Motley Fool Money - Cloudy With a Chance of Burgers

Episode Date: January 13, 2025

Sonos, Moderna, and Shake Shack are all staring at some near-term headwinds – can they work through them? (00:14) David Meier and Dylan Lewis discuss: - Why Sonos CEO Patrick Spence is on his way out, and how the company can restore its status as a premium brand in audio… and maybe more. - Moderna’s massive revenue adjustment, and how it highlights the company’s need to diversify revenue streams. - Shake Shack’s new plans to open up 1500 company-owned locations. (16:53) When an insider at an undervalued company starts buying a bunch of stock should you follow suit? Senior Fool analyst Alicia Alfiere and Ricky Mulvey, look at Progyny, the fertility benefits manager with a notable amount of recent insider activity. Companies discussed: SONO, MRNA, SHAK, PGNY Host: Dylan Lewis Guests: David Meier, Alicia Alfiere, Ricky Mulvey Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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We're talking three stocks down bad. Mottleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motleyful analyst David Meyer. David, thanks for joining me today. Thank you for having me, Dylan. We've got three different companies in the news today facing different kinds of headwinds, all showing a little bit of red on the market today. We're going to dive into why. Our first one up, Sonos.

Today, Sonos CEO, Patrick Spence, announced he was stepping down from his leadership position after what has been, I think, a tough run on the technical side for this company. Shares are down about 8%. Do we want to do a little bit of a history lesson here on where this company's been and some of the problems that have been plaguing Sonos? Sure, we can do that. The speaker maker and audio file has had a tumultuous 2024. And the root cause seems to be an app that rolled out early that did not work.

Apparently, not only was it buggy, but they cut features. Now, I will say, I personally am not a Sonos person. I don't own their equipment, but I have lots of friends who do, and they loved it before this app rollout. They still love their stuff, but they definitely did not appreciate the technical difficulties that they ran into. But that seems to be the root cause of why the CEO is now out of there. I'll add the customer perspective here because I have Sono speakers in my house, David.

And I will say, yeah, I think the rep for this company for such a long time was incredibly high quality hardware and just kind of a it just works approach with a lot of their app and software stuff. And I have run into the frustrations of wondering where my speakers were or am I able to control them in the app, some stuff with integrations as well with some of the other apps. And so I can understand the frustration because it flies in the face of, I think, kind of what the company's promise was out in the marketplace to customers. And when you compromise on that, it creates a lot of questions about the viability of the business, especially in such a competitive landscape like consumer technology. So you are 150% spot on about the brand, basically, because your experience with a company, that's what defines a company's brand, right? There's, we know we, so my former engineer here, we know lots about how sound works. We know lots about how sound to make sound sound great. We know lots about those things, but how do you package it all together?

How do you create an experience? And Sonos has done a great job of that with wonderful equipment. And yes, good software. But there's lots of other companies that do this. And in fact, you're seeing some struggles. The company sold a lot of equipment. during the pandemic years, right? And they've been slowly seeing small declines in their top line as that faded off. So, again, you're exactly right. It's very competitive. Your

brand is basically what is going to get people to buy stuff from you. And right now, they're struggling. In the interim, current board member Tom Conrad is going to step in and fill the CEO's role. Conrad has held high positions at Pandora. Snapchat and Quibi. So not a stranger to digital media, not necessarily a stranger to the music world. And he has been on the board for eight years. He has a tattoo of the Sonos Ace on his forearm, which I thought was clearly some dedication to the product suite. But he is not the long-term solution. The company is going to begin a CEO search and is looking for a replacement for Spence. What do you want to see out of this new CEO that they'll be bringing in?

Well, actually, I'll start with the interim CEO. The interim CEO. The from CEO has got to make sure that whatever PR public relations communications they're putting out there, this is the Miaculpa moment, right? We're sorry, we're going to get better. The other thing is if there's any internal issues, he has to get ahead of that as well. Understand what they are. Are there groups that are not communicating? Is morale bad? Things like that. Because that's what's going to get transferred to the new CEO. And then, okay, so what do we want from a new CEO? Well, I think you have to have somebody experienced with brands, high-end brands as well. Obviously, some technical background would be good. And then I want to see marketing.

Okay. How am I again, this is a, we need to change the narrative moment because this brand has seen its cachet erode a bit. So those are the things that I want to see from the new CEO. And quite frankly, I think they should take their time. This is a big deal for this company because of where they operate at the high end of the market. And the technology associated with it all has to be a great package. Take your time, find the right person, get the foundations ready for that person, and then we'll see what happens. From what we have seen from company communications recently, this will not disrupt what they are planning with their product pipeline or their near-term releases. And one thing that I thought was a little bit curious, I wanted to get your take on, was there are some rumors that Sonos is interested in expanding into video streaming.

So getting outside of just being a pureplay audio company and widening out a little bit. What do you think of that? So I think now is the wrong time. But I think I do understand the extension. Okay. So one, yes, it's a different technology, but it's still, what is it about? It's about delivering good content, right? They don't make the music.

They just make the music sound better, if you will, right? They bring it to you. They help deliver it in whatever room of the house you want to be in. So I think that there's overlap between, especially from a software standpoint, overlap between how do I make sure all the content goes where it needs to go? But then you have to figure, okay, what are the right devices? Am I going to, am I Sonos going to make those devices or am I going to partner with some? somebody. This seems like a pretty big challenge, but from an extension, product extension standpoint,

strategy extension standpoint, I get it. But again, not like, this has got to be postponed. You have bigger fish to fry. Joining Sonos in the cloudy outlook department is biotech company Moderna today. Shares that about 20%. And the reason, I'm going to quote you directly from Slack here, David, the most uncertain revenue guidance I've ever seen. You care to elaborate on that? Yes. So, I've been doing this a long time. I've been at the Motley Fool. I'm going on my 20th year. I have read lots of earnings reports, lots of conference calls. I don't think I've ever seen a revenue guidance with a billion dollar range. The range for revenue that the CEO put out for Madurda for 2025 was 1.5 to 2.5.

billion dollars basically like hey it could be anything I don't I don't know I literally have never seen that and the worst part of it is when we put it in context that's actually the two billion dollar average is actually around 30% decline from the previous year so like that this is this is there's some struggles going on here the management team over at Moderna pointed to a couple different reasons why they are showing this maybe head scratching range for their revenue guidance. One of them increased competition in their core COVID market. Another falling vaccination rates.

The third, the timing when it comes to some of their manufacturing contracts. And then the fourth, they have an RSV treatment that is out there and they are unclear on what the re-vaccination guidelines are going to be from the CDC. Yes. When you think about those four headwinds, which of those do you think are kind of the most concerning for you? Well, so if this business is right now pretty much all dependent on COVID vaccines, I would say anything associated with the COVID vaccine, especially on the manufacturing

piece of it. This is something that the company was able to ramp up quickly in terms of, you know, during the pandemic. So what's, you know, what's going, what is changed that there are challenges today? The RSV vaccine, this is not my specialty, this biotechnology, but from that standpoint, whenever any business is dealing with a regulator, right, you're at the whims of the regulator. So somehow that has to get fixed in order to get that product off the ground. In the press release, they did specifically, management did specifically say that the next year's

revenue is going to be a mix of COVID and Mresvia. which is their RSV vaccine, they just didn't give a split. So we'll see over, we'll see over 2025, like how that split comes to bear. But right now, we were commenting also, just to give you an idea, I believe my numbers are right, 2020, this company did $19 billion in revenue with COVID vaccines and $2 billion average for 2025. That is a change of heart in terms of the market for COVID vaccines. Yeah, and I think what's so hard when you look at a company like Moderna is if you rewind the clock to 2020, they did, I think, about 275 million.

Correct. Million, not billion, million. And so if I told you nothing else and said they are guiding for their top line to be 10x what it was five years later, you would say, that is fantastic. Right? And what the company has been able to do over the last five years virtually unprecedented in terms of scaling up. being able to handle ridiculous amounts of demand that was mission critical for what we needed. But they tied their fate very closely to one specific thing. And we were talking before with Sonos about maybe not wanting to see them diversify strategically right now.

I think it's almost the opposite here with Moderna, where we're kind of applauding the fact that they are digging deeper into the RSV market. Yes. And not only that, but within the press release, they give an update on their pipelines. They have common flu vaccines that they're working on, new COVID vaccines, RSV, and some other things. So the company is not standing still, but it does in this, you know, in the biotechnology realm, you know, investments take a long time, right? You have to go through trials, you know, things like that. So they have some phase three trials underway and as well as going into 2015.

So there's revenue light at the end of some of those tunnels, but it's not helping today. So you have to be patient. The thing that is helping this company right now is they have an absolute war chest of cash on their balance sheet. So they will be able to get through this period because of the fact that they've been smart in terms of how they've been allocating their capital, protecting their treasury, things like that. All right, bringing us home, also being bit by the guidance bug today, ShakeShack, shares of the restaurant town around 8% today as we tape. David, it seems like the market is much more focused about what the company is saying for 2025 and less what they are saying about the long-term outlook for the business year.

Yes. So the big headline is new CEO has come in and looked at the data, and magically, we think we can open up 1,500 restaurants. So, to put that in perspective in 2015 at the time of the IPO, they said, we think we can do 450 restaurants. These are company-owned restaurants. Today, at the end of fiscal year, 2024, they have 329 restaurants, so they are well on their way to their 450 number.

But now we're going to almost 5x this thing. And that was, you know, that's the message. This CEO believes that there's plenty of market available. to open up restaurants. ShakeShack has kind of been a little bit more, we'll call them almost destination fast casual, like, hey, this is an experience. Like we're going to go to a big one. They're looking at open up smaller footprints, which can be good. The less capital, right? The more throughput you get, the more benefit you get from scale. Actually, I don't think 1500 is a ridiculous number. I think they can, you know, because they're only, they're not, they're not spread

throughout the United States just yet. They're pretty geographically regionally centric. But to, to, you know, But to the point that you made, the guidance for 2025 on the revenue line pretty much in line with what analysts were expecting. But the one note that the one thing that popped out to me was a restaurant level margins ended the year at 22.7 and they said basically, we think we're going to get to 22 for the whole year of 2025. Some of that can be because of restaurant openings. They don't come.

You don't open a restaurant with full margins. That doesn't happen. And so you get a little bit of a penalty there. But the market, you know, after having the business performing well in 2024, I think the market was sort of expecting a little bit more for 2025. But that's what happens in this business. Yeah. When you perform well, as the stock did in 2024, I think they're up about 75%.

They expect you to continue to perform well. And, you know, the company's right around all-time highs. So maybe not surprising that the market sold off a little bit on some of the near-term stuff. I want to dig into that long-term tar. they have of 1,500 stores because it hits me a little bit as one of those TAM numbers that you will see from a software as a service company when they are debuting and trying, you know, maybe in their roadshow trying to build up excitement about the opportunity, because they are so far away from that number right now.

And so, I don't know, as an investor trying to model out a business like this, do you put any discount on that and say, I'm not building that into anything over the next. 10 years. I'm going to take a number that's a little bit less and assume that that's actually what we're working with here. So there's actually a couple of different ways you can approach it. One, you could take that number and see how many stores would you have to open up each year in order to get that? How much would it, how much capital would it require? And then compare that to what they've done in the past, right? If over 10 years opening up 1,200 stores, right, can I open up 120 stores a year?

Like what is it, what's it going to take to do that, right? And then as an analyst, and Ask yourself, does it make sense? Is it going to take long? Could it take longer? What's the impact of if it took 15 years to get there as opposed to 10? How much capital am I going to need? Can I fund that from the cash flow that I generate from the current restaurants that are here? Or am I going to have to hit the debt markets?

Or am I going to have to hit the equity markets for more capital to fund this? So I don't necessarily, and as someone who looks at the SaaS space, since you brought it up, I actually don't mind like these mind-blowing numbers, what seem like mind-blowing numbers. But as the analysts, what I'm trying to do is grounded in reality. Can you even do this? And then so what happens if they only get to 1,200? What's priced into the stock today versus what could it be at different scenarios? A thousand, 1,000 more, 1,500 more.

That's how I would approach it and basically ask myself, Is the risk reward based on what's built into the stock price today and what we see from the incremental performance associated with opening all those restaurants? Is it worth the risk? David, we'll compare notes and spreadsheets some time over a burger. Thanks for joining me today. Thank you, doing. Coming up on the show, when an insider at an undervalued company starts buying a bunch of

stock, should you follow suit? Up next, Senior Fool analyst Alicia Alfieri, joined my colleague Ricky Mulvey, for a look at Progeny, Fertility Benefits Manager with a notable amount of recent insider activity. So Alicia, one green flag for a stock is when you see leaders buying a lot of shares on the open market. And that's exactly what's happening with the company we're about to talk about. And it's what drew my eye to progeny. Before we get to this signal that I think long-term investors should pay attention to, I want to talk about the business of progeny, one you cover. It's a network of fertility specialists. So as we think about our friend Tim Byers, when he says, does this company

we solve a migraine level problem. This is certainly a migraine level problem, but it's kind of a, anytime you're talking about networks and healthcare, it gets complicated. So talk to me about the business of progeny and what's the value drivers for this company? Yeah, well, first, it is absolutely a migraine level problem that we're talking about. So according to the CDC, one in five married women in the U.S. struggle with infertility. And it's also an expensive problem. For example, depending on where you live, a single round of IVF could cost $10,000 to $20,000 and that may not include any medication costs. Prior to companies like progeny, if infertility was covered by health insurance, it could be

restrictive with lifetime dollar maximums and things like mandated step therapy. And what that means is that regardless of individual issues, a patient would have to start with a less costly option before moving on to the next treatment, and that can burn up time and money and make an already stressful process needlessly worse. But so for progeny, essentially, they're a health benefit that employers provide as part of their overall benefits package. Think of it like a super customer-focused health benefit, including drug coverage for fertility and family building. And Progeny negotiates contracts with providers for fertility treatments, then bundles those services and offers them to large self-insured companies in the U.S. And the drivers here are winning

over more companies to use their services. So the company earns a little bit of revenue on the population basis or how many people it covers, regardless if they use the service. And then most of progeny's revenue comes from when a patient uses the benefit. So this utilization component is what drives the bulk of their revenues. So it's basically a different network for a type of health insurance that's not normally covered by the health insurance you get through work. So if you're a big tech company and you want to offer fertility family benefits to your employees, you do that by partnering with a company like progeny. There's one other that I found, but this is one that's working with Microsoft, Google, Amazon had them and then cut them. We can get into that. But basically, it seems like it's an extra benefit for these big, big companies to help with family support. That's the relationship with employers. What's the relationship then with progeny in the big health insurance companies?

Yeah. So several companies offer fertility benefits, most of which throw away the old mandated treatment steps that I talked about earlier. But not every benefit solution is. integrates with insurance providers. And they either require their own separate HSA or are provided on an after-tax basis. And progenies benefit solution integrates with insurance carriers. And so pretty much what that means is that it's part of your overall health plan. And then when patients go and use these fertility service, it isn't treated any differently than if you were to go to a doctor for any other health issue. So that includes, you know, things like co-pays and deductibles and out-of-pocket maximums. The other side of this business is menopause support. What's that part of the business do? Menopause is something that we don't really talk a lot about, and yet its symptoms can

disrupt a patient's life, causing some to miss work or cut back on their working schedule. And that means it can impact companies as well. And so what Progeny is looking to do here is apply its concierge-style customer service that has really helped its fertility patients and apply it to a menopause solution. So through this new service, patients connect with specialized care providers. They get a personalized treatment, gain access to education, and like the fertility patients, they have access to a patient care advocate as well. Let's get into the business and some of the stock talk with it. I know one concern you've had with Progeny in the past is it's shared based compensation, which happens in a lot of high growth tech companies. It's how you want to

retain talent there, but it's something that stock investors want to keep an eye on. So they're not unique in offering that benefit to their employees. But one thing I have noticed over the past year is that the company has actually reduced its share count. So when you're looking at this company now in 2025, is this a company starting to find religion on capital allocation? It's possible. And to be fair, I can get kind of salty when I see things like share-based. compensation, or as some people call it, if you want to be salty, equity cookies. And you're right. I like equity cookies.

Who doesn't like cookies? And you're right. This tends to be a thing that tech or younger companies do in the beginning. And over time, I'd like to see that stock-based compensation decline. And it looks to be what's starting to happen at progeny. So in one of their investor presentations, the company reported that they had a high of about 13% of their revenues in 2022 were stock-based compensation. But 2024 is expected to be less than that. And according to this forecast in their presentation, the company expects stock-based comp to

fall to 6% of revenues by the end of 2027. So that would be great, but I would actually want to see that happen before giving them credit for the change and how they deal with their capital. but it is a good early sign that the buybacks that the company has instituted this year have resulted in a decrease in share count. So often when you have stock-based compensation, it can be frustrating when companies use share buybacks to make sure their share count doesn't get too crazy as a result, right? And it can limit share count growth for sure. But are regular shareholders really benefiting from that? It doesn't feel like it. anytime you're looking at a rule breaker type company, you're looking at high growth prospects,

but also a higher chance for failure. So anytime a retail investor is playing this game, Alicia, this is one where your expectations are that you may strike out or you may hit a home run. For a lot of progeny investors, this has been more of a strikeout in the market has very much soured on progeny lately. We're going to get hopefully into some catalysts that could turn it around. but to set the table for that question, why is the market soured on progeny? Recently, the market soured on progeny, I believe for two reasons. So one part of it is that while Progeny has said in a lot of their filings that they've retained the majority of its company customers, this year Progeny lost a large client.

Progeny didn't explain who that customer was, and there's a lot of conjecture there, but the worry was that the loss of this client could potentially impact the number of patients under its care. But Progeny also reported that its sales season added more than a million new covered potential patients for the fourth year in a row. So that is a positive. The other issue is that there has been some weirdness in terms of patients using progeny benefits. So in the last quarter, patient experiences aren't really consistent with the long-term trends that Progeny has seen in the past. So, for example, it's taking patients longer to get through their treatment cycles, and as a result, they use less treatments in the quarter. The company saw some potential signs in the early fourth quarter that this could be just a blip, but they're erring on the side of caution.

And that is probably wise, but it doesn't necessarily make investors feel great about where the company is. So let's get into the buybacks. Alicia, if you're trying to do something at work, and you're, you don't want a ton of people to notice, when would you do something at work and you don't want a ton of people to notice? Well, Ricky, this is a strange question, but I'm assuming we're talking about the buybacks and company dealings. And I would say, you know, it's a strange question.

It is a strange question. If you're trying to do something pretty low fee at work, how about December 23rd and December 26, when everyone's out for the holidays, the news cycle slowing down? for a little bit. And those are the dates that the current CEO and former CEO, CEO Peter Inefsky and executive chairman David Schlanger collectively together picked up about $5 million worth of stock on the open market. That's getting into supercar money. That is a little bit of belief in the company right there, Alicia. So this stock's been beaten up over the past couple of years. This is something I really like to see for a company that's getting beaten up is when

is when executives are putting enough money into their company to hopefully make them sweat a little bit. So what do you make of this? What kind of catalysts could they be watching here? Yeah. Well, and I would say I'm not sure if they were looking to avoid any kind of awareness of other people. It is certainly interesting that it was just before the end of the year. But I think that some catalysts that we could look for for the fourth quarter and certainly next year would be improvements or a return to the historical trend for patient treatment journeys. So that should help with revenues and profitability. And also, I think what could be really interesting to watch is patients signing up and using

the new services of maternity and menopause so that we could see if there are early signs of success for these new services and how they might impact the business. So Alicia, especially when you're looking at these smaller cap companies, or I guess how about any rule breaker type company. When are insider buys meaningful to you? Is insider activity something that's something you're checking? Yeah. And I would say it's more than just rule breaker companies. I'd say first that insider activity, insider buys in particular, they matter more to me than sells, which can happen for any number of reasons, including a need for diversification or who knows, even paying for a child's education. Open market buys are interesting to me, especially when it's

those in leadership like CEOs or the executive chair of the board. Also, if the CFO is buying shares, which is not the case here, but I think that could be an interesting sign. I think that along with the company repurchasing shares could hint that leadership believes that progeny shares are at an attractive price, potentially undervalued, which is meaningful to me. But that's not the end of the exercise. I also like to dig in for myself and see what I think can happen with the company and where I think the growth can go from here. Good place to end it. Alicia O'Reary, thanks for being here. Appreciate your time and your insight. Thanks. 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

Snow Pirates sell anything based solely on what you hear. All personal finance content follows Montlyfool editorial standards and is not approved by advertisers. The Motley Fool only picks products. It personally recommended friends like you. For David Meyer, Alicia Alfieri and Ricky Molli, I'm Dylan Lewis. We'll be back tomorrow.