Motley Fool Money - Chewy’s New Kitten

Episode Date: July 2, 2024

This investor is not a cat, though. Asit Sharma and Ricky Mulvey discuss Chewy becoming a meme stock, Cedar Fair and Six Flags merging into one company, and headlines from 2029. Companies discussed: CHWY, SIX, FUN, AMZN, WMT Host: Ricky Mulvey Guest: Asit Sharma Producer: Mary Long Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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It's a big day. for roller coaster investors. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Osit Sharma. Asset. We've been talking for about 10 minutes. Still lovely to see you. Thanks for being here. I'm going to pretend I just got on and saw you for the first time. Great to see you, Ricky. Sometimes we do hop on for the first time, but sometimes we, you know, we chat about things that we can't chat about on the show. Anyway, let's talk about Chewy. You're peaking everyone's interest now, Ricky. But let's move forward with this show. I was telling Osset, my deep, dark secrets. And someone who had maybe a little bit of a secret up until a couple weeks ago

was Keith Gill, or last week, aka the Roaring Kitty guy. So last week, I wondered sort of with Tim Byers why pet retailer Chewy had surged more than 60% in a month. Then it turns out, Roaring Kitty, one of the leaders of the GameStop stock frenzy. He had a movie made about him, and he was sort of the leaders of the online retail investor movement that was buying up the stock and squeezing the shorts on that. Turns out he's interested in Chewy now. We found out that he owns about 7% of the whole company. That's a quarter billion dollars.

This is an interesting activist to have on your team or interesting stockholder to have on your team if you're Chewy. But let's focus on the shareholders. Like me, Osset, what should Chewy shareholders do with the news of Roaring Kitty owning 7% of the whole company? I think what I'm going to say here is, obvious, Ricky, that shareholders should prepare for a little more volatility than normal. But Chewy's been a volatile stock. The company is profitable. It has amazing loyalty for its products.

Its average spend goes up every year for those who purchase its products for their pets. But they have this long-term plan to improve margins. It's taking some time. Investors worry about the margins. The stock has been down. And as you point out, suddenly, I'm seriously creeping up, and this is part of that picture. But what does it mean for the long term? I actually don't think it means as much as this meant to GameStop. When GameStop was hovering under a billion dollars in market capitalization, and Keith Gill was starting to accumulate his first position,

just starting to get on YouTube and talk about this company. These are two very different situations. It was pretty funny. Did you see the SEC form where he created his own question that said, are you a cat and said, I am a cat, I am not a cat, and he checked the I am not a cat box. Like usually, the second time, the joke's usually not as funny, though, that got me this morning. That got this cynical podcast host, Asset.

Hey, well, I think you've got a point there. So let's talk about that. The second time round is the joke as funny. One of the reasons that the magic worked for Roaring Kitty was that he was going into businesses that had a very uncertain path of cash flow. So you look at GameStop, hovering on the edge, teetering towards potential bankruptcy. They've made a business out of selling their shares whenever he pushes their stock up. In fact, he resurfaced, and I believe GameStop took quick advantage of that and sold some shares, raise some money.

Here, on the other hand, you've got Chewy, which has massive distribution centers. They have been working on their business development for years, an established company with much more predictable cash flows. With that customer loyalty comes very stable cash flows. When investors look at propositions that are more certain, the stocks are less likely to get pushed around in the near term. A highly uncertain company where that is in doubt could move a lot. Now, I know I just said that Chui has been volatile, but part of that is investors resetting expectations for the near term after a fairly successful IPO.

And then the hard business of getting that model to scale up, which it's scale. So I think for you, Ricky, you own shares, it's going to jump around a lot. But if your thesis is still that folks are going to buy more food for their pets and this company has the widest offering of SKUs and maybe the biggest distribution system for that, not a bad thesis. I think that's a little more complex than mine. I think customer love was a big part of my Chewy thesis. But I have been a little troubled by their seemingly inability to get more customers

on the platform. also gaining about $2 billion in cash on the books from selling shares for the latest run-up. We'll see if Chui has been able to take similar advantage of that. All right, Austin, let's talk about roller coasters, shall we? Because Cedar Fair and Six Flags have officially merged into the largest theme park operator. 27 theme parks, 15 water parks, nine hotels, Cedar Fair and Six Flags calling this a merger of equals. I get a little skeptical at that anytime two companies come together. Someone likes to be the alpha.

Are you buying the merger of equals like the billing says? I think so. I think both of these companies are faced with sort of a tough market in their industry because the consumer has a little bit less purchasing power after the pandemic. Both companies are highly indebted. So it takes money to open these parks, Rookie. There's a considerable debt burden that both have. So, the problems are similar.

The overarching problems tend to lend to consolidation in this industry. And here you've got a company now that is going to span the whole bottom half of the United States, a lot of coverage on the East Coast, good coverage on the Midwest. So maybe they can find some economies of scale. I'm not too worried about like 1% shifting here or another. What's your take on this idea that they're a merger of equals? So I grew up playing roller coaster tycoon. grew up playing planet coaster.

So the idea of an investment opportunity becoming more attractive with more roller coasters like hits me, hits me in a way that I am completely biased. I'm like, of course it makes sense, more roller coasters equals more money. Naturally. I think anytime a company,

now to actually answer your question, anytime a company's getting 51% that may flex in unexpected ways down the road. Right now, they might be in a honeymoon period where we're a merger of equals. But, you know, coming down the pike, the management team with 50% of the power may be able to use that.

Let's talk about the consolidation, because the pitch is that the deal is going to create $200 million in synergies, $120 million from cost savings, and then $80 million in extra earnings from an enhanced guest experience. They're going to use that extra money to pay off a lot of the debt load that you previously mentioned. That's the pitch to investors. You're an investing analyst. Are you buying that story?

You know, maybe buying that story, but it is something that's different. Let's take another company that uses a very similar pitch to investors, Starbucks. We're going to elevate the customer experience and that's going to increase sales. I think that works easily for Starbucks because you're talking about a nominal spend out of someone's pocket. So if that elevated customer experience results in maybe 20 or 30 percent more in rate hike on someone's latte, it's not such a big deal. But investing in customer experiences is harder in this industry, just as in the cruise industry. Any of these industries where you're not looking at a small spend, but disposable income, someone has to make a choice to go there. So I wonder about that particular pitch to investors.

And we were talking just before taping. You sounded a little skeptical on that front. So Salim Basul is the CEO of Six Flags. He's the chairman of the new combined entity. And his pitch when he came in is the... the CEO of Six Flags back in late 2021 was, you know, we're actually going to decrease attendance a little bit. We're going to enhance the guest experience and raise prices a little bit. And it seems that that hasn't quite happened at a lot of the Six Flags parks.

You know, operations continue to be tough. I'm not saying that I could do better as an activist shareholder. It sounds like an absolute nightmare to run a theme park. But the core customer of these theme parks is one that's a little bit more value conscious, right? There's takes in the financial media that this is a way for these parks to combine with Disney World and Universal. And it's a completely separate offering. These writers do not understand roller coasters, Asset. But my take is it might not create the extra earnings that they may be pitching to the investors.

Yeah, and you may be on to something here, Ricky. I know when Saleem did this at Six Flags, one of the things they're working on is to decrease the bottleneck. at the gate. So you go to the park, you have to wait to get in. So by making it a more selective customer, maybe you have smaller lines, but then you're going to get people who want to spend inside the park. And I don't think that happened. When you raise food prices and make that food a little more upscale, you're still faced with the same dynamic of people who are trying to avoid spending on food because they want that allocation to go to the rides. People more often want to sneak in food to roller coaster parks. And I'm not like that.

laughing at anyone who's listening today. I mean, my family did that way back when, when we used to go to roller coaster parks a long, long time ago. So this is something, it's a dynamic in the industry, which I know Sleem-Basul has a desire to change the way people think of these parks, but they're really adrenaline experiences, aren't they? You're taking your kids to go on a roller coaster. You want to make Ricky Mulvey's eyes grow wide. You're not really taking Ricky to go sit in a glorified food court and eat overpriced French fries. No, I grew up going to Kings Island a lot in Cincinnati. And that's where you went.

Because if you're a teenager and you're bored on a summer day and you want to get out of the house with your friends, it's a really good option. I have been there. Amazing place. Last thing I'll say on this, too, is sometimes the extra earnings comes at the cost of the regular guest experience is these parks, Cedar Fair and Six Flags introduce more of these like fast passes, paid fast passes. What ends up happening is you get, you know, pure revenue, pure profit from people

paying to skip the line. And then on the other side, people are going to be waiting in more one, two-hour lines for that quick ride on the roller coaster. And so it's something that honestly, I think, may hurt them a little bit more down the road. Last thing on this topic. Whenever I think of these types of companies, it's a really fun company that catches your attention. It's so fun from the Peter Lynch perspective.

Go to the theme park. Evaluated as an investment. It's not a boring company. Even with this merger, the synergies, the defined offering, I'm going to give you the new six flags or I'm going to give you an S&P 500 index fund for your $100, Osset. What are you taking? Oh my gosh, you've put me between a rock and a rock, Ricky. Right now I'm scared of the index because the big tech has propelled it so high.

And here's a company that I really would love to like wait and see. I'd rather visit the combined company and look at the guest experience and commit that $100 today. But if you press me on it, I'll go to a rock and a hard place and say, yeah, I'd still rather put the money in the S&P 500 index, even though I love fun ideas. And there are other fun ideas. Look, Disney itself had problems last year with the same type of fast-pass dynamic in their parks. It's a hard business. So maybe go for a company that's got a little more diversified hook. I know Disney, it's boring, but you've heard me tell the virtues of Disney, before. I almost would rather put my 100 in Disney as a value play there. And we haven't even

talked about Inside Out to this week. Maybe we could chat about that soon, but we should move on. No, it made a billion dollars at the box office. Totally. You know, I'm not ready to overreact and say the movies are all the way back, but it was a good win for Disney. All right. Final, topic. Awesome, we've got Fool Fest in a couple of weeks. I'm really looking forward to it, July 14th through the 16th, we'll be in D.C. talking to members, and, you know, hopefully I get to see you there. One of the things I'm going to be asking, I'm going to try to get some audio for the show, is, you know, what's your headline from 2029? We're traveling five years into the future and reading some newspapers there. And, you know, because investors, you want to think about the

future. You want to think about what's headed or what's coming, excuse me. So I'll start with you, just to maybe get the ideas flowing as people get hyped up for Fool Fest. What is your headline from 2029? Investment AGI Eddy says no need to invest in U.S. stocks from this point forward. Simply invest in AGI Eddie. Why is that? That's more sarcastic. So AGI artificial general intelligence.

We keep hearing this term in the press. This is the moment where creative intelligence and artificial intelligence, human-like intelligence, human-like intelligence merge, and we get this all-powerful AI that will be as intelligent in many different stratifications as human intelligence. That's the moment where many people predict the worst is going to happen. There will be this AI apocalypse. Now, five years from now, it's not going to happen. But I thought it would be fun just to think ahead. What happens to investing when an all-powerful intelligence takes over? So my first one is sort of sarcastic. Do you think it'll solve the problem of having to research and pick stocks? You can just, you know,

sort of hit a button that you could say and solve the problem for you. Yeah. On a more serious note, this question has fascinated me for a long time. And I think markets always have a way of thwarting the best technology. So even if you have AIs competing against each other to root out the best stocks, it almost becomes like commoditized intelligence. They're all going to look at the same thing. The winners will be those who look away from the crowd.

So investing, I have a feeling is always going to be a sort of hard. game, even if the computers eventually take over. And by the way, I don't think they will. I think the best human investors plus the best AI will be the way to go in the future in terms of investing and probably many other things in life. So you're not just hitting a button and saying, well, that was easy. Anyway, the one I got is a little bit more basic, but JCPenney closes for Pickleball Entertainment Center. I think that, I actually, I think the pickleball trend is going to keep going, is a lot of people, it's become an acceptable way for people to socialize and meet new people in person. And I think that part of the trend is really going to continue.

And especially as more department stores close and you have all of this large retail space with good parking lots and the demand for experience and continues to increase, I think these are going to blow up. And I think they're going to be sticking around for a while. I really love that headline, Ricky. And I'm going to tease here. You and I are probably going to talk in the near future about something else that's coming into malls that would otherwise go out of business. But let's leave that. Do you got another headline or do you want to save it for Fullfest? I have one.

Okay. One more. Let's hear it. All right. I see this headline on the front page of Barron's. Selling at just four times 2029 revenue of $1 trillion is Amazon undervalued? Oh, I love that. That's a good place to end it.

And that's less sarcastic. Here we go, Asset. Yeah, so this is halfway serious. If you follow analyst projections out for the next four years, it's easy to see that Amazon. com will be on the cusp of a trillion dollars in sales. It's never happened to any company on the face of this planet. But I think sometime next year, latest by 2026, Amazon is going to overtake Walmart as the world's largest retailer with some $600 billion in sales each year.

they're going to quickly scale up to a trillion dollars. If you look at historical multiples, that means if they sell it four times that revenue in 29, you've got to double from here on out. But what a ridiculous looking statement on the face of things. Asset, we've had a lot of starts and stops in today's show. It has been quite a journey. Hopefully, you, the listener, have not noticed. But I appreciate you being here.

And more so, I appreciate our engineer, Tim Sparks, for cleaning this up. Asset, thanks for your time and your insight. Thanks, Ricky. And thanks, thanks, Tim, for cleaning up. this roller coaster of taping to date, but it was fun. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. Don't buy or sell anything based solely on what you hear.

I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.