Motley Fool Money - Earnings Buzzwords: AI and Shrink

Episode Date: August 25, 2023

Nvidia earnings soaked up a lot of headlines, but they’re not the only one making moves in AI.  (00:21) Andy Cross and Jason Moser discuss: - The epic hype around Nvidia’s earnings release, and how AI is playing into the ambitions for other companies in tech like Workday.  - Why “shrink” is the buzzword of the season in retail and how investors should be looking at it. - How Williams-Sonoma and Ulta bucked tough trends in retail to put up strong numbers, and the numbers behind updates from Intuit and Autodesk.  (19:11) Olivier Pomel, CEO of DataDog, talks through the company’s recent results, the promising signs he’s seeing in customer spend, and why he thinks his company still has a 10X opportunity in front of it. (33:52) Andy and Jason break down two stocks on their radar: Nike and Chewy. Stocks discussed: NVDA, WDAY, WSM, ADSK, ULTA, INTU, DLTR, FL, NKE, CHWY Host: Dylan Lewis Guest: Jason Moser, Tim Beyers, Olivier Pomel, Tim Beyers Engineers: Dan Boyd, Kyle Carruthers Learn more about your ad choices. Visit megaphone.fm/adchoices

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The best thing. Cool global headquarters. This is Motley Fool Money Radio show. I'm Dylan Lewis. Joining me in studio, Motley Fool senior analysts, Andy Cross and Jason Moser. Great to have you both here, guys. Hey, Deli. We've got retailers doing well and not so well. A CEO's take on how listening to your customers can help shape your offerings. And of course, stocks on our radar. But we're kicking off today with two buzzwords from the earning season, AI and shrink. We're going to start with AI, and we're going to start with Nvidia. Jason, this is basically the company that could change its name to the AI supply company,

and no one would think twice. Safe to say AI is not going anywhere, and this business continues to benefit from it? I think that's a safe assumption, yes. Let's back up a little bit of forgetting that Nvidia is a great company, taking advantage of what is clearly a very large market opportunity in AI. The level of the anticipation going into this release, to me, it's honestly, it's a red flag, right? I mean, this thing is taking on a life of its own. I'm not referring to the fundamentals of this business.

Okay, don't get me wrong. I'm referring to the level of enthusiasm, the sentiment, right? I mean, the perspective here that there's Nvidia and then there's the rest of the market. And so I would encourage investors at least be careful. Let's keep our heads screwed on straight here, right? We've had a lot of valuation lessons reiterated to us over the past couple of years. No matter how you slice it, I mean, this stock is screaming. I mean, 35 times trailing sales, 115 times trailing earnings.

The stock is up better than 220% just this year alone. Now, that's for good reason, and we'll get into that now. Revenue better than doubled from a year ago, non-gap earnings per share, up 430%. Yes, 430% from a year ago. I understand the enthusiasm, right? But, you know, I mean, you also look and think, well, this is a business that's come off some recent challenges. I mean, it wasn't that long ago.

crypto was supposed to be the really big tale when taking this thing. And then all of a sudden, that just kind of disappeared. So I would just encourage investors to sort of keep their heads about them in this case. Now, the AI story is real. And that's not something that's going away. And management called this out in the call. I think with Nvidia today, really the big focus of this business right now, it's the data center opportunity.

And the world has something along the lines of $100 trillion in data centers, which are ultimately in this process of transitioning into accelerated computing ingenerative AI. And so the investment that's going into this data center opportunity on an annual basis, management estimates somewhere in the neighborhood of a quarter of a trillion dollars of capital spent each year. So, I mean, Nvidia is going to get their share of that. It also won't last forever, right? So just keep that in mind. The market, being a forward-looking mechanism,

is looking at all of these numbers and looking at what this company has done to date and giving it a lot of credit, you just got to kind of look forward and see how long does this opportunity continue and what did these growth rates look like a year from now? Well, I think, Jason, you hit it on the head with the data center, and that is where the massive growth is right now. I think their data set of revenues maybe doubled. I mean, it was just extensive. And the other areas were very nice growth, but much, much smaller.

So the data center investment, as NVIDIA builds out, not just on the graphics processing units, just the chips, but the entire stack to support the data with generative AI. with all the computing power required. I mean, you look at the clients they continue to reference in their call. You're talking AWS, Google Cloud, Meta, Microsoft, Oracle. Snowflake is a big client. They just partnered with Snowflake for a new deal to help Snowflake make sense of all of its data

that they are collecting for their clients to be able to make sense of that as they are looking to analyze all that data. So it is just fascinating. And I can't remember another company in recent memory that the investment community has been so excited to understand and talk about because of this massive growth opportunity that we're seeing in generative AI. Yeah, you said Data Center. I mean, just to put a bow on that. I mean, data, you know, I like to see how often things are mentioned, right? And for the longest time, it's been AI.

I mean, Data Center itself was mentioned 50 times in this call, right? We're talking about record revenue of better than $10 billion. It was up, like you said, AC, up 141% sequentially up. 171% from a year ago. So clearly, they're light in the world on fire here. Just try to figure out how long does this continue, because at some point, it starts to slow down. Andy, we're going to take the challenge here from Jason and have a conversation about AI that does not include Nvidia. We're going to talk about another company. And I think it's important to kind of look at, we see these headlines related to Nvidia and AI. Let's actually look

at how businesses are implementing AI in their offerings and talking about the positioning there. You dug into the results from Workday. It seemed like a good company to profile for that. Well, Workday is actually a really interesting company to talk about, not just because of what they are serving in the human resources and the financial area, software provider to help companies make sense of their HR financial operations, but also, like you said, in the AI. So just very quickly, the quarter for Workday is a $60 billion market cap

that provides the human resources and the financial functions for half the Fortune 500, for example. So very large clients. Really solid quarter subscription revenue is up almost 19%. The revenue backlog was up almost 33%. And operating margins, real operating margins, so you add in all that stock-based compensation was at 2%, but that was versus a loss of a year ago. So they are making progress on the profit curve. But what's really interesting, like you said, Dylan, is the focus on AI. And they did talk about this throughout the call, highlighting workday's investments in AI and machine learning that they've been doing since 2014. Their software touches 65 million users globally. So take their clients and all the people who touch and use that software, 65 million users who

have that high personal touch interactions that are so important for a company like Workday, and AI and machine learning are really benefiting from that. The company believes that AI will be central to changing the way that Workday's clients interact with their software. Again, you're talking about HR and financial functions. So a very personal function for an employee base. They process 50 million machine learning inferences a day, and that's up 60% from a year ago. So they're collecting all this information,

trying to make sense of it, put it into their systems and build better tools for their clients. And clearly right now it is starting to work, and I'm excited about work today because it's interesting as it is not just being able to grow revenues, but actually be able to grow profits. And finally, I talked about that, the ability for things like,

generative AI to help improve their operating performance and eventually help with their operating margins down the line. All right. Over to buzzword number two, and this is really the story of shrink. It continues to grow. This week, we saw disappointing results from several retailers, Dollar Tree, Foot Locker, Dix, and Jason, one word just kept coming up. Shrink.

It is a real problem, although I think it's also a real excuse in some cases, right? I think for some retailers, it's a bit more relevant than others. I mean, looking at something like a Dollar Tree, for example, we were just going through those results earlier. Talk about things that are mentioned in Call, right? The word shrink mentioned 26 times in Dollar Tree's calling it. And I would argue, I mean, Dollar Tree, that's going to be, I think that's a business that's going to be difficult to really monitor this stuff. Because you have these shelves full of thousands upon thousands of skews, just a lot of stuff in those stores. It's just difficult to keep track of all that stuff.

But, I mean, they did quantify this in that shrink is continuing to restrict their margins. They said by about 75 to 80 basis points on a year-over-year basis. Now, they're taking what they call the appropriate actions to try to combat that. They didn't really dig into what those actions were. And I think that is a testament to really how tough of a problem this is to solve. But I also think it'll be no worthy to hear this perspective a year from now, because if you think about it, shrink is really kind of a trailing indicator. It's telling us what happened.

And so as we've seen companies like Dollar Tree, they're through about 75% of their inventory for the year. So as they finish that count, and we get a better understanding of how big of a force that is, on their margins. A year from now, we'll see if those appropriate actions have actually helped out at all. Andy, going over to Jason's metric of the day, number of times things are mentioned in earnings call. I looked over at Foot Locker nine times on the call. Shrink came up. Same story there? Yeah, actually, I don't think it is. I mean, shrink definitely is impacting their business, but really they are facing some very, very stiff headwinds on the consumer.

Their revenues were down almost 10%. Now, that was an improvement from a drop of revenues from the first quarter, this was in the second quarter, in the first quarter that fell 11.4%, but still same store sales down more than 9%. That was worse than they saw in the first quarter. Gross margins fell by 460 basis points, that's 4.6%. Because of markdowns and occupancies cost. So they have a lot of inventory they've been trying to move out the door because their consumers are just not spending as much. And that's the challenge that Foot Locker is facing right now. Their consumers are just not spending. They had to cut their EPS, their earnings, their earnings, earnings per share guidance to $1.30 to $1.50 versus prior guidance of $2.25 to just earlier this year.

So they are looking at their consumer base. They are looking at the challenges the consumers are going to have with not just the macro factors like what's going to happen when so many consumers have to start paying back student loans later this fall, as we know. What has happened with while employment numbers and workforces are still very strong, what has happened with the higher interest rates, how all these factors are impacting a company like Foot Locker. And furthermore, Nike is almost two-thirds of their sales. And as we know, Nike is moving more and more to direct a consumer. And that's having an impact. So a lot of challenges for Foot Locker and a very difficult quarter they faced. All right. Coming up after the break, we've got retailers putting

up some better numbers. Stay right here. This is Motley Full Money. Welcome back to Motley Full Money. I'm Dylan Lewis here in studio with Andy Cross and Jason Moser. We're going to stick with the retail conversation and continue the earnings parade with a look at Ulta, Jason, cosmetics company raised full your guidance and the top and bottom line for them. What's going on right for them right now? Yeah, I mean, this encouraging report, I think it's one that shines a bit of a light on the reasons why we like this cosmetics and beauty market. I mean, it's really, it's a resilient one.

Sales, $2.5 billion was up from $2.3 billion a year ago with comps up 8% and earnings per share up 5.5%. They did see transactions up 9%. So, clearly, people are shopping. while they saw the average ticket just fall 1%. So really just, not much really to write home about there. I think they're able to maintain some pricing there. Gross margin fell 110 basis points.

Most of that really was just due to, unfortunately, they did mention the word shrink, not nearly as much, but I think it was more about higher supply chain costs in this case. They did end up raising their outlook for the fiscal year. I think an interesting dynamic with ALTA, you know, you look at their partnership with Target. It's something that probably flies under the radar, but they had that store within a store partnership with Target now. They opened 62 of those stores for the quarter. They have 421 of those little store within store now. And that's on top of the Alta retail locations, which is above 1,300. So just an interesting opportunity there for them.

And I think one of the things they're really focused on with that target opportunity is their loyalty program. Not really sure fully of the economics in regard to that actual agreement there. But one thing we do know is it does sign up more ALTA reward program members, and they now have 41.7 million active members that was up 9% from a year ago. And just a fascinating point here, I discovered, 95%. These loyalty members drive 95% of ALTA's revenue, so you can clearly see the value that they present. Sticking with retail, shares of William Sonoma up 11% after earnings this week, revenue and earnings down. year, but the market seemed to really like the margin picture that the company was putting together, Jason. Yeah, you know, we did talk a little bit earlier in the week about retail and how it can be a

difficult space for buy-to-hold-style investing as things change so much in this world. I think William Sonoma is the one that stands out where buy-to-hold can work, along with Alta. But we look at, I mean, William Sonoma's Stock Advisor, a longtime stock advisor recommendation. It's a tremendous returner for a member. So just a company that keeps on keeping on. I mean, you look at these results, not the greatest in the world. Compt revenue down about 12%. Gross margins saw some compression there to the tune of about

280 basis points. A lot of that was due to higher shipping and freight costs. And while they did ratchet down expectations on the top line for the year, they're able to ratchet up a little bit on the operating margin side, which basically means it's a wash for earnings guidance, right? Earnings still ought to come in in line. And I think that when you present that narrative to the market, that top line is a little bit of a downer. But if the company's going to be as profitable or even perhaps more, I think that's the enthusiasm we saw from the market. And the cash flow line, too, as well, Jason. The inventory and those costs have been really a hammering William Sonoma. I think we'll start to subside over the next, certainly

in the next year or so. And that's going to help on their free cash flow line. It's been a company that pays a nice dividend, buys back stock, makes smart investments, Laura Alber and their team, I think are really underappreciated managers in their retail space. And William Sonoma continues to impress. Yeah, this isn't a company I'm super familiar with Andy, but just in prepping for the show and getting my research together, I didn't realize the e-commerce presence they had and the push that they are making into college and dorm wares and just what that might mean for this business. Yeah, it's really interesting, Dylan, because over the last, say, five years, they made a broad push to go more and more into e-commerce. Now, they still have a retail footprint,

but they're managing that very well, and they really build out those, the brands they have and expanding beyond just the core of William Snowmore or Pottery Barn into other lines, especially, as you said, into younger consumers like those who are in college. Summertime might not be when people are generally thinking about taxes, but Intuit does a lot of other things, and I think shareholders probably appreciated seeing a 2% bump after the company reported fiscal Q4 earnings, Andy. What did you see in the results? Yeah, a really solid quarter from Intuit and strength in the business to business. That's really on the small business, self-employed, quickbooks online, online services,

is that area, a little weakness on the new credit card, credit karma business they bought maybe two or three years ago. That was actually down 11% versus growth of 21% in the small business and self-employed, which, by the way, saw strength there across the online system that they are continuing to add in the features like payment volume. Payment volume was actually up 22% in that small business area. So strength in the B-to-B sphere, Dylan, and a little bit weakness on the consumer side. Now, they're very excited about the credit karma business. I think that can lead to some really strong growth long term. But that was weak this quarter. They're expecting kind of further weakness ahead. Yet still, you think about the sales overall up 12 percent, operating income

up 45 percent, adjusted EPS for the quarter, up 50 percent. They do have two-thirds of their debt maturing over the next 15 months or so. So it'll be interesting to see how they refinance that debt and what it cost them to do so. You mentioned the credit karma asset. And is the weakness that we're seeing there part of the broader interest rate story? Yeah, it's part of the broader interest rate. So it's weakness in loans and its strength in credit cards. They are seeing more and more interest in credit cards. Unfortunately, as we are starting to see, a little bit weakness in credit card payments,

and some of the banks are starting to set aside some of those reserves, some of those credit cards. Losing a little bit of talent, too, aren't they, Andy? Intuit. They are. They are. They have PayPal signed their new CEO, who came from Intuit, ran a very nice business with Intuit. So, while that's an advantage of PayPal, it is a little bit of a loss to Intuit, I think.

All right, we'll round out the earnings talk with a look at Autodesk, shares up 5% this week. This is kind of one of those lesser-known companies. I know our fool analysts follow it and really enjoy looking at the company following it. This is also maybe a name that comes up in AI conversations, Andy? Yeah, a little bit. It's a $45 billion company, so it's not small, and they are the leader in providing software to architectures, engineer construction firms. That's a big part of their business. They do AutoCAD. They have lots of different lines. They actually have a little media business, too,

that provides 3D modeling to entertainment companies to help them build out some of their films and movies and television. So a really solid business. Their revenue for the quarter was up 9%. They saw a strength really pretty much across the board, AutoCAD up 9%. That architecture, engineering, construction, which the big part of their business was up 14 percent, manufacturing up 9 percent. Direct sales was up 18 percent. So that's not going through resellers. That's going directly to their customers. That was up 18 percent and now makes up 37 percent of their sales. So strength really across the board for Autodesk, their backlog of demand, their CEO said, is still very significant as the markets figure out the best way to adopt digital solutions to help build out what really

is a need for better architecture solutions when it comes to helping to build all kinds of things. And Autodesk touches all kinds of things. The free cash flow is a little bit lower this quarter and up to the rest of this fiscal year. But that will start to trough and start to improve in the next year or two. And that's what I'm really excited about when I look at Autodes, the free cash flow potential of this business. Is what we're seeing with the financial picture there, Andy, somewhat a reflection of this business transitioning from the licensed model of software to the as-a-service model of software? Absolutely, Dylan.

So they're moving from upfront payments and much more towards subscription, both yearly and over a couple years. So that means the recognized revenue will get recognized over years as opposed to upfront, and that's impacting their near-term cash flows. But that will really start to normalize not so much this coming quarter or the next quarter, but probably a year out. And that's what I think the free cash flow potential and viability of auto desks really starts showing.

Andy Cross, Jason Moser, fellows, we'll see you guys a little bit later in the show. Coming up, we've got the CEO of a company, our analysts love, talking through recent results and mistakes companies make when they only listen to their big customers. Welcome back to Motley Full Money. I'm Dylan Lewis. We're sticking with the earnings theme this week for our interview. Earlier this month, cloud monitoring and security companies, company Datadog reported its second quarter results, and when it did, it affirmed the reality that industry-wide, customer spend is still a bit tight. But if you take a step back, that budget

tightening looks more like a short-term hiccup than a long-term headwind. Last week, Motley Fool analyst Tim Byers caught up with Olivier Pamel, CEO of Datadog to talk through the company's recent results, the promising signs he's seeing in customer spend, and why he thinks his company still has a 10x opportunity in front of it. The last time we talked about Datadog, there was a lot of innovations that you were introducing, you did more of that again this past quarter, continuing a trend. I think we've seen from day to dog over the course of its public life and really throughout its history. But I wonder if we could just take it from the top, if you had to summarize where you are as a business today, maybe just thinking about the quarter, because growth maybe

has slowed a little bit. I don't think that surprises anybody, but how do you summarize where you are right now. Well, so we are the leader in observability and definitely around cloud workloads. We are establishing a footprint in security also in cloud workloads in addition to observability. And we're growing along with the broader trends of digital transformation and cloud migrations. I would say in the recent quarters, cloud migration has slowed a little bit, at least in the numbers after a few years of very rapid growth after the pandemic. But we think, you know, we're still in the early stages of a multi-years or even decades-long migration that's going to keep happening.

And our role today, our job, is to keep building the product to cover all of our customers' observability and security needs and keep getting our products, or our customers, spread of these products, basically. So we're heads down on that. Let's talk about large customers because there's, One of the things you've always tracked and you've been very good about this over time is the number of customers that generate high amounts of annual recurring revenue using Datadog. You reported at the 100K level and you also reported at the million dollar level.

It seems to me that the customers that grow into that million dollar tier, Olivier, are arguably the most important for thinking about the long-term value, the compounded value that data dog can generate. Am I thinking about that right? And if I'm not, can you help me think about how do you consider what are the things that you have to do in terms of serving customers generating value that creates real value for shareholders over a long period of time? Yes. So I would say it's right in part. And we definitely derive a lot of value from the, and we focus on customers that pay us a million dollar or more. And your largest customers today pay us in the tens of million of dollars a year.

But really, where the bulk of our revenue comes from is all customers that are above $100,000 a year. And that represents about 85% of our total revenue. And this is what I would say today and in the few years to come is really what's going to drive the growth of the company. It's the growth of these cohorts and scale of customers. And they grow with us as they move further into the cloud. So they move more of their architecture or infrastructure from legacy environment.

and on-premer environments into cloud. And also, they add up more of our products as we solve more of their problems. So they go from infascular monitoring to all of the observability, including logs and application performance monitoring, and then they add security, and then they add developer workflows and all the other things we can do for them. I would say, in the longer term, though,

we also have a very broad customer base in general. Unlike, the most companies in the space are either focused on a very low end or on the very high end, but nobody really covers the full spectrum drum like we do. Today, the revenue is really concentrated on the higher end and about the bottom half of our customers only represent a couple percent of our revenue. But, you know, as we keep adding more products and solving bigger products for our customers, the lower end of our customers becomes more important and more monetizable. You know, the issue you have when you have customers

that don't pay you a lot of money because they are small is that it's really hard, you know, to feed, go-to-market team to pay the customer acquisition costs on that, and then to pay the cost of serving the customers and giving them customer support. But as you solve a bigger problem, as you add products, you increase the amounts you can get from the smaller customers, and as a result, you make those more investable, and you can make them more of a vector of growth. So that's not the focus today, but that's definitely something that's in our future as we broaden the platform and we solve bigger problems for all of our customers. Let me see if I'm hearing you correctly here, Because what it sounds like is as you, one of the ways we should think about growth is that as

data dog compounds this number of use cases, like I have a library of problems. There's data dog that I can solve. And if I have a very large library of problems I can solve, then I have a long tail of ways that a customer who may be small but can come in to the data dog ecosystem and then grow with data dog over time. Is that, am I hearing you right? Exactly. That's the way to think about it.

Exactly. And in the short term, in midterm, even, we're talking about larger customers, so $100,000 or a million dollar or more. In the longer run, you know, every single customer, even the smaller ones, represents an interesting opportunity for us and the vector of future growth. We derive a lot of value, actually, from having this very broad customer base. You know, even today, if the majority of a revenue comes from our larger customers, we do take a lot of influence for the smaller customers in terms of keeping

the product simple and getting being deployed in a very wide variety of situations, you know, which gives us a network effect for the product in terms of who it works and the device configuration is going to support. I would also imagine that you may run into some situations where a use case that popped up at the lower end suddenly makes a lot of sense for a large customer that didn't realize they had that problem. Totally. And a lot of the newer technologies, next generation, technology.

technologies tend to start with the smaller customers, the newer companies and the smaller companies. That's the case, for example, today with a lot of the newer AI stuff. A lot of that is starting with brand new companies that are exploring and trying new things. Some of it is being adopted by larger enterprises, but it might take more time for that to crystallize and reach scale in those larger enterprises. So we definitely see a lot of value from having those two worlds meet in Datadog, the world of the smaller, newer companies and the world of the large, the large.

larger, more traditional, larger scale enterprises. Okay. Let me give you a question around this idea of how you're investing, not just in the go-to-market team, but just broadly. You're a company that rewards your employees with a lot of stock-based compensation. I get questions on this all the time from our members. and it was, SBC was 23% of revenue and the last quarter, it's grown a lot. So I know that this is something you're going to use in a way that I tend to think about it. I imagine you're using this as capital you are investing to recruit things like, you know, very talented engineers.

How should we think about the way that you think about stock-based compensation? And does this moderate over time? Do we like, where are you in the genesis of using stock-based compensation as part of your strategy to grow? Yes, it's a great question. The first thing I'd say is that there's actually not, there hasn't been a large change in the ratios or how much we can compensate with stock-based comp. One change is more optical and accounting driven, you know, because we used to, before we took the company public, who are granting stock options to employees. When we went public, we stopped doing that

and we started granting RSUs instead. The stock options don't enter the gap numbers the same way as the RSU. So the ramp up you've seen was largely the RSU is ramping up and replacing these stock options. We are, by design, compensating employees with equity. The reason for that is that we see ourselves still at the very beginning of a long expansion cycle.

Like, we're internally, we're going after the next 10x in the size of the company. in the scope we can have for our customers. And as a result, we want everybody to be aligned on the long-term success of the company. We do it in a way where the significance of the equity stake goes up with the seniority of the role in the company. But everyone at Datadog gets equity and everyone is an owner.

I think it's important, culturally, it's very important to us. I want to key on something you just said there. So you think there is, if I heard you, right, this is an opportunity, it's early enough that you see There's a 10x opportunity here, meaning that you think the available, addressable market for you is at least 10x over where you are today. Is that right? Yes. I hear you right.

Yes. And I think there's a 5x or 10x on cloud migration alone, because we're far from being done with it. And that trend is going to keep going on. And we think AI is only going to accelerate that trend. If you want to adopt AI, you need to be digital. that's given and you probably need to be in the cloud because no how else are you going to do it anyway. So I think it's going to accelerate all that. And then there is a more of an opportunity if we can broaden to other categories. If we can fully establish ourselves as a leader in security in

addition to observability. And then there's a few more potential longer-term opportunities around IT automation, developer workflows is getting closer to the developers. So there's a number of things we can do there to get to the 10x. And that's what we're looking for. We're looking for. for internally, and that's also why we want employees to align on that in the long run. That makes sense. This is really interesting. I wonder, I mean, this is a very short-term question, and you kind of addressed this during the earnings call, but I thought I'd just see if there's anything I missed here. What I thought I heard you say during the earnings call is there are some optimizations still happening. There are some headwinds that every cloud company has faced

here. What is it that gets you out of those headwinds? And do you see that happening 18 months, 24 months? Like, is there a reacceleration that you think you can see? What are you doing to kind of get beyond some of these optimizations that may be crimping the growth rate in the short term? Yeah. So here's the thing. We don't really control it, right? Because this is driven by a lot of the macro background, things that we don't control, is driven also by a change in a posture from a lot of investors to a lot of newer companies. So if you look at our customer base,

the companies that have been optimizing the earliest and the most where the digital native companies, so I would say more recent company, more tech forward companies, that were completely into the cloud. So substantially all of their IT span is cloud span. for whom IT spend is a big part of their revenue, and for a large fraction of them, they were actually unprofitable or not very profitable companies.

As you well know, these companies were not viewed as favorably by investors over the past years. So they had to reorganize pretty drastically their finances, and one of the big opportunities for savings was the cloud. And even before us, before observability, was their cloud provider. You have to remember that if a customer pays us a million dollars a year, they pay $10 million or $20 million a year to their cloud provider. But we are attached to that cloud consumption. So we don't really control it.

That being said, when we look at those cohort of customers who started optimizing and who are at risk, we feel good now that they're in a much better place. And we know that because we see those customers now commit with us for longer periods of times in the future. and at a level of commitment that is above their current consumption, meaning that instead of projecting themselves towards further optimization, they project themselves towards growth in cloud environments again. So we feel good about those. Now, this is not the only cohort. There's still a number of pieces in the area in the macro environment.

I mean, every other day there's a new piece of economic data that falls and reaches falls in markets a little bit. So it's impossible for us to say whether we see all of that come to an end, you know, quarter, two quarters, three quarters, we can't tell. And if you look at the comments or the commentary in the earnings calls from the cloud providers, whether it's Microsoft or Amazon or Google, they also don't really know. I mean, they think also the market is reaching a rough off right now, but they can't know for sure. So what we know is that while customers optimize or what the largest, earliest customers

optimize, the slowing of cloud migration is a bit of a headwin for us. But we also know that as that optimization subsides, the cloud migration and digital transformation are going to become a tail win again, which has been true through 95% of the history of our business. If you're sweating what to cut as you optimize spend, one thing that might ease your mind is knowing that Motleyful Money is available for free daily as a podcast and weekly here on the radio. You can get our full archive at podcast.com or where to wherever you listen to podcasts. Coming up after the break, Jason Moser and Andy Cross return with a couple stocks on their radar. Stay right here. You're listening to Motley Fool Money.

As always, people on the program may have interests in the stock 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, joined again by Andy Cross and Jason Moser. We've got stocks on our radar, but first, a story to round out the show. Subway is going to be taken private by Roark Capital in an estimated $10 billion deal, ending the company's long run as a family-owned business. Jason, if I give you $10 billion, which company are you taking private in the restaurant industry? Dylan, I'm not going to lie, I've got a Joey Tribioni-esque love for sandwiches.

I love them. One that flies under the radar for a lot of folks. A.C., I know you know what I'm talking about. Ellen, you may not. Schlotsky's Deli. I grew up with a Schlottes back down in Charleston, South Carolina. This is one. There's only like 340 locations nationwide from what I can see.

I would buy that thing. I would rejuvenate it. I would spread that thing far and wide. Because that is a delicious sandwich, delicious. Just the bread they use for them. It's one that just don't think gets enough credit. in today's sandwich-driven world. Andy, it sounds like Jason's going Passion Project.

Where are you going with $10 billion? I like the doghouse hot dog chain. If you guys, there's one downtown Silver Spring where I live, and you can go there and get all kinds of different kinds of hot dogs. They have beers on tap and they have televisions. And I like the doghouse. I don't know who owns it. But I find myself when I just want a good hot dog, that's a place I go.

It's a good local shoutout. We appreciate it. All right. Over to Stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question. Andy, you're up first. What are you looking at this week? Dan, I'm going with Nike.

The stocks at 98 is down 18% year-a-day, $150 billion in market cap, has a lovely balance sheet, almost $11 billion in cash versus about $9 billion in debt. The stock really has struggled as you're thinking about all the challenges that consumers are having. We talked about the retail challenges. The stock has fallen almost every day for the past two weeks, the trend that I don't think that's seen in a long time concerns over slowing consumer growth. They're direct-to-consumer strategy that they're not. They really want to push towards more than 60% of sales versus about 44.

Now, maybe that's not having as much success as they originally thought. China is about 14% of sales. Their gross and their operating margins have fallen by more than 200 basis points. So a lot of challenges that Nike's facing, but when you think about leading brands, you think about very solid businesses, you think about global opportunities. Digital sales now make up more than a quarter of total sales. Nike Direct, I mentioned how important that is for them as they are kind of bypassing. some retailers. Price earnings about 30 times trailing, less than 25 times forward sales.

Really, one of the best companies in the retail space, one of the best brands. And I think Nike could be a buying opportunity here. Dan, a question about the Greek goddess of victory. So Nike, a little-known company, Nike, of course. Andy, would you say that it's in its value play era right now? Well, it's moving in that direction with the price. I wouldn't say it's quite there yet, but definitely one of those growth at a reasonable price. levels because, Dan, the year is not going to be great for Nike, but I think over the next two to three years, you're going to see it rebound. Jason, what's on your radar this week?

Woof-woof, chewy earnings are out on Wednesday, ticker C-H-W-Y. Just to look back at last quarter, this is a business. They benefited clearly over the last several years for obvious reasons. Revenue last quarter, $2.8 billion was up almost 15%, with net sales per active customer of 14.8% as well. margins maintaining their composure there. I think a lot of that just has to do with the fact that this is such a digital-centric business, right? I mean, it is something that as they grow, they should continue to be able to scale that.

One of the more attractive parts of the business is the auto ship, right? You'd kind of set it and forget it. As a guy with three dogs and a cat at home, that auto ship is a lifesaver, because that stuff just shows up on my front porch as if out of nowhere every couple of weeks. auto ship sales grew 18.6 percent, represented 75 percent of sales for the quarter. So I think that's something they'll continue to benefit from. And they ended the quarter with 20.4 million active customers. Now, that was actually down incrementally from a year ago, and I think that really is something

to keep an eye on with this business. The growth in active customers, you know, it's worth remembering they ended 2019 with 13.5 million actives. So they really brought a lot in over the last several years. And I understand why. You kind of wonder how far that can go past this 20.4 that they reported last quarter. Dan, you're a cat man. Question about Chewy?

Jason, you only have three dogs? Because when you record at home, it sounds like you've got about 100. They're very loud dogs. They're just three, but they are very loud. All right, Dan, which company's going on your watch list? I like a big brand with tempting valuation, so I'm going to go Nike. All right. Put it on the board.

Andy Cross, Jason Moser. Guys, thanks for being here. Thanks, Dylan. That's going to do it for this week's Motley Full Money Radio Show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening. We'll see you next time.