Motley Fool Money - McDonald's Exits Russia (Who's Next?)

Episode Date: May 16, 2022

If you were hoping to start the week with a hostile takeover, you're in luck! (0:30) Jason Moser discusses: - JetBlue Airways going hostile in its pursuit of Spirit Airlines - McDonald's leaving a major market for the first time in its history - The prospect of other major restaurant chains following McDonald's and closing up shop in Russia (10:35) Jason and Matt Frankel take a closer at how Twilio makes money and one of the company's competitive advantages. Stocks discussed: JBLU, SAVE, ULCC, MCD, DPZ, SBUX, TWLO, ABNB, CRM, UBER Host: Chris Hill Guests: Jason Moser, Matt Frankel Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. For the first time in its history, McDonald's is leaving a major market. Motley Fool Money starts now. I'm Chris Hill, and I'm joined by Motley Fool Senior analyst, Jason Moser. Thanks for being here. Hey, happy Monday. Happy Monday, indeed.

We're going to get to McDonald's in a second, but I want to start very quickly with the airline industry. JetBlue is ramping up its all-cash bid for Spirit Airlines before it was a friendly takeover, and now it is officially hostile. which it shouldn't make me happy, but it does. Spirit officially rejected the bid from JetBlue earlier this month. They said, we're going ahead with our plans to merge with Frontier, a fellow low-cost airline. And I don't have an investing interest in. I don't own shares of any of these companies, but I look at this, Jason, and beyond just sort of the popcorn entertainment value of a

hostile takeover. Am I wrong to think that JetBlue, if they go ahead and they make this happen with Spirit, that it makes them more competitive with the larger airlines, the Americans, the deltas of the world? Because if that's the case, I feel like that is a potentially a win for people who want to fly from one place to the other and not pay a lot of money. I feel like you're definitely on the right path. I too, I have no interest in this, no, no dog in this race, so to speak. It's an interesting situation. There's a lot of drama behind this, because when you look at the Spirit and Frontier deal, like the Spirit Frontier deal is financially, it's inferior to the offer that JetBlue made. JetBlue actually made financially a better offer

than this Spirit Frontier deal would be. And so I certainly can understand why they feel the need to go hostile. I guess they're going to submit this tender offer and see if they could win over the favor of shareholders there. In theory, yeah, you should see this merger, either which way this merger works out, whether it's Spirit and Frontier or JetBlue, it would ultimately, I think, result in what the fifth largest carrier in the country. In theory, yes, that would mean they should compete a little bit more with the bigs. And that makes sense. Now, the reason why this seems to not be happening, the reason why there seems to be so much drama, Spirit, you know, they ultimately

said, no thanks to JetBlue. They have some concerns with JetBlue and the regulatory environment. They're feeling like that, ultimately combining with JetBlue might actually result. in higher prices, right? Because they feel like they're going to be moving away from like that low-cost provider into that other echelon of provider like the Biggs. And you look at JetBlue. JetBlue has a, I think, a partnership with American, I believe it is a relationship with American in some capacity. And maybe that was part of the concern there is the feeling that ultimately this would eliminate competition and ultimately offerings on that low-cost provider side. And so that's where all the drama kind of comes from. And there is a lot of drama with this.

So it remains to be seen how it ultimately all shakes out. But yeah, it doesn't seem like the story is going to end anytime soon. And it really does feel like JetBlue knows what it wants. It's trying to figure out exactly how to get it. If the tender offer is, is something that works. Yeah, then we'll see how the regulatory side plays out because that's not a hurdle altogether. All right. Let's move on to McDonald's. Earlier this year, McDonald's paused its operations in Russia due to its invasion of Ukraine. Today, the company announced it will sell its business and exit Russia entirely. They've got more than 800 restaurants. Most of those are company owned. We'll get to the ripple effects in a second, but if you're

shareholder of McDonald's, how should you feel about this? Because they're going to take a charge on this somewhere in the neighborhood of, you know, probably north of a billion dollars. So, you don't like to see that. On the flip side, it does provide some certainty in an area that was kind of up in the air. Yeah. To me, this feels like a pretty easy decision. They can take, they can make this decision and it appears, you know, it looks like they get, they can take a stance on something that really pretty much the whole world is on board with, right? I mean, we all kind of feel like what's going on over there in Ukraine right now is unacceptable. And so they don't have to really worry about repercussions there in taking sides, so to speak,

because really it seems like everybody, for the most part, around the world, is on the same side on this one. But also, I mean, you look at it also, frankly, it's not the greatest line of business for them anyway. You referred to the company-owned dynamic there, and I think that's important to know, because when you look at McDonald's as a business, franchise restaurants represent 93 percent of McDonald's restaurants around the world. But if you look at Russia, franchises operate only 15 percent of the Russian locations. The company owns the rest. And that matters, because ultimately, when you look at McDonald's financials, you see how

this all breaks down. In 2021, they did $9.8 billion in company-owned restaurant sales, right? Not system-wide sales. I'm talking about their revenue, right? And so the operating expenses involved there were $8 billion. Now, if you look at revenue from franchise restaurants, that was closer to $13 billion. And operating expenses there, which are primarily just occupancy expenses. Those were $2.3 billion. And so it kind of feels like they were looking at this from $10,000. from two different angles saying, you know what? Maybe they weren't all that thrilled with this line of the business anyway. It's kind of a lower margin business. Maybe the juice isn't

really worth the squeeze anymore, given the geopolitical upheaval that's going on over the past several months. And so you put all that together. I mean, I look at this and it seems like it's a pretty easy decision for management to make. It's worth noting they're retaining their trademarks there in Russia. So I would look at this and say, you know, you know what, they're making this decision now. It's probably not a threat or anything like that. They're just saying, look, we're going to go ahead and do this. Now, if the geopolitical environment years from now looks considerably different, they feel like the risk has diminished somewhat, then they, I think, would always have that option to consider opening back up there

if they were wanted. But it feels like a pretty easy decision for them to make. I would definitely would not consider this a thesis-changing event by any stretch when you consider the global nature of McDonald's? I mean, system-wide sales? I mean, these guys did system-wide sales in 2021. They did $112 billion in system-wide sales, right? And so when you look at Ukraine and Russia, those markets represent in total about 2 percent of those system-wide sales. So nothing really that's going to hit them in the pocketbook, so to speak. Yes, they'll take a charge. Yes, they'll present adjusted earnings. And ultimately, it does look like. like their guidance for the most part remains the same and they will continue opening stores

around the world, just not in Russia. Does the spotlight now shift to businesses like Burger King, Domino, Starbucks, and others? It seems like a natural question for shareholders and Wall Street analysts to ask, well, look, you know, here's the worldwide leader. They're leaving Russia. What are you going to do? Yeah. I mean, it's a fair question and that's really anyone's guess is, too, to how companies will ultimately deal with this. I mean, you look at Starbucks, for example, they believe they have halted operations, at least in Russia for the time being. I don't know that I've seen anything where they said they're actually shutting down. But, you know, again,

I mean, it's difficult in certain instances for companies to take stances, right? I mean, if it's a debatable issue, it becomes a much riskier proposition. This really is a very important. This really isn't that risky of a proposition because it's not really a debatable issue. I think most of the world is on board with the notion that this really is unacceptable and Russia shouldn't be doing what it's doing. So there isn't that risk. And I think that probably gives these leadership teams at all of these different food and beverage operators, it gives them the opportunity to at least examine those lines of business more closely to see really if, like I said earlier, is the juice really worth the squeeze? Because if it's not, you know, then they can go

go ahead and make that business decision while also getting a chance to really stand for the values that they espouse. I mean, I think this really falls in line. When you look at McDonald's, their core values, their core values are serve, inclusion, integrity, community, family. And it feels like this one really falls squarely on the integrity value, which for them is ultimately do the right thing. I feel like they feel like they're doing the right thing. I think most people would side with that. So for businesses considering this, I think they're taking a very close look at how McDonald's deals with this. They're taking a very close look at how the investor community and the rest of the world responds. And that will

probably help dictate the course of action for some of these others in the next several weeks to months, assuming this continues to drag on. Thanks for being here. Thank you. Actually, Jason Moser is sticking around because he and Matt Frankel are taking a closer look at Twilio. Now, you may not know Twilio, but if you've ever ordered an U.S. Uber, you've experienced its technology. Twilio helps send the notification saying, your ride is here. Shares are down 60% year to date, and the guys are focusing in on how Twilio makes money, the risks for investors moving forward, and one of Twilio's underappreciated competitive advantages.

We love to dig into companies here. We love to learn a little bit more about what they do and why they peak our interest. And this week, we're digging a little bit more into Twilio. This is a company I'm sure many listeners are familiar with and many likely own. I know I own it. Matt, I feel pretty darn good about that. Even in this market selloff, we're witnessing. So let's take a few minutes to dig into Twilio.

Let's learn a little bit more about the business, what it does and why it might present an opportunity for investors. Just very, very high level, though, to get started here. What does Twilio do? Yeah, so this is a stock that's been on my watch list for a long time now. I don't own it yet, but especially at the current prices, I'm pretty sure I'm going to be a Twilio shareholder before too long. They're a software as a service company.

Their mission is to kind of bring the way companies communicate with their customers into the 21st century. Just to give you a few examples, most people listening have been a user of Twilio's software without even knowing it. If you've booked an Uber and you get the little push notification that your driver is arriving, that's something that Twilio has provided them. If you make a restaurant reservation through Yelp, that's something that Twilio does. If you get an automated message from Airbnb confirming your booking, that's a Twilio product. So they build out kind of these communications

tools designed to help businesses interact with their customers better, because quite honestly, people expect more from the companies that they do business with than they ever have before. Nobody wants to pick up a phone and call a helpline these days. Nobody wants to have to go to a website to see if their pizza is on the way. Nobody wants to have, they want a quick notification on their smartphone. They want something that's automated, fast tells the story, and that they don't have to go out of their way to do. And Twilio kind of helps companies fulfill this essential need of their business. Yeah, yeah.

I'm glad you made, I think, a great point there in. that a lot of people, most of us, probably all of us, to an extent, are probably using Twilio technology or benefiting from Twilio technology and never even realizing that's the case. And to me, those oftentimes are really some of the most compelling investments, because you know, we see the convenience at our fingertips, yet we don't really understand the infrastructure and the work that's going on behind the scenes. And that really is what Twilio is doing. And they do this through these APIs, right?

These application program interfaces that just enable them to ultimately build out the communications infrastructure for this digital economy that we're really evolving into. And so to me, it's always struck me as a necessity at this point, right? I mean, businesses need to be able to incorporate this technology into their models or they'll fall by the wayside. So then you have the option, you can either try to build that functionality and capability yourself, or you can go to expert providers. And it feels like Twilio is certainly building up that reputation as an expert provider.

We'll talk a little bit more about some of the customers in its universe there. But we always like to look at how these businesses make money. I think it's one thing to really, it's very important to understand how a business makes it. money because that can really paint a picture as to what the future may hold. When we look at Twilio, obviously, a lot of customers, a lot of big customers, but how does Twilio make its money? Well, it's a subscription model. The companies that use it pay Twilio for integrating their product into their platform.

It's a recurring revenue model, which is, like most software as a service company's run. like most software as a service company, it's a high margin revenue stream. Twilio's gross margins well over 50 percent, and it should get even better as it scales. And it's a fee model, and it's fee income that grows with the customers. As customers are growing and are using Twilio more to communicate with their customers, they're actually spending more on Twilio's products and services over time. The average customer that's been with Twilio for a year is spending 30, said more than they were a year ago on Twilio. So it's a nice, not only recurring revenue,

but it's a very expandable relationship. Yeah. Well, I mean, I think you make an astute observation there, and you got sort of a dual threat there. There's a subscription side to the business, but there's also that usage-based model, right? And so as its relationship grows with its consumers, I mean, that usage-based model really comes into play. And I think actually the majority of its revenue does come from the the usage-based side, which to me is encouraging, given sort of the direction we're headed in this digital economy and communications becoming paramount for so many of these businesses. And so the more they're using Twilio's products and services, well, the more they're benefiting,

of course, and of course, the more Twilio is benefiting as well. And when we talk about some of these clients, some of these customers that Twilio works with, I mean, there's a litany of them, right? I mean, they have over 250,000, I think over 260,000 active customer accounts today now. But some of these clients are massive. I mean, Airbnb, Stripe, Salesforce, just to name a few, I mean, when companies start, companies of that stature start incorporating technology like Twilios into their models, into their infrastructure, it feels to me like as time goes on, there's a stickiness that develops

there where it just becomes less and less likely that companies are going to want to switch over to a different provider, particularly if the services that they're getting from Twilio are delivering. It feels like at this point, those services are delivering. So maybe as time goes on, that we start to see some switching costs develop there. Yeah, and you made a good point. The kind of counterpoint to that is it makes Twilio's revenue kind of top-heavy. Kind of like the problem that the S&P index funds rely on, Amazon, Microsoft, Apple for a lot of their market cap. Twilio relies on its big customers for an outsized portion of its revenue.

DoorDash is another one that uses Twilio for customer notifications. The top 10 customers in Twilio's out of those 256,000 account for 12% of the revenue. So that's a pretty concentrated top 10 out of 256,000. Hopefully, some of those other 255,990 will become some of these big customers one day. For now, it is a top-heavy business model that creates a little bit of risk. Yeah, and certainly top-heavy usage-based. I mean, it's great when times are good, but it's also worth remembering. I mean, when times do get tough, if that usage goes down, that definitely is going to impact,

Twilio's financials, I mean, that's going to impact business performance. And I mean, I think one of the nice things about that usage-based sort of approach, there's a very low cost of entry for new customers, right? I mean, new customers can try Twilio out without really having to invest much of anything to give it a shot, right? There's a little time and a little work in incorporating it, but ultimately, it's a pretty easy entry for new customers. They don't have to commit a lot up front.

And then as they discover, if they discovered that the relationship's working, that they're gaining value from that relationship, then they expand that relationship, they add on services and functionalities, and that certainly can grow the relationship there. How do we feel about leadership here? This is a founder-led business in Twilio. Any things stand out to you in regard to leadership here? Well, their founders are pretty impressive guy. Jeff Lawson.

If you just look at a little bit of his resume, he was a... a founding executive of Stubhub, he was one of the original project managers when Amazon launched AWS. So, you know, really high percentage of success in these high growth startup businesses. I mean, Stubhub, I just used Stubhub yesterday. It's the biggest ticket platform in the world, outside of like the Ticket Masters. AWS speaks for itself, and he was the original product manager on it. He's a highly invested CEO. He owns about 4% of the company. And his employees like him. That's one thing that really stands out. People really underestimate.

I always get a lot of questions about, why do I always mention glass door reviews when I do a right? You know, the employee satisfaction reviews. Especially in the highly competitive tech industry, that's such an underappreciated competitive advantage because it, being Being able to attract and retain top talent is everything. It's not just about pay. Today's tech workers will not put up with a crappy work environment in exchange for a great salary. They just won't.

Everyone's offering a great salary in tech. He has a 93% approval rating among his employees. And so many reviews specifically call out the great corporate culture and great benefits, things like that. So, that's a really overlooked competitive advantage that Twilio has going for it. I mean, great leadership team, great board of directors. Former Amazon and Oracle executives are on there. Some ex-politicians are on there.

Really interesting group of people to kind of make decisions behind the scenes. Yeah. And ultimately, I mean, this looks like a business with a lot of potential. Clearly, the stock has just been taking a beating. a beating here over the last several, several weeks, as has everything. But I really wouldn't, to me, I don't know, that's not a, that's not a, that's not a signal that this is a bad or failing business. I mean, everything is really, everything is really taking a beating, of course. But when you look at the market opportunity for a business like Twilio today, management sees this

total addressable market reaching $87 billion by 2023 just next year. And, you know, you business that's chalked up here, I think, just a little over three billion dollars in revenue over the last 12 months. And it's also a team that sees growing organic revenue at 30% or better annually here over the next three years. So, I mean, you've got a business with a lot of, a lot going for it, a tremendous market opportunity, feels like leadership that is committed to building products and services that customers want. I think you know where I stand on this one as an owner of the shares already, Matt. It sounds like I kind of I feel like I know the answer. It sounds like you feel pretty good about this one, too.

So your bottom line takeaway on this, when you feel bullish, you feel bearish on Twilio, you're still on the fence? All the things she just said, plus the fact that the stock's down about 75% from the highs doesn't hurt. So, no, it's toward the top of my watch list. I will probably become a Twilio shareholder once I have some free capital to do so in the next few weeks. I'm a fan of the business, and I think we're still in the early stages of the digital transformation, and the Twilio has a lot to gain from it. As always, people on the program may have interest in the stocks they talk about,

and the Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.