't quite as affluent as some buyers are here in the U.S., you're coming in with a relatively low-cost product. $30, $40, $50 is a normal price point for a crox shoe. That's going to be still pretty accessible no matter where you are on the income scale. I was thinking about it with Lulu Lemon, right, where Lulu Lemon has a similar growth trajectory

internationally, huge growth in China. Consumers get a little tighter in China. That's a problem for Lulu Lemon, so I appreciate the differentiation. And you came on the show two years ago. I'll throw you some flowers because you helped convince me to buy some Spotify stock. Turned out to be a good idea. Spotify at the time was undervalued. And right now, Crocs isn't a spot where it's trading at about eight times free cash flow, 10 times forward earnings. The earnings number isn't out of whack historically, and it's always sort of traded at a discount to Adidas and Nike. Adidas is about a forward earnings multiple of 30. Nike is about 24 times forward earnings for the hits that specifically Nike has taken. There's the setup. There are the comps. What do you think about Crocs' current

valuation? I think it's a good risk-reward profile for Crocs right now. The way that I think about it is you have the Crocs brand. That's the foundation. Still growing. So this is still a business that revenue is going to grow, profits are going to grow for the Crocs brand. But like I said, we've got that hey dude anchor around the business right now. So you kind of combine those two and the growth sort of cancels each other out and you get a stock that isn't growing much at all. That's why the market is saying, hey, you know, a nine to ten price earnings multiple is appropriate here. But if that hey dude brand turns around, if we go from negative comps to what if they're growing high single digits or maybe even double digits, you get some operating leverage in the business.

Now you're starting to grow instead of low single digits. You're growing the business overall, high single digits, maybe even double digits. Now you earn a better multiple. So you have better operations and you get maybe a better multiple that is more like 15, 20 times earnings. I think that's the bull case here is that if that Hey Dude brand becomes something of a help to the business, and it doesn't even have to be a lot of a help, just a little bit of help, that's where I think the stock can really go to the next level. But it's really going to come down to Hey, dude, because I think Crocs is really just a foundational company. And it's not going to earn a big multiple, but that's okay.

You can have a phenomenal business just selling rubber shoes around the world. It's a great place to send it. Travis, appreciate your time and your insight on this. Thanks for having me. 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 ourselves stocks based solely on what you hear. I'm Mary Long.

Thanks for listening. We'll see you tomorrow.