Motley Fool Money - Is The Sharing Economy Growing Up?

Episode Date: June 29, 2023

DoorDash has started offering hourly wages for its couriers. (00:21) Bill Barker and Deidre Woollard discuss: - What prompted DoorDash’s recent updates. - Fees, tips, and other ways Airbnb and DoorDash pass on costs to consumers. - How demand for spicy food is just one positive sign for McCormick. (16:15)  Sanmeet Deo and Mary Long break down the main components of Adobe’s business and how AI could prove to be a major growth area. Companies discussed:  ADBE, MKC, DASH, ABNB, UBER Host: Deidre Woollard Guests: Bill Barker, Sanmeet Deo, Mary Long Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard. Daredevil Born Again, official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. DoorDash goes hour long. and McCormick keeps things spicy.

Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard. I'm here with Motley Fool analyst Bill Barker. Bill, I feel like everyone's getting a second dose of you this week, so that's awesome. How are you today? Well, thanks for asking. Well, let's start talking about DoorDash.

They're the leader in the restaurant delivery wars. They announced an hourly wage option for dashers. Those are the couriers that do the pickups. Previously, it was on a per-job basis. So I think this came because there was some pressure on sort of gig economy workers from local governments. I think this is good news for the dashers. Is it good news for the company? I think in the long term, it's good news for the company because it's going to supplement,

in particular, pick-up jobs that weren't very profitable on a per-job basis, but were on an hourly basis or could be at least decent pay at an hourly basis, smaller orders, longer travel. So in terms of satisfaction of the ultimate customer, I think DoorDash is going to be supplying more of the deliveries through this choice that the dashers have. And I think it's a recalibration of the business model. In these sort of run-fast and break things kind of models or get things out, don't worry too much about where the profits are right away, get a lot of customers, and then figure out the profitability over time, both by the company and by the gig economy employees. Over time, you see where

the holes in the system are, and this is filling in one of them. Yeah, the holes in the system thing is interesting, because this is a similar path that I think all of this sharing economy, gig economy companies have had to wrestle with. Uber has had to deal with it, Airbnb. This is just a lot of the share economy. something that, you know, these companies, as they evolved, they sort of have to, they're sort of becoming more like traditional work in some ways. Well, there are regulations that show up in certain locations where some of the gig economy employees or not employees become considered employees or part of the way toward that.

So I think that, you know, over time, you're not going to find that jobs like jobs like, you're this pay either too much or too little, but in the short term, they will. And I think that the people that can game the system the best, do the best until, you know, people here, oh, if you work the system this way, you can make a ton of money, and then you get more supply chasing that, and that tweaks the model a little bit. And ultimately, people get fairly paid is the likeliest outcome. Yeah, it's true. Around Uber, there's a whole system of people sort of giving advice about, you know, which rides to pick up and things like that. Another aspect of all these companies is the tipping, right?

So another update Dordash made on their app is they're now going to allow post-checkout tipping for 30 days. It seems like a while to me. But there's been a little bit of a backlash sort of in the world about point-of-service tipping. Everybody feels like they're being asked for tips at any. any transaction, any moment. With DoorDash, with Uber, it seems like they have to do everything they can to encourage tipping to keep the workers happy. Are they sort of passing on some of the costs of doing business to the customer? No, there's no sort of about it. You're a customer. You've had costs passed on to you. You've been given opportunities to tip that are many,

many, many times the number of transactions that used to be the case. And you have, perhaps, I'm not accusing you of tipping or not tipping at any point, but you've probably paid more money for the same service in the last couple of years than you did five years ago. Am I right about that? You are right about that, because there's the other aspect of it, especially with Uber or something like that. I'm attached to my rating, and that's part of the aspect of this, too.

you don't tip and you plan to use the service again, you're going to be in trouble. I have made probably the mistake of not caring about my Uber rating. Oh, okay. I never really couldn't tell you what it is, and therefore, maybe I'm not tipping as much as you are in pursuit of a better rating. I'm hard pressed to think of an occasion where 27 days after a service I would have been compelled to tip. I can't imagine the circumstances under which that would occur. So leaving things open for 30 days for a tip, I guess, signal something to the employees.

Look, you've still got a chance. I guess if you go back to the same spot, the same customer again and again, and deliver a good service, maybe you can get retro-exam. Maybe you can get retro, active tipping. Maybe. Maybe. We'll see. I want to take a quick pivot to another sharing economy service, because yesterday on the show, you chatted with Ricky, about Delta and travel. Travel boom is sort of, where summer travel, even though it's getting a little dicey with some of the airlines lately. But there was a story from a tweet that went viral yesterday about Airbnb. A real estate consultant published some data from this company called All the Rooms, saying Airbnb revenues down by at 50% in markets like Austin and Phoenix. There's competing data from another company,

AirDNA, saying the revenue is only down around 3%. Either way, looking at Airbnb, is there a demand problem, or is this a prices have gotten too high problem? I think that it's more likely that the prices, if not too high, have gotten to be no value compared to hotel rooms, especially on a short stay, given what seems to be. be a very large cleaning service for any Airbnb stay. So I think that short-term rentals, hotels are going to be, if not competitive, or if not superior, very competitive. And they're more of them.

There are more employees at the hotels today than there were a year ago. There's more people coming in to do seasonal work than there was a year ago. It's still hard to get into the country a year ago. You had needed to have a negative test, just to get into the country. I can't remember what month that changed, but it was sometime after May when I was traveling back into the country. And so, it's just a case, I think, the data is very different between these two services, as to what the extent of the decline is.

As you point out, there is a decline year over year, but 3% is very different from some markets. 50%. That's also a headline. Selecting the hardest hit market, you can find throwing that into your headline, calling it a collapse. There is no collapse here, but there's more hotel rooms being supplied with more staff that can turn around hotel rooms in a timely manner. Yeah, the collapse thing. Yeah, that was a very overblown headline. But you mentioned the cleaning fees. This is a big issue that everyone has complained about Airbnb. They have made some moves to increase the transparency on it. The fees part is one problem. The other part is the demands that you get when you use in Airbnb. They ask you to take out the trash or strip the bed. Sometimes it can be more than that. Can Airbnb kind of administer that on the corporate level? It's a little bit different than transparency with fees.

It's not at the app level. It's really at the host level. Yeah, ultimately, you get what you pay for. You know, if you are paying a very small amount for a room that seems or a house that seems exceptional, then there may be additional fees that supplement that and make the fee less attractive or you're getting less service than you would if you were paying more. So, can the, yeah, this is another example like DoorDash where you've got a new business model. You come out. It evolves.

You tweak it. The broken things get fixed over time. And ultimately, the customer, hopefully, I think for Airbnb, the challenge is the customer to have a consistent experience where it is very hard to give a consistent experience due to the nature of, independent operators being the one supplying the rooms and housing. So getting that information out there in a more transparent manner, and Airbnb is not the only one who provides a price upfront that then you confront at the end of the transaction wasn't anywhere close to what you thought you were going to get. That's available in many, many different travel services. So, But if people are getting upset because of the experience of booking their Airbnb stays,

Airbnb will correct that. Yeah, absolutely. Let's talk about something different. Very consistent business, actually. We're in the heart of grilling season, which it seems like every food season might be good news from McCormick. Strong quarter for them, sales up percent. The part of the business where they see the growth, though, isn't necessarily the hot sauces. the spices that we buy. It's the flavor solutions they sell the businesses. So why is this

a growth area from McCormick? Well, the headline number seems like more growth than, you know, once you dig things away. Flavor solutions, sales, and that's the category selling to restaurants and to, you know, the industrial market formally called the industrial segment, up 12 percent. But that It was all pricing. It was a 14% increase from pricing actions offset by 1% volume decline. It was pretty much the same in the consumer segment, much smaller, not able to raise prices as much, only 9% increase from pricing and a 2% volume decline. So quarter, quarter over quarter, year over year by the quarter, people were stocking

up less, but they were paying a lot more. especially at the restaurant level, which is also probably something that would come as no surprise to you or listeners. It seems like restaurant pricing has gotten very generous at the restaurant level. Yeah, generous for them. Yeah, a little bit painful for us. Yes, we're being the ones who are generous. And apparently, they're being generous with the amounts that they're paying to McCormick. That won't last forever. They're not going to be able to raise prices at that level. People aren't going to put up with inflation of the 12 to 14 percent range on their meals, or the components of the meals for very long. And of course, inflation

has come down recently in the rest of the economy. So I don't think that we're going to see numbers like this going forward for McCormick. As you point out, it's a very stable business. People aren't going to eat 10 percent more or be 10 percent more flavorful in the they're eating from one year to the next. That's true. We've got a CEO change with this one, too. You talked about a CEO change yesterday with AutoZone. Another very, very stable, sedate kind of change.

You've got Brendan Foley, who became president a year ago. He's taking on the CEO job in September. The current CEO, Lawrence Curzias, he's going to stay on as the chairman of the board. Foley's been in leadership for a while. This seems like a nice, easy transition, kind of like the one from yesterday. Is this what you want to see steady company, steady transition, or do you sometimes want to see an outsider come in? Well, steady is part of it, and the reason why you would want this to be a steady transition

is it's not just steady. You can have a company that is a subpar performer, but very steady at doing so. McCormick's not that. McCormick has been an exceptional investment, and so you don't want to see that equation changed, particularly, and so it's a happy event, I think, for shareholders to see a continuity of management where you do want to see management changes where you are not enjoying exceptional or above-average returns. And then you're going to see more agitation for a change in style or name or more than that.

Yeah, we don't need that with McCormick. What's interesting to me about McCormick and about our taste in general is our capacity for spice. So we have just fallen in love with hot foods. Brendan Foley, who's that incoming CEO, he said it's not just the hot sauces, but it's also heat as a component of spices, seasoning, snacks, everything. That's like a huge growth area for them. They have Frank's Red Hot. They have some other hot sauce brands. Do you think they're going to continue to go down the hot sauce road, maybe buying other brands? Or how do they keep pay with the other companies that are embracing this, hot all the things trend? Historically, what they've done is to acquire great brands and to keep them going.

I think Old Bay, if regionally, is probably the best known brand. Here we are not too far from Maryland. Old Bay's very central place in the world of eating crabs is one of the things that defines the experience. But I think that Franks Reds and some of the other hot sauce acquisitions they've made are indicative of what they do with their excess earnings, which is to make targeted acquisitions. and they've been successful, and they're able to put more money behind the marketing of regional success stories, and that has worked out. So I think that rather than trying to develop new brands, they're better off buying

smaller, regionally successful brands, and bringing them both domestically and internationally. Yeah, I think that's right. And then the hot sauce category, there's plenty to choose for. There is. There's plenty of regional success stories out there, and they have the ability to make them national success stories. Absolutely. Thanks so much for your time today, Bill. Thanks for having me. Adobe's new generative AI product, Firefly, has people buzzing. That's not all you need to know about the company. Mary Long and Sandmeet Dea walk through Adobe's different businesses and where the company could go next. Today, we're putting the spotlight on

one company benefiting from the AI Gold Rush. Here to talk all things Adobe is Motley Full senior analyst, Sam Meet Deo. Glad to have you. Hi, thanks for having, Mary. Many listeners may already be familiar with Adobe for its creative software, but there's more to Adobe than just Photoshop, right? So how does this company actually make money? Yeah, that's a great question. One of the first things we asked when we're looking at a company. So basically, more than 93% of their revenue comes from subscriptions. Their three main segments are digital media, which is about 73% of revenue. Digital experience is about 25% of revenue in publishing advertising, which makes up just a little bit around 2%. They're geographically very diverse all across, you know,

with America as being 60% of where the revenue comes from, Amia 25% Asia Pacific of 15%. You know, their gross margins in the height 80%, and their operating margins have been above 30% in the past four years. So, you know, they have products that you've probably used before, PDF, Acrobat. There's also a slew of content creation tools that video editors, photo editors use, that, you know, I haven't used, though, that realm of software, but they have a wide variety of products across the digital landscape. Very good, broad-based company. And are there other offerings beyond that, like, content creation bucket that you mentioned? Those are the main ones, but we're going to get into it a little bit later where they've been adding into their product

suite with generative AI, which is meant to kind of enhance some of those products. So I know we're going to get into that a little later. And so with those offerings, that you mentioned without dipping too much into the generative AI stuff quite yet. Who are Adobe's chief competitors? You mentioned PDF, Acrobat. Is there? DocuSign, their top competitor there? Yeah, DocuSign is there. And that's actually a product I forgot to mention is the Signatured, DocuSign-style product that they have. But they also compete with the big software guys, Microsoft, Salesforce, some of those other companies. But there's also a lot of private companies that they compete with, where they compete with.

whether it be Canva, Figma, various other private companies as well. Yeah, you mentioned Figma, and that's another thing that we'll get to in just a bit. But before we dive into that, let's think about the leadership of the company and offer an overview there. So the CEO, Shansanu, Narayan, has been at Adobe's helm for about 16 years. How integral is Narayan's leadership to the Adobe story? Narayan has been a phenomenal CEO. He's been at the helm since 2007.

And just to give you a snapshot of what he's done, since he began. and this Adobe stock has returned 17.1% versus 9.6% for the S&P 500. So over that period of time, the stock is outperformed based on a lot of the initiatives that he's taken on. He's actually been recently named the number two in the top seal list on Glassdoor. He's been instrumental in them changing their business from a traditional software company where you would buy the package software to a cloud-based subscription model, which changed their revenue model to a more recurring steady revenue stream rather than the traditional

package software products. So that was a huge transition. It did slow down their revenue a little bit, but it proved to be much higher margin and a better shift for them in the long run. He's one of the ones that's helped establish a global standard for digital documents with Acrobat and PDF, which is something we all use. You know, he led the, launches of Creative Cloud in 2013, Experience Cloud in 2019. He's guided the company and adapting to the changing digital landscape. And he's also been, and the company has been recognized as a top place to work for women and minorities. So he's very involved with diversity and inclusion. So he's been a great CEO for them.

Awesome. You kind of gave us an overview earlier of some of the different metrics that have, and how they've changed at Adobe over the past few years. Can you walk us through how you're thinking about Adobe's current valuation? So, currently, based on 2023 estimates, they're trading at about 31 times PE. The free cash flow yields at about 3.5%. One quick metric I like to take a look at that I do a quick calculation on is if we were to assume a 20 times normalized PE, which is kind of a normalized PE for the market and various stocks over a long-term average, their current price, which last I checked was 489, I haven't

check the one, the price as of today, but their five-year EPS kit, so their current price of 49 implies a five-year earnings per share Kager of about 2012 percent. So that's what the market is pricing in. Consensus expectations is about the same. So they're kind of trading in line with what consensus thinks their earnings will grow at over the next few years. So they're fairly valued, I would say, and not significantly overvalued, even given the run-up in the stock. Because while the stock's been running up, their earnings and their cash flows have been growing as well at a very high margin steady clip. So fairly valued, I would say. You mentioned the run-up in the stock. Year-to-date, Adobe stock is up over 40%. Has something

in particular driven that surge? I think it's just been good old fundamentals and strong results of the course of the year. They've been continuing to post strong results that beat expectations in a challenging economic environment for tech stocks. And specifically SaaS stocks. And that just is a testament to the nature of their products and their software being a core product and utilization for their customers. And also AI has been something that's been a big tailwind for them in terms of the momentum for the stock. So let's talk about AI. What makes Adobe an AI play? So the thing I like about Adobe is an AI play is they've kind of not the first ones you can

when you think of when it comes to AI. You know, you think of Google or, you think of, open AI and chat GPT, but they've been slowly and steadily been working to integrate their generative AI tools into their core design products like Photoshop, Illustrator, and Premiere. They've been working on it for a while, and now they're kind of starting to bring those products out to bear. The cool thing about their gender AI is it could entice customers to kind of pay more for the solutions they're already using with Adobe, as well as solutions that Adobe is creating in conjunction with AI to kind of enhance. enhance the usability and the interaction.

So one of their core products that they recently came out with, they launched a beta version in March of Firefly. And Firefly is basically, if you've heard of Dolly 2 or Mid Journey, it's an AI photo generation video generation, mostly photo generation for now, app where it's trained on hundreds of millions of stock photos that Adobe has, openly licensed content, and copyrighted expired public images, that you can basically type in a text, create me this image of so-and-so, be as creative as possible as you want,

and it will create an AI-generate image for you. What I like about what they're doing with this is too, is they're trying to play as safe and be very mindful of copyright laws to protect artists and their work. They're not in a rush to kind of be the first mover and move fast and break things, as is always the case in technology.

While some of the other image generation, AII apps, are at risk of potential copyright infringements. So they're already getting some heat. And while regulation is forthcoming, as it always is, Adobe's trying to play that good side of that and kind of be on the side of the artists and the content creators.

Yeah, I saw something literally today that was saying Adobe was so confident in their Firefly program that they would support the legal fees of any artists that were, faced with copyright infringement lawsuits or something because they, because that system is trained on Adobe's wholly owned stock images and openly sourced ones, there shouldn't be any issues there. That was kind of an interesting play, but speaks exactly to what you're saying.

Yeah. And then also just one thing I want to add about Firefly, it's only as three months since Firefly's launched, users have created almost half a billion images with its tools. Right now, it's free and they're going to, at some point, charge. for it. And the other thing I wanted to mention about Adobe and their AI generation is, this is one thing that we look for in our portfolios when it comes to AI investing is, how close are they or are they monetizing their AI? Like, many companies talk about AI. They say they're going to explore AI, but are they really making money from it? Or is it just something to boost up their stock and kind of get people excited about them? Adobe's, I would argue,

is close to that tipping point of actually monetizing AI, and especially with the fact that their current tools are going to be enhanced by AI, and it could help retention and added usability. So Adobe's been around since 1982, so it's not like it's the new kid on the block, but, as we've just said, it is stepping into this cutting-edge technology and as being a real player there. So is this company, do you think of this as a stalwart company, or is there still a growth story here? That's a good and tricky question, and I think it is a stalwart with the optionality and potential for huge growth opportunity ahead. They have their core businesses that are generating a ton of cash flow and steady operating, like, you know, cash flow.

So that is there, and it's going to continue to do well. But I think with the generative AI, that provides an additional boost in terms of growth. and the Figma acquisition could add another boost of growth if that were to be approved. So I see it as one of the stalwarts with a growth component to it. Yeah, and for sure. So let's kind of step into this Figma conversation, too. Last year, Adobe announced its plans to acquire Figma, which is a collaborative design software and a huge competitor to Adobe.

And the price tag on this was $20 billion. So there was plenty of skepticism around that sky-high number. but also around potential antitrust issues. So the U.S. and U.K. regulators are already considering blocking the deal and the EU recently launched an antitrust investigation. How central is the success or failure of this acquisition to your Adobe investing thesis? I don't think it's central to the Adobe thesis because, like I said, they have such a core business that is strong and doing very well, very highly diversified with a ton of recurring revenue and cash flow generation. Their genera AI, I think, is going to be very additive to their core business as well as future lines of business.

But, you know, the deal has some positive attributes, which I think could really help them in terms of gaining access to a new user base, complementing their tools with Figma's tools, which are not completely the same, helps them stay competitive in a collaborative design software market. And it kind of diversifies their products and revenues even more. So while it's a very high price tag, 50 times forward revenue, I think would possibly be the highest for a software acquisition. It has a lot of positive attributes that could be additive for them in the future. But if the deal doesn't get approved and doesn't fall apart, I would not be hesitant to continue to own the stock and be positive on it.

Sounds like there's a lot of upside with Adobe, kind of no matter how you slice it. Whether or not this acquisition goes through, kind of they're paving the way but being patient with AI. So lots of things to watch here and lots of good news all around. So much Sandmeat for diving into Adobe with us today. Good to talk to you. Thank you, Mary. 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. So don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.