Motley Fool Money - Is Toast toast?

Episode Date: November 2, 2023

PayPal’s new CEO debuted with some heat.  (00:21) Ricky Mulvey and Jason Moser discuss: - Alex Chriss’s first earnings call as CEO of PayPal. - Renewed focus for the payments company. - Airbnb’s quarter and questions for its international growth. - Investors going through an “airline stocks phase.” Plus, (14:10) Mary Long and Tim Beyers take a look at restaurant tech company, Toast. Stock Advisor discount link: www.fool.com/mfmdiscount Companies discussed: PYPL, ABNB, TOST, ORCL Hosts: Ricky Mulvey, Mary Long Guests: Jason Moser, Tim Beyers Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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PayPal has a new. dad, his name is Alex. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jason Moser. Jason, good to see you. Hey, Ricky, good to see you. How's everything? It's going pretty well. How about for yourself? You know, I could complain, but nobody ever wants to hear it anyway. No, I want you to complain. I want you to complain. Let's, we've got five minutes of J-Mo complaints. All is well. All as well in the neighborhood. We had a successful Halloween, and, you know, now we're kicking off Thanksgiving month, you know, and so I'm excited to get that bird on the Gregor this year. Well, speaking of kicking things off, PayPal has a new CEO. Alex Chris, 30 days on the job.

I'm not going to ask you to judge's performance. He can't really do anything in 30 days. But yesterday was his first earnings call gave investors a first impression. What was your take on Alex's first impression to the PayPal shareholders? I'm optimistic. I mean, I really feel like we've got someone, in the CEO office there that is aware of the potential that this business has, but also is aware of some sort of the unforced errors that they've committed kind of along the way that have the market really looking at this thing, you know, more glass half empty right now. His feelings regarding the business, it seems, you know, we would talk about this in production, right? The word focus was used a lot. And I think that's, we could argue that the company

He's probably lacked focus here over the last several years as it's tried to, you know, reinvent itself and become that super rat that we heard Shalman always talking about. Really, you know, at the end of the day, that didn't seem like it was the wisest move. So they're whittling down the cost structure, focusing more on what they do well, which is payments. And I think that his awareness of some of the concerns in the investing community is encouraging. I mean, I think, you know, one of the things we got on that call yesterday, was a clear mission that they are not, they're not giving us the key performance indicators

that tell us how this business is doing, right? It's been a difficult, it's been difficult to judge this business because, you know, the information is just not so granular. We didn't get that level of granularity that I think a lot of us are looking for. It sounds like, it sounds like that's getting ready to change, which is a good thing. Yeah, I will note that Schollman was thanks, quote, for his diligence and professionalism on handing the reins over absolutely nothing on the past leadership from the new CEO, Alex Chris. And he did talk about the key performance indicators. You tell me, how big of a problem was this for PayPal?

This is the quote, I believe in the last several years, it has been difficult to model our company consistently because the company itself hasn't provided consistent metrics to allow you to do so. That is going to change, end quote. You're an analyst, you follow PayPal. What are the metrics you need to see out of the new form of the leadership? Well, I think ultimately, it's, you know, PayPal today is much different than it was, you know,

years ago. I mean, this isn't just some app where you just, you know, send money to your friends. I mean, this is a, it's a big and somewhat complicated business. I mean, you've got PayPal and Venmo and Braintree. There's branded. There's unbranded. This growing focus, obviously, on small and medium-sized businesses or SMBs. You hear them talk about. And so I think, you know, it's been a problem for a while.

The lack of these key performance indicators really giving. us, you know, a way to judge their success and their progress. This isn't just, hey, we're looking at gross dollar volume being pushed through the network anymore. I mean, each facet of the business, right, plays its own role. And so I think getting those KPIs, getting those metrics where we can gauge the success of each part of this business is going to be, it's going to be extremely helpful. I mean, I know I'm not the only one. I think it's been a very common sort of complaint in the investing community is just, you know, not. being able to really judge their progress or lack of. And now, I mean, you know, it feels like

we're going to be able to look under the hood as, you know, at each of these drivers of this business and understand more the levers that they can pull with PayPal or with Venmo or what, you know, what is happening with Braintree and, you know, branded versus unbranded. You know, we're going to see, you know, big focus on this, this PayPal complete payment solution. That was a big theme of the call as well. So I think that next quarter is going to be very enlightening from that perspective. I'm looking forward to it. Yeah, we got 18 mentions of the word focus. And that was just in the opening remarks for Alex Chris. He is going to repeat that into your skull. He also had a couple innovations that he wanted to highlight. I'm going to give you the menu and then you tell

me if any of these are really worth investors' attention. Number one, we got a cashback credit card. Number two, a unified PayPal rewards program, 25 million users in the past 12 months. They've also highlighted easier sign-in experiences, reduced friction. And then number four, JMO, the first regulated stable coin by a global payments company in which connects PayPal and Venmo accounts. Let's go. Crypto is back. Yeah, well, I'm not the biggest crypto guy, so I'll just, I'll decline to really comment much on that.

To me, it seems like they're taking just a measured approach in whatever crypto aspirations they have. So that's a good thing, I think, not going all in. I think with PayPal, I mean, reducing friction is always key. It's frustrating if you are going through checkout, for example, and then you get to that last step and how you want to pay isn't necessarily supported. So I think reducing friction, you know, they've opened up now to where they are part of the Apple wallets and Google wallets. Again, that PayPal complete payment solution, I think, is going

to be something that really ultimately reducing friction that creates longer, stickier relationships with consumers. Hey, I mean, listen, everybody loves rewards, right? I think a unified PayPal rewards program that makes a lot of sense too. You know, you kind of, for heavy users of the service, I mean, that's something that keeps you coming back for more. All right. We also got Airbnb earnings, but anything you want to hit, anything else you want hit from PayPal before we move on? No, no. I'm just, I think, you know, this was a great introductory quarter, I think, for new leadership.

And I think next quarter is really what we're looking forward to, because we're going to get a better idea of exactly how they're going to take this business forward. I think it's, you know, it's worth noting to the sale of that happy returns business to UPS. that I think is a good example of focus, right? Get rid of these things that just don't have much to do with your core business. And thankfully, they sold that to UPS and they actually made a little money on that deal. So, you know, good outcome there.

All right. Investors tended to be a little, they're a little tepid about Airbnb's latest quarter. It's got revenue for $3.4 billion. That is up 18 percent year over year. Adjusted net income from 1.6 billion. That is the highest ever. It's active listing supply. The number of houses, condos, rooms grew at about a 20 percent clip.

That's an extra million places to stay. day. And then they also announced $500 million in stock repurchases over the quarter. What do you think is worth highlighting? Well, you know, I understand the, there's a lot of uncertainty out of the world right now, right? And I mean, this is truly a global business. So I think when you look at the cross border, for example, the nights booked, cross border nights booked increased 17% in the quarter. They actually called that Asia Pacific having fully recovered to pre-pandemic levels. So I think, you From a global perspective, you look at the opportunity that they're pursuing and travel.

I mean, the tourism industry is greater than $2 trillion opportunity. Obviously, that's not Airbnb's total market opportunity, but it just goes to speak to how large of an opportunity this is. And so I think you see this business ebb and flow a little bit as it's kind of figuring out its place in the world. We've talked a lot about the headline risk with New York City and this, what was it, the local law that they passed through, essentially banning short-term rentals. And that's something that, you know, it was a headline, but it wasn't something that

was terribly fundamental to their business. I think they said it represented maybe 1% of overall revenue. And it does feel like they're finding their way in this world, kind of like we saw with Uber, you know, back in the day when it was really getting established. So I think for me, you know, looking at this from the global perspective, I understand sort of the hesitation or the concerns, at least in regard to the forward-looking guidance there, because international travel right now is a little bit of a riskier proposition than it has been in the past. But all things considered, I mean, this is, I mean, it's a very

important business. I do believe if they shut their doors tomorrow, I mean, the world would feel it. And so to me, nothing really other to point out than maybe getting a little bit more insight into what they want to do with their experiences. Next week, I think they have their big winter release. So we'll get some more information there as to updates they've made and sort of the strategy that they're taking with that experience and the business because that can be a very complimentary one. Yeah, Cheskey talking about cities opening the doors to Airbnb a little bit more.

I think San Diego was one of them. Of course, that's not going to grab the headlines quite like one shutting off Airbnb. But yeah, the experience thing is a little bit of a concern, Jason. That's the plan for New York City. And before the show, we're doing research. And there are experiences in New York City that look lovely. You can have a T-tour, they have comedy shows, there's someone that'll yell at you while you walk across the Brooklyn Bridge with them. But a lot of the business and experiences or a good chunk of it does seem to be people taking

photos of you in front of oncoming traffic. I guess, what is your message to those experienced buyers that would like those photo shoots in Times Square in front of oncoming traffic? I just make sure your insurance policies are up to date. Get, you know, take. out a little bit more if you need it, because that sounds like an accident waiting to happen. And last thing, I think that Airbnb hasn't really approached yet, but makes a lot of sense for the business. It's a loyalty program. Yeah. Chesky told Bloomberg that they're thinking about it, but it really wouldn't have anything to do

with like points or free stays, saying, quote, it would probably be more novel than a standard points program, not like a subsidy program, which is what most programs are, but something where when you use it, the service actually gets better. I don't know what that means. Yeah, it's difficult to say, I mean, you know, you're getting rewards by virtue of the card that you're using to pay for your Airbnb stays. So, you know, maybe there's like, you know, the Airbnb power users. I mean, maybe this gives you free upgrades or, you know, maybe you get to waive the cleaning fee or something. I don't know. It sounds like they have to give that, give that one a little bit more thought. But, you know, loyalty programs, they pay off, you know.

if you're giving people a reason to keep using and to keep coming back. So as long as they, as long as they execute it thoughtfully, it seems like it has some potential. All right. Let's finish off with a little bit of mailbag. We got an X or a post or a tweet or a message on the platform, formerly known as Twitter from at Tela underscore Franklin. We'll ask you this, Jason. Does every lifelong investor regrettably go through a quote, I should buy an airline stocks phase? Yeah, I think so. I mean, I think the longer that you invest, the, I mean, sure, the more

success you witness, but the more mistakes you make, right? I mean, and that's, it's a never-ending learning experience. And yeah, airline stocks are funny. I mean, I'm assuming this is not just focused on airline stocks, but that's probably an easy one because, you know, I think historically that's been a pretty tough investment. I think Warren Buffett's got some pretty good quotes out there on investing in airlines. And even he flit-flopped and decided he needed to get into airline stocks at some point. But yeah, I think we all go through that. And the key is to just make sure that you're aware of it and that you learn from it. Like, you know, Ricky, we just got through with this big SPAC phase, right? I mean, we all probably suffered a little bit

from that from that spec phase. I know I did app harvest. You know, where are you now? That was a dumb investment on my part. But, you know, hey, listen, I learned from it. And so, yeah, yeah, I think that the key is embracing the fact that you're You're going to go through those phases and learning from them. And being able to identify that and saying, okay, well, it feels like I'm in this phase. And the last time I went through a phase, what did I learn? Should I just avoid going through this phase? Is it just a phase?

I think that's really the key. It's just always keep an open mind as an investor and just embrace the learning opportunities because that's what they are. Jason Moser. Thank you for your time and your insight. You got it. Thank you. If you're early in your career and looking for insight, inspiration, and honest advice, listen to the Capital Ideas podcast, hear from Capital Group professionals about leaning into the differences that make you unique,

making decisions that last, and what it means to lead with purpose. The Capital Ideas Podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. The analysts you hear on the show, well, they have a whole other day job, providing premium coverage, and recommendations for the Motley Fool's suite of stock investing services. We're giving our listeners a discount on Motley Fool's flagship service. It's called Stock Advisor. So if you're interested in more analysis from our team, two stock recommendations per month, and access to Stock Advisor's full scorecard of companies, visit fool.com slash MFM discount.

I will also include a link in the show notes. All right, when a stock drop 75%, is it time to order up or are things toast? Up next, Mary Long talks with Tim Byers about a beaten-up restaurant tech stock. So to kick us off, I think I should admit my biases up front because when I go to sit down at a restaurant, I have a nice meal, and then at the end, the check arrives in the form of a little white box that I'm supposed to tap my credit card onto, I turn into a curmudgeony, Luddite-like version of myself. The point is, I don't want to like toast. So what am I missing? Is toast anything besides a point-of-sale system?

It is. It solves what I often call a migraine-level problem. And what I mean by a migraine-level problem is if you have a headache, aspirin is nice, but sometimes you can go to sleep and ride it out. But if you have a migraine, you will pay whatever is required in order to get relief for that migraine. And so I like to be investing in companies that solve migraine level problems because they tend to have things like pricing power. They tend to have a little bit of a competitive advantage. And in the case of toast, the migraine level problem here is that if you're a restaurant operator, you do need to be investing in everything from the point of sale system to managing, ordering, reservations,

integrating with delivery systems, managing your payroll, managing, just a bit of a business. bazillion things. There's a lot of digital systems that you need to be invested in and which need to be integrated. You can do really one of two things. You can hire somebody who will get the tech for you and then integrate it all for you, or you can go with toast, which has what I would call a full-scale restaurant operating environment. They give you all of the things that you need for the tech infrastructure for a restaurant, which is very attractive. If you're a restaurant operator, particularly if you're a restaurant group that has, say, like, five to up to 20 locations, you get all the point of sales systems, you get all the

hardware, then you get all the software, you get all of the integrations. And so the way toast charges is they will charge you something for that hardware, and they do charge a subscription fee, but the key feature here that is a win-win for the restaurant, and really a win-win-win for the restaurant, the wait staff, and Toast itself is what's called the FinTech side of the business, where they are taking a slice, a small slice, about 50 to 55 basis points off of the fees that are generated through just the business that runs through the restaurant. So as the restaurant does more business, Toast makes more money. As the restaurant makes more money, toast makes more money. And as the restaurant makes more money and turns tables faster,

those wait staff are happier too because they're getting more tips. They might be getting bigger tips. So a lot of people win by putting toast in place. And that's something I very much like about this business. I think the massiveness of that migraine is reflected in the fact that the restaurant business is pretty notoriously tough. The National Restaurant Association reports that just 20% of restaurants actually make it past the five-year mark, and then for those that do succeed, margins are famously slim. Do you think that that high-failure, low-margin combo, does that affect host prospects at all? It does, but it also provides an ever-refreshing pool. This is something that is true about every company, and you know the names because they're motley-full picks that deals with small businesses

of any sort. So let's talk about HubSpot. Let's talk about Shopify. These are businesses that cater to a sector of industry where the churn rate is high because the failure rate amongst small businesses is high. And that would be a really big problem if there weren't always new concepts, new small businesses being created. And in the case of the restaurant business, there's always a new restaurant concept, Mary. I mean, there have been so many of these. And that will always be true. We will always find ways to go out and have a good dining experience. whether we're talking about quick serve, or in the case of really the core of toast customers is a sit-down experience, just maybe have a bottle of wine, a good meal.

And we're talking primarily about that type of restaurant and restaurant group where it's an owner that is not a massive chain. There are maybe two or three different proprietors who came together had a concept and wanted to build something, and they've gotten to like 10 locations. And those are the people who have really no interest in the entrenched player here, which is micros, which was acquired by Oracle, been around for years, and they have not been all that modern, and they've been much more of a point solution. And so Toast has been taking share from them. And for those that have been around for a while, Micros has been a big, Target. And Toast has been getting a lot of business replacing those micros point of sales systems. And I think

that's probably going to continue. This is still an early stage company. Revenue's been growing at a good clip, but Toast has yet to turn any net income. Third quarter earnings for the year come out next week. But long term, what kind of returns do you expect to see from Toast in the next five, 10 years? And what do you think it needs to do to actually get there? Well, there's a number of things that it needs to do to get there. There's a couple of main drivers for Toast. The first is number of locations, and in the latest quarter, I'm just checking my numbers here. If I look at it in the last quarter that ended June 30th, they were up to 93,000 locations. Now, Toast has said that their addressable market in the U.S. is a bit over 800,000 U.S. restaurant locations. Across the world, they think that

addressable market, and they are going international, that can be over-decentral. 20 million. So locations are a big part of this. They want to multiply the number of locations they can get into. And they're doing a very good job of doing that. So just for comparison sake here, Mary, from June 30, 2023 to June 30th, 2022, that's from 68,000 in the year prior quarter, up to 93,000. So adding 25,000 locations in a year, that is an impressive number. So what we're hoping when we see in the current quarter is more growth in locations. But really what we want to see in addition to that is steady growth upwards in terms of revenue per location, profit per location, and total business that these restaurants are doing. And I think if they continue on the trajectory they're

continuing on, Mary, they can get to a place where they're generating about a 15 to 16% free cash flow margin, get to about 250 to 300,000 locations. And if they get there at the rate they're growing, the revenue, they earn per location, this is a company that can generate 20% plus average annual returns over several years, maybe even up to a decade. That's a lot. A lot of things need to go right. They're going to be subject to things like macroeconomic conditions, consumer for spending. So this will not be linear, but the seeds are there for this to be a very successful growth company over the next several years. In spite of that growth in number of locations that you mentioned, the stock is down nearly 75% from the high that it hit of $65 per share, which

happened right after its IPO. Do you see that as a product of these macro-level conditions and kind of things that you just mentioned? Or is there another reason why the market is valuing this company so differently. The valuation needed to reset. I mean, let's just be honest. They came out the gate in their IPO, and they were valued way too richly, way too early. And the valuation had to come back to normal. And so now it has come back down to a much more rational level. I would call this stock pretty fairly priced and potentially cheaply priced if the growth holds up. But I wouldn't call cheap on a pure basis because it's not yet profitable. But I think it is priced for very good growth over the long term. But initially, Mary, it was vastly overvalued coming out the gate. And so the

market has reset the pricing here. Now, more recently, which driven down the price are a couple of things. First, the flub with putting on digital orders, they decided to try to put on a 99-cent digital ordering fee onto every toast order that was a digital order. And that went over like a lead balloon. That did not work well. And they had to admit the error and backtrack from that, which I think was the right thing to do. And then the other, I think, is a pretty big misunderstanding about a CEO transition. So Chris Comparato, who had been the CEO and had worked with the founding team for a really long period of time, including at their prior company, it was time for him to move on to become executive chairman. And the CEO is not somebody who's coming in from the outside.

This is a founder. This is, you know, Adam Narang, who has served in a number of different operational roles for Toast. He helped lead sales early on in the company's life. This is somebody who's been training for a step up to the CEO role almost since day one. He still owns a fair amount of stock in the company. I think this is probably the least controversial, most interesting, and most useful CEO transition I've seen in a while. And so the fact that the stock is getting whacked on that only makes me more interested in buying more. As always, people on the program may own stocks mentioned. The Motley Fool may have formal recommendations for or against,

so don't buy yourself anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.