Motley Fool Money - “Good Discipline” From IPOs and Investors

Episode Date: September 20, 2023

There’s plenty to learn from the Instacart and Klaviyo IPOs, even if you’re staying away from the stocks themselves.  (00:21) Tim Beyers and Dylan Lewis discuss: - The market’s reaction to Instacart’s IPO and whether the company can return to its lofty private valuations. - An under-the-radar IPO this week – Klaviyo, and why it’s worth studying to understand the data relationships between businesses and their customers.  (20:39) Deidre Woollard gets the inside scoop on peak performance and corporate training from consultant and author Greg Harden.  You can grab your copy of 5 Stocks Under $49 for free and Fool.com/Report. Companies discussed: CART, ARM, NDAQ, KVYO, BRZE Host: Dylan Lewis Guests: Tim Beyers, Deidre Woollard, Greg Harden Engineers: Dan Boyd, Kyle Carruthers  Learn more about your ad choices. Visit megaphone.fm/adchoices

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Today, we're looking at two IPOs, one you know, and one you don't. Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motleyful analyst, Tim Byers. Tim, what's the caffeination level over in Colorado right now? Fully caffeinated, ready to go? Thank you for asking. Love it. All right, today we've got two IPOs, one that has captured a lot of headlines and a lot of attention,

probably a very familiar name to a lot of people, and another one that borrows its name from Mountaineers. We're going to have a fun language lesson later in the episode. Tim, let's start with the household name first. Instacart shares hit the market this week. Some clear interest in this one. We saw a day one pop. Shares are back down around where the IPO priced in the low 30s now. What did you see in the market reaction?

And what did you see in the business looking at this one? Well, the business really cleaned up in order to get to the IPO. I mean, they really made a concerted effort. And we've talked about this before, but Instacart made a really concerted effort to get profitable. ahead of its IPO debut. And not surprisingly, the market liked that. I mean, we haven't seen very many IPOs where the company comes out and it's readily profitable. And they're talking about profitability long term, which is great.

I mean, I do think there is something to the Instacart business and to the reaction that we're seeing. There is a premium that companies are getting when they're coming public with some profitability behind themselves. And in the case of Instacart, I think they do white label for some very big names. And I think there are some big retailers that do not want to do things like grocery delivery and are very happy to outsource that to Instacart. So we know there's a bit of a competitive advantage there. Having said that, that does not mean that this is a market that is Instacart's to lose. I think it's still a bare-knuckles market.

And so seeing it come back down is a recognition that the premium, there was a bit of a premium priced into this. And I don't think the market is ready to sustainably pay premiums, really for any business, but particularly tech businesses. We haven't seen a lot of premium pricing, at least on a sustained premium that keeps rising for tech businesses. That's more 2020 market. And that is not 2023 market. And I honestly, Dylan, I think that's somewhat healthy. I'm glad to see that. Yeah, to your point, Tim, you look at where the price is settled now, and they're probably at roughly a $12 billion valuation based on what we've seen. That's down pretty dramatically

from where they were just a couple of years ago in the private market's $39 billion company. This has got to be one of those confusing ones for a lot of people, because this is certainly a snap test company, where if it disappeared, a lot of people would notice right away. But the economics of this business, very tough, too. Well, yeah. I mean, you get into retail anything, and now you're getting into delivery and the logistics of delivery. And there are so many moving parts here. And so Ken, I mean, one of the main questions I had for Instacart coming into the IPO, Dylan, is these operating expenses and the moderation of these operating expenses looks great right now. How about when this company scales? Because they are going to continue to go after growth. Will we continue to see, will they gain economies of scale as they scale up? Can they keep this up? Or was this dressed up for the IPO?

And that's a question I don't have the answer to, which is why I'm not an owner right now. Do you think that's a fair question people should be asking of tech companies in general right now? Is the discipline that we're seeing on the cost side, sustainable discipline? Or is this something that goes out the window when money becomes more available? I think you should ask it every single time. And I think if one of the tests you can run is if you are looking at the documents and you see a period, multiple periods of cost discipline where not gross margin, but operating margins are improving and they've been improving over time, that's a good sign. That is a company that does appear to be gaining economies of scale as it gets bigger and grows faster. Those are good signs. If it happens to be a pretty small window and it came just before the IPO,

then I think you should be appropriately skeptical. I think regardless of the outlook for Instacart and also Arm Holdings, another very buzzy IPO recently, regardless of what you think of those two businesses, I feel like NASDAQ shareholders, probably pretty happy to see more names coming public, Tim, and a little bit more of that IPO activity for the exchange. No doubt. I think that's right. And when there is a website, that I tend to look at just so I could see the IPO pipeline. It's called Retail Roadshow. There's only one that's in the, and what that means retail roadshow is it means this is a company that's going out. It has its IPO prospectus. It's preparing to go public. And so it's going

out and talking to investors. It's on a roadshow. And so Retail Roadshow would say, hey, here is a company that's going out and they're talking to investors now. And so you could go to that site and you could see it. There's only one company in the backlog right now. At the height of the IPO market, there's usually like five or six that are just lined up and going out to see different institutional investors still. So it's not back to where it was, but I mean, there were months where that list was just barren. Like you could go to retail roadshow. It's like, nope, we don't have anything today. So now we've got something and that's different. And better. So I do think investors are happy to see the IPO market warming up a little bit. But I also

think it's very good to see investors being discerning. That is smart. We don't want to be betting real money on companies that are mistreating public investors by going to the IPO market too quickly just to get some easy money, put it on their balance sheet, and hope and pray. someday they will have a better, more profitable business. We don't want that. We want good businesses coming public. With the IPO landscape over, I'd say, like the last six to 12 months, Tim, we have seen these big names come public, and there's been a lot of enthusiasm for them. Kava is one that was somewhat recent. We see it again here with Instacart. I think the hope, if you're interested in this space and you want to see new names come public, is that some lesser-known

names also get some of that enthusiasm, and we see some momentum there as well. And we have, I think, kind of a litmus test of that. This week, we have Clavio coming public. This is a company that provides intelligent marketing automation powered by customer data. Tim, help me unpack that. What exactly does this company do? First say that three times fast. Come on.

Intelligent marketing automation powered by customer data times three. I mean, it is, it's a mouthful and doesn't really mean anything. Essentially, what Clavio does, this is a very competitive space that has become more important recently. And they're called customer data platforms or first-party data platforms. And all that means is that they're a place where it's software that is capturing data about the customers that you do business with and their tendencies and, you know, their purchase history and all sorts of things to make it easier to automate and fine-tune your marketing to those existing customers because they matter. They are, you know, you want to drive as much

of your business as possible through things like repeat purchasing. Where this all got really, it came out of, I would say, Dylan, the movement to get away from what's called third-party data, which is I buy a data set and it's anonymized and it comes from data that's collected through things like apps and social media. And so Apple decided at one point, it's like, you know what, we don't like it if there are apps on our point. platform and they are collecting data from customers who are using things like iPhones and then reselling that data to other people for third party data so that they can market. We don't like that. We're going to kind of put a stop to that.

This is, by the way, how Facebook just got absolutely rocked by Apple. Remember all that? That was a huge sell-off, yeah. That was huge. And so we've kind of gotten away from this idea that third-party. data is how we market. And now first party data, in other words, getting smarter about the transactions that live on the, you know, the sites that we have and the stores that we have, who are our customers and how do we get to know them better and how do we automate the way

we market to those customers. So that's what a customer data platform is. And Clavio is one of them and they kind of made their bones around doing business with Shopify. They became kind of the I mean, back at that time, they were more of like an email automation platform or marketing automation platform. They're founded in 2012. And we're very popular within Shopify. And they've been profiled by Shopify like, hey, here's this business that's built on Shopify. And so they have done very well to scale to where they are. But this is a very competitive market, Dylan. If it sounds like customer data platforms are something that a lot of companies do or could do, you are correct.

And so, yeah, Tim, go ahead. I want to hop in there. So is the right way to think about this business that increasingly companies are trying to own the relationship, specifically the data relationship that they have with their customers and that these businesses help do it? Yes. That is a way to think about it. And this used to some degree, the focus was really on the communications with customers. And that was marketing automation.

Like, how often do I automate? What's the schedule at which I send emails? How often or when do I send a text? When do I make a phone call? And things of that nature. And so we've graduated from that to, I want to know everything I can about the customers that I have and their preferences and tendencies so I can tailor to them. much more specifically. I want to know everything I can know. And so you collect all the data,

you operationalize it, and then you build like workflow on top of that. How often does this customer want to be emailed? Or do they not like email and they prefer text? Things of that nature. And so Clavio does this and they say, here's how they talk about it. And I think this is kind of fascinating. They say they enable business users of any skill level to harness their data in order to send the right message at the right time across email, SMS, and push notifications, more accurately measure and predict performance. It's right. It's that marketing automation with the data, and you smush those two things together. And the way they talk about this, they have their own, I mean, this is adorable, but not really. They have their own little metric that they call,

Wait for it. They call it CAV. What is that, Tim? What it's, I think it stands for clavio attributed value. So it's sort of like gross, gross purchasing volume, like we see GPV all the time. I think that's what they mean by it. And so they say their 130,000 plus customers have to live, they've, they've realized 37 billion of CAV. Okay. I mean, so they essentially say by putting these two things together, the automation and the data, they help their customers generate value by how they engage with their customers. So, Tim, trying to understand this business and hearing you talk through it a little bit, it sounds like a company that we follow a little bit here at The Fool and also use and our

customers over the Fool, Brays. Is that the same space that the same space that the business operates in? Yeah, they're very, there are a lot of businesses that are loosely related, and they may attack it slightly differently, but Braise is certainly one of them. That's a rule breakers pick. Twilio is another. Twilio started as a communications company. They were using the cloud to enable SMS, to enable email, and all of these things.

And then they've sort of grown into that, and now they've really gotten big on building out a customer data platform on top of all of those communications. So those two are Clavio and Twilio who had been partners. They're kind of wrestling with each other a bit, Braise too. And so they all come at this slightly differently with different approaches in their tech, which if you're an investor, I could see how that would be immensely frustrating. It becomes a shrug emoji, like which one do I pick or do I buy all of them? The answer is, to me, I think if you are going to get deep, you may find some that have some

different financial advantages, but it can be perfectly great, Dylan, to either have a basket or ignore the space entirely until you see somebody really establish clear financial advantages. Tim, I liked how you kind of set the table there talking about just the history of data and the relationship that businesses have with it, because I think regardless of whether you have a horse in this race in your portfolio, probably a space that people need to understand as they think about online marketing and just the way that customers and businesses are interacting with each other? Yeah, absolutely.

And there is, look, if you are interested in Clavio, I personally am not of the opinion that this is a buy at the moment. But if you want to see whether or not this platform is sticky and things, you know, like one of the things I like about Braves is they seem to be very sticky with the customers. customers who have chosen them. Here at the Motley Fool, there's a lot of people internally here that love it. And what we've been able to do with it, like emails that you get from us now, those are powered by Bray's. And so you may see like, for example, this is something really stupid, but it's something that's actually been very meaningful that we've been able to do through Bray's. If you get an email from us and you see at the bottom, it has a smiley face and a frowny face, and you click one of those too, say, I like this or I don't like it.

That is data that is signal that populates inside Braes and gives us insights that allows us to make decisions about how to either send you more or less email of a certain type. And Braise has that kind of functionality cooked into it. So in the case of Clavio, there is a metric that they have that I think would tell you a lot about whether or not it's sticky like Braes is. there are presently 1,458 Clavio customers that generate at least 50,000 in annualized recurring revenue. So, 1,458. It's about 1.1% of the total universe of Clavio customers. So if that ratio starts to go up and it starts to go meaningfully up, like it's from 1.1%. And then you see it in a couple quarters, it's going up to 1.5%. And then next year it's up to 2%. I think that would be a very good indicator for this business, Dylan.

Yeah, that sounds like strength to me. Yes. You know, and that's generally how we like to look at these SaaS businesses, is can they increase spend, increase the relationship they have with their customers and grow as their customers grow? Right. And that's what that would tell you, is that you have a cohort of customers that are making bigger and bigger commitments to Claibio, which as a SaaS company, the economics of software

as a services, you need customers who have decided your platform is so valuable that I will make big, long-term contractual commitments to you. And that tends to show up and the reported number for the large customers. In the case of Clavio, those are the customers that are spending at least $50,000 annually on their platform. I promised a language lesson here, Tim, so I'm going to give it. We've been saying clavio. You can forgive anyone that pronounces it clavio. The name of the company is inspired by clavija, the Spanish word for mountaineering pins, which support climbers as they ascend the mountain. The idea is this business helps other businesses on their way to the summit.

It's a nice storytelling, and I think kind of a fun way to tie into where they fit into the customer. One of the things I want to leave with here is this walks, talks, and quacks like a SaaS company. We have a dollar-based net revenue retention number. We have high gross margins. This is also a company that came public at roughly an $11 billion valuation, first day of trading. $600 million trailing revenue. Tim, how does it feel to be looking at a SaaS stock trading at 20-time sales?

Still too high. Yeah. It's still too high. I'm bringing it around to our expectations conversation earlier. Right. It would be a lot better if that were a lot lower. So in the case of, let's say, a company like Braes, which again, I like quite a bit, it's on the Rule Breaker scorecard, trades for half of that. Trades for half of that and doesn't burn as much cash and is a very sticky platform.

Both of them are unprofitable at this point. And they are similar. I mean, there's always room in this kind of category, particularly at this stage of the market where customer data platforms are still relative. new, you're going to get a lot of different players. And the consolidation is probably not going to happen for several years here yet, Dylan. At least the history of tech would suggest that. And that is absolutely fine. You could easily own the basket here, but I think it's just as great to say like, you

know what, I'm not ready for this yet. Let these guys prove themselves. It's a bare knuckles fight. Let them punch each other in the face. I'll, you know, not to be too brutal about it, but, you know, let them fight it out a little bit. We'll see who is showing up with better financial results. Tim, you're my go-to for the history of tech and also where it's going. Thanks so much for joining me and talking me through this one.

Thanks, Dylan. Tim's my man for all things tech and he's one of our premium analysts here at the Motley Fool. Our premium team thinks there are a lot of great companies out there that are back at levels not seen in years. And that's why our analysts have rounded up five companies that have dipped below $49. There's a share, and we're giving away that list for free. You can grab a copy of the report, five stocks under $49 for free at fool.com slash report. That's right, five stock picks, totally free from our premium team. We'll also put a link in the show notes, but fool.com slash report is where you can get it.

Next up, some mindset advice from one of Tom Brady's coaches. Greg Hardin is a peak performance consultant and the author of Stay Sane in an insane world. How to control the controllables and thrive. Motley Full Money's Deidre Wallard caught up with Hardin to discuss why Fortune 100 businesses call in a coach and what businesses can learn from elite teams. These days, I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly why I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense.

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We all know that athletes have coaches, but business people can and should have coaches. A lot of them don't. What is the value of having a coach in a business career? Well, let's think about it like this. If we're pushing an agenda that's like total person peak performance, the total person is who we're talking about. We're not just talking about a money-making machine. We're talking about a human being. We're not just talking about a MVP of a Super Bowl.

We're talking about a human being. And when we are committed to just trying to become a better person, I guarantee you you'll be a better leader. Well, I love in the book you touched on one of my favorite principles, which is luck is kind of, luck is meaningless unless you're prepared for it. I mean, luck is awesome, but if you can't capitalize it, it doesn't matter. How do you prepare people to capitalize on that moment when something does fall in your lap? Well, what's your opening the door to talk about is attribution theory. What do you attribute your success to?

Yes. Or hard work. And teaching people to understand, it's important to learn that. the rewards you have gotten is because you worked so hard for it, you planned and prepared for it. And I love your turn. Deidre, you said what I say. I don't, luck, I don't believe, I believe in bad luck, okay, but luck, oh,

only when opportunity knocks and you're prepared, does it work? So teaching people that opportunity is going to knock. And if you're prepared, you can go somewhere. If you're not prepared, if you don't understand it, if you don't train for it, it'll pass you by. Opportunity is not for a lot of people, and they were not prepared.

Do you feel like you have to train for bad luck in the same way? I believe that ordering chaos is real, and there are going to be times of conflict, there will be times of trials and tribulations, and it's predictable, therefore, more manageable than people think. I can anticipate that something's going to go wrong. And I have to be able to buckle up and be confident and clear. The data says that I have recovered and we've done fine. I want to talk a little bit about Tom Brady. As you mentioned, he wrote the forward to the book.

You coached him early on. I grew up in Massachusetts. So thank you for creating a winner. It was great to see our Patriots win. We know what he does on the field. What do you think the smartest thing he does off the field? He trains not just his body, but he trains his mind. He's constantly trying to figure out how to improve the way that he thinks, the way that he processes.

He studies the game. He isn't just like, I'm really good. He's studying the game. This boy knows defense is better than the defensive coordinator. But he's the quarterback. Shouldn't he just know he does not rely on I can throw

the ball. I have great receivers. He knows what you're going to do before you do it. Interesting. What do you think of some of his business acumen? Well, it seems like they're like everyone else. He's had successes and failures, but he's had more successes than failures. And this boy is good. Everything he touches turns to go. And if it doesn't, it wasn't supposed to happen. But he moves on. and he recovers quickly. If it's not working, he moves on. Yeah, that's a really important point.

You have coached Fortune 100 companies' businesses. When you're called in, you're obviously called in. There must be, you know, the company needs something from you. What do you find that they're looking for usually? Oftentimes, and they call you for many different things, but just to keep it specific for our discussion, Sometimes they're simply trying to get managers to be better. And what do I do when I go in?

I'm going to make your managers better coaches. But Deja, you ready for this? What do I do if you call me about your coaches? I'm going to tell your coaches to be better managers. To understand not just the X's and O's, but what it means to run an organization, a corporation. It's a business. So when I'm going into a Fortune 100, whatever company, small or large,

I'm going to actually talk about leading with humility. I'm going to talk about empowerment and trusting the people that are on your team. If you can't trust them, why are they on your team? I'm going to talk about, stop thinking that because you have a work group, you have a team. A group is not a team. This is our marketing team. This is your marketing group. Now, let's turn them into a team by taking them away from this setting and teaching them about each other.

To love, to trust, to be able to build each other up and to bond at a level that hasn't been done before. Just because, you know, you've got a group that's working together doesn't mean that they, have bonded. So what does that look like? Let's say you're at a company, you know that they're a group, not a team. Does this take the form of corporate retreats or is it things you do in an office? What kinds of things do you do to make them a team when they're not cohesive like that? Well, we're going to cover the whole range. And oftentimes it's going to be a retreat. And most importantly, we've got to get them out of their normal. setting, so that we can open up their minds and end up having fun and teaching them how to

actually test each other and see what works for Pete, what works for Gladys. There's some things that they don't know about each other. Imagine this. Imagine that you're sitting in a room of these corporate giants and whiz kids, and you ask them, in 25 words or less, share with something. with everyone in this room, something that made your heart same,

something that is totally unrelated to this business, something that brought a joy into your heart, something that you feel good about, something you're proud of that's happened in the last 12 months that nobody knows about you. Deidre, that's a game changer.

It starts off pretty vanilla, and I swear at some point somebody's going to say my father was dying and he was able to survive because of the love that we gave him. Somebody's going to say, you know, my child was sick.

Somebody's going to talk about the greatest adventure of their life and the challenges that took place. And I'm all of a sudden, I'm knowing, I'm seeing Deidre more than just my competitor or my colleague. I'm seeing her as a whole person. When I see my colleagues as real people, all of a sudden, there's an energy that changes in the group

dynamic. And all of a sudden, we're considering ourselves together. And I see you as a person, a whole person. Yeah, yeah, that vulnerability is really key for trust. It's amazing. So we're not just going to do fall backwards and we'll catch you. We're going to challenge them to think about things they haven't talked about before in a group like this.

As always, people on the program may own stocks mentioned, and the Mottley 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. Thanks for listening. We'll be back tomorrow.